10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2023

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission File Number: 001-40591

HCW Biologics Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

82-5024477

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

2929 N. Commerce Parkway

Miramar, Florida

33025

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (954) 842–2024

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

Title of each class

Trading

Symbol(s)

Name of each exchange
on which registered

Common Stock, par value $0.0001 per share

HCWB

The Nasdaq Stock Market LLC

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

As of November 13, 2023, the registrant had 35,974,570 shares of common stock, $0.0001 par value per share, outstanding.



 

Table of Contents

Page

 

PART I.

FINANCIAL INFORMATION

1

 

Item 1.

Financial Statements

1

 

Unaudited condensed interim financial statements as of and for the three and nine months ended September 30, 2022 and September 30, 2023:

 

 

Balance sheets

1

 

Statements of operations

2

 

Statements of changes in stockholders’ equity

3

 

Statements of cash flows

4

 

Notes to financial statements

5

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

Item 4.

Controls and Procedures

26

 

PART II.

OTHER INFORMATION

27

 

Item 1.

Legal Proceedings

27

 

Item 1A.

Risk Factors

27

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

Item 3.

Defaults Upon Senior Securities

27

 

Item 4.

Mine Safety Disclosures

27

 

Item 5.

Other Information

27

 

Item 6.

Exhibits

28

 

Signatures

29

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

HCW Biologics Inc.

Condensed Balance Sheets

 

 

 

December 31,

 

 

September 30,

 

 

 

2022

 

 

2023

 

 

 

 

 

 

Unaudited

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,326,356

 

 

$

11,220,793

 

Short-term investments

 

 

9,735,930

 

 

 

 

Accounts receivable, net

 

 

417,695

 

 

 

710,078

 

Prepaid expenses

 

 

1,394,923

 

 

 

1,742,341

 

Other current assets

 

 

196,015

 

 

 

174,881

 

Total current assets

 

 

34,070,919

 

 

 

13,848,093

 

Investments

 

 

1,599,751

 

 

 

1,599,751

 

Property, plant and equipment, net

 

 

10,804,610

 

 

 

14,780,872

 

Deposit for interest reserve

 

 

 

 

 

5,250,000

 

Other assets

 

 

333,875

 

 

 

137,626

 

Total assets

 

$

46,809,155

 

 

$

35,616,342

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,226,156

 

 

$

3,153,834

 

Accrued liabilities and other current liabilities

 

 

1,730,325

 

 

 

2,262,839

 

Total current liabilities

 

 

2,956,481

 

 

 

5,416,673

 

Debt, net

 

 

6,409,893

 

 

 

6,332,736

 

Other liabilities

 

 

14,275

 

 

 

 

Total liabilities

 

 

9,380,649

 

 

 

11,749,409

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

Common, $0.0001 par value; 250,000,000 shares authorized
   and
35,876,440 shares issued at December 31, 2022; 250,000,000 shares
   authorized and
35,927,321 shares issued at September 30, 2023

 

 

3,588

 

 

 

3,593

 

Additional paid-in capital

 

 

82,962,964

 

 

 

83,715,133

 

Accumulated deficit

 

 

(45,538,046

)

 

 

(59,851,793

)

Total stockholders’ equity

 

 

37,428,506

 

 

 

23,866,933

 

Total liabilities and stockholders’ equity

 

$

46,809,155

 

 

$

35,616,342

 

 

See accompanying notes to the unaudited condensed interim financial statements.

1


 

HCW Biologics Inc.

Condensed Statements of Operations

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended
September 30,

 

 

 

 

2022

 

 

2023

 

 

 

2022

 

 

2023

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,809,025

 

 

$

853,102

 

 

 

$

5,380,570

 

 

$

1,517,792

 

 

Cost of revenues

 

 

(1,447,220

)

 

 

(678,325

)

 

 

 

(3,062,496

)

 

 

(1,210,077

)

 

Net revenues

 

 

361,805

 

 

 

174,777

 

 

 

 

2,318,074

 

 

 

307,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,648,794

 

 

 

1,667,442

 

 

 

 

6,408,353

 

 

 

5,539,919

 

 

General and administrative

 

 

1,732,666

 

 

 

3,585,215

 

 

 

 

5,321,262

 

 

 

9,716,765

 

 

Total operating expenses

 

 

4,381,460

 

 

 

5,252,657

 

 

 

 

11,729,615

 

 

 

15,256,684

 

 

Loss from operations

 

 

(4,019,655

)

 

 

(5,077,880

)

 

 

 

(9,411,541

)

 

 

(14,948,969

)

 

Interest expense

 

 

(32,184

)

 

 

(95,514

)

 

 

 

(32,184

)

 

 

(284,465

)

 

Other (expense) income, net

 

 

137,645

 

 

 

234,753

 

 

 

 

(38,237

)

 

 

919,688

 

 

Net loss

 

$

(3,914,194

)

 

$

(4,938,641

)

 

 

$

(9,481,962

)

 

$

(14,313,746

)

 

Net loss per share, basic and diluted

 

$

(0.11

)

 

$

(0.14

)

 

 

$

(0.26

)

 

$

(0.40

)

 

Weighted average shares outstanding, basic and diluted

 

 

35,835,135

 

 

 

35,926,921

 

 

 

 

35,809,216

 

 

 

35,907,123

 

 

 

See accompanying notes to the unaudited condensed interim financial statements.

2


 

HCW Biologics Inc.

Condensed Statements of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2022 and September 30, 2023

(Unaudited)

 

 

 

Stockholders’ Equity

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2021

 

 

35,768,264

 

 

$

3,577

 

 

$

81,827,006

 

 

$

(30,637,343

)

 

$

51,193,240

 

Issuance of Common Stock upon exercise of stock options

 

 

11,225

 

 

 

1

 

 

 

2,272

 

 

 

 

 

 

2,273

 

Stock-based compensation

 

 

 

 

 

 

 

 

260,348

 

 

 

 

 

 

260,348

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,057,207

)

 

 

(2,057,207

)

Balance, March 31, 2022

 

 

35,779,489

 

 

$

3,578

 

 

$

82,089,626

 

 

$

(32,694,550

)

 

$

49,398,654

 

Issuance of Common Stock upon exercise of stock options

 

 

44,434

 

 

 

4

 

 

 

5,996

 

 

 

 

 

 

6,000

 

Stock-based compensation

 

 

 

 

 

 

 

 

271,335

 

 

 

 

 

 

271,335

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,510,561

)

 

 

(3,510,561

)

Balance, June 30, 2022

 

 

35,823,923

 

 

$

3,582

 

 

$

82,366,957

 

 

$

(36,205,111

)

 

$

46,165,428

 

Issuance of Common Stock upon exercise of stock options

 

 

12,212

 

 

 

2

 

 

 

1,672

 

 

 

 

 

 

1,674

 

Stock-based compensation

 

 

 

 

 

 

 

 

302,320

 

 

 

 

 

 

302,320

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,914,194

)

 

 

(3,914,194

)

Balance, September 30, 2022

 

 

35,836,135

 

 

$

3,584

 

 

$

82,670,949

 

 

$

(40,119,305

)

 

$

42,555,228

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2022

 

 

35,876,440

 

 

$

3,588

 

 

$

82,962,964

 

 

$

(45,538,046

)

 

$

37,428,506

 

Issuance of Common Stock upon exercise of stock options

 

 

10,195

 

 

 

1

 

 

 

1,900

 

 

 

 

 

 

1,901

 

Stock-based compensation

 

 

 

 

 

 

 

 

259,206

 

 

 

 

 

 

259,206

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,070,686

)

 

 

(5,070,686

)

Balance, March 31, 2023

 

 

35,886,635

 

 

$

3,589

 

 

$

83,224,070

 

 

$

(50,608,732

)

 

$

32,618,927

 

Issuance of Common Stock upon exercise of stock options

 

 

40,086

 

 

 

4

 

 

 

7,708

 

 

 

 

 

 

7,712

 

Stock-based compensation

 

 

 

 

 

 

 

 

263,423

 

 

 

 

 

 

263,423

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,304,420

)

 

 

(4,304,420

)

Balance, June 30, 2023

 

 

35,926,721

 

 

 

3,593

 

 

 

83,495,201

 

 

 

(54,913,152

)

 

 

28,585,642

 

Issuance of Common Stock upon exercise of stock options

 

 

600

 

 

 

 

 

 

84

 

 

 

 

 

 

84

 

Stock-based compensation

 

 

 

 

 

 

 

 

219,848

 

 

 

 

 

 

219,848

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,938,641

)

 

 

(4,938,641

)

Balance, September 30, 2023

 

 

35,927,321

 

 

$

3,593

 

 

$

83,715,133

 

 

$

(59,851,793

)

 

$

23,866,933

 

 

See accompanying notes to the unaudited condensed interim financial statements.

3


 

HCW Biologics Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(9,481,962

)

 

$

(14,313,746

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

456,696

 

 

 

860,634

 

Stock-based compensation

 

 

834,003

 

 

 

742,477

 

Unrealized loss (gain) on investments, net

 

 

253,550

 

 

 

(248,445

)

Realized (gain) on investments

 

 

 

 

 

(15,625

)

Reduction in the carrying amount of right-of-use asset

 

 

1,463

 

 

 

(1,045

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(222,555

)

 

 

(292,383

)

Deposit for interest reserve

 

 

 

 

 

(5,250,000

)

Prepaid expenses and other assets

 

 

1,854,155

 

 

 

(251,008

)

Accounts payable and other liabilities

 

 

(202,979

)

 

 

392,802

 

Operating lease liability

 

 

(89,110

)

 

 

(242,990

)

Net cash used in operating activities

 

 

(6,596,739

)

 

 

(18,619,329

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(10,206,441

)

 

 

(2,486,950

)

Proceeds for sale or maturities of short-term investments

 

 

24,983,520

 

 

 

10,000,000

 

Net cash provided by investing activities

 

 

14,777,079

 

 

 

7,513,050

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

9,947

 

 

 

9,697

 

Proceeds from issuance of debt, net

 

 

6,448,166

 

 

 

 

Offering costs

 

 

(144,870

)

 

 

 

Debt repayment

 

 

 

 

 

(8,981

)

Net cash provided by financing activities

 

 

6,313,243

 

 

 

716

 

Net increase (decrease) in cash and cash equivalents

 

 

14,493,583

 

 

 

(11,105,563

)

Cash and cash equivalents at the beginning of the period

 

 

11,730,677

 

 

 

22,326,356

 

Cash and cash equivalents at the end of the period

 

$

26,224,260

 

 

$

11,220,793

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

284,465

 

Noncash operating, investing and financing activities:

 

 

 

 

 

 

Operating lease liabilities arising from obtaining right-of-use assets

 

$

231,196

 

 

$

 

Capital expenditures accrued, but not yet paid

 

$

 

 

$

2,095,724

 

 

 

See accompanying notes to the unaudited condensed interim financial statements.

4


 

HCW Biologics Inc.

Notes to Condensed Financial Statements

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

Organization

 

HCW Biologics Inc. (the “Company”) is a clinical stage biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen healthspan by disrupting the link between chronic, low-grade inflammation and age-related diseases. The Company believes age-related low-grade chronic inflammation, or “inflammaging,” is a significant contributing factor to several chronic diseases and conditions, such as cancer, cardiovascular disease, diabetes, neurodegenerative diseases, and autoimmune diseases. The Company is located in Miramar, Florida and was incorporated in the state of Delaware in April 2018.

Liquidity

As of September 30, 2023, the Company had not generated any revenue from commercial product sales of its internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases. In the course of its development activities, the Company has sustained operating losses and expects to continue to incur operating losses for the foreseeable future. Since inception, substantially all the Company’s activities have consisted of research, development, establishing large-scale cGMP production for clinical trials, and raising capital. The Company's total revenues to date have been generated solely from the Wugen License and its manufacturing and supply arrangement with Wugen. In the three and nine months ended September 30, 2023, the Company recognized revenues from manufacturing and supply of materials for Wugen of $853,102 and $1.5 million, respectively.

As of September 30, 2023, the Company had cash and cash equivalents of $11.2 million and a deposit for interest reserve of $5.3 million. Since inception to September 30, 2023, the Company incurred cumulative net losses of $57.1 million. Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise additional capital to fully implement its business plan. In November 2023, the Company expects to begin to draw down on its $26.3 million Development Line of Credit Agreement, the proceeds of which will be primarily used for the buildout of the Company's headquarters, including upgraded research laboratories and a new manufacturing facility. See Note 8. Commitments and Contingencies - Project Financing herein. The Company intends to raise capital through additional debt or equity financings. In addition, the Company intends to continue its efforts to enter into business development transactions. Business development efforts are focused on out-licensing rights to non-core assets or regional markets, third-party collaboration funding, cooperative agreements for clinical trials, and other transactions. However, if the Company is not able to obtain financing at adequate levels, it will need to reevaluate its operating plan and may be required to delay the development of some of its products.

Summary of Significant Accounting Policies

Basis of Presentation

Unaudited Interim Financial Information

 

The accompanying unaudited condensed interim financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2022 and 2023 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to Article 10 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed interim financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Company’s financial position and the results of its operations and cash flows. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results expected for the full fiscal year or any subsequent interim period. The condensed balance sheet at December 31, 2022 has been derived from the audited financial statements at that date but does not include all disclosures required by U.S. GAAP for complete financial statements. Because all of the disclosures required by U.S. GAAP for complete financial statements are not included herein, these unaudited condensed interim financial statements and the notes accompanying them should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2022 which appear in the Company’s Annual Report on Form 10-K (No. 001-40591) filed for the year ended December 31, 2022 with the Securities and Exchange Commission (the “SEC”) on March 28, 2023 and in other filings with the SEC.

5


 

Deposit for Interest Reserve

The Company has established an interest reserve account for the purpose of paying interest on outstanding debt under the Development Line of Credit Agreement which is further described in Note 8. Commitments and Contingencies - Project Financing herein. As of September 30, 2023, there was a balance of $5.3 million included in Deposit for interest reserve in noncurrent assets on the accompanying condensed balance sheet.

Revenue Recognition

The Company accounts for revenues in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”). To determine revenue recognition for arrangements that fall within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services transferred to the customer.

At contract inception, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. To date, the Company's revenues have been generated solely from transactions with Wugen. The Wugen License includes licenses of intellectual property, cost reimbursements, upfront signing fees, milestone payments and royalties on future licensee’s product sales. In addition, the Company and Wugen have an agreement for supply of materials, from which the Company also recognizes revenues.

 

License Grants:

 

For out-licensing arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement.

 

Milestone and Contingent Payments:

 

At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event. When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. The Company’s licensees will generally pay milestones payments subsequent to achievement of the triggering event.

 

Materials Supply:

 

The Company provides clinical and research grade materials so that licensees may develop products based on the licensed molecules. The Company plans to enter into commercialization supply agreements when licensees enter the commercial stage of their company. The amounts billed are recognized as revenue as the performance obligations are satisfied by the Company, once the Company determines that a contract exists.

 

On June 18, 2021, the Company entered into a master services agreement (“MSA”) for the supply of materials for clinical development of licensed products. Under the MSA, the Company enters into statements-of-work (“SOWs”) for transactions for the purchase of clinical and research grade materials which meet all requirements necessary to qualify as a contract under Topic 606. The

6


 

sale of clinical and research material supplied by the Company each represents a single performance obligation that is satisfied over time. The Company recognizes revenue using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company's progress toward completion. As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgement to determine the progress towards completion. The Company reviews its estimate of the progress toward completion based on the best information available to recognize the cumulative progress toward completion as of the end of each reporting period, and makes revisions to such estimates, if facts and circumstances change during each reporting period.

 

The Company recognized revenue related to sale of development supply materials to its licensee, Wugen, of $1.8 million and $5.4 million, respectively, for the three and nine months ended September 30, 2022; and $853,102 and $1.5 million, respectively, for three and nine months ended September 30, 2023.

Investments

The Company holds a minority interest in Wugen which is accounted for using the measurement alternative whereby the investment is recorded at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee. No impairment has been recognized on the minority interest in Wugen as of September 30, 2023. As of December 31, 2022 and September 30, 2023, the Company included $1.6 million for the investment in Wugen in Investments in the accompanying condensed balance sheets.

From time to time, the Company invests in bills and notes issued by the U.S. Treasury which are classified as trading securities. The Company reported a fair value of $9.7 million and nil for the fair value of investments in U.S. Treasury bills as of December 31, 2022 and September 30, 2023, respectively, included in Short-term investments in the accompanying condensed balance sheets.

Operating Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in Other assets, Accrued liabilities and other current liabilities, and Other liabilities on the accompanying condensed balance sheets. Operating lease Right of Use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company has a lease agreement with lease and non-lease components, which are accounted for separately.

Net Loss Per Share

Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share of common stock includes the effect, if any, from the potential exercise of stock options and unvested shares of restricted stock, which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive.

2. Accrued Liabilities and Other Current Liabilities

As of December 31, 2022, the Company had a balance of $1.7 million included in Accrued liabilities and other current liabilities in the accompanying condensed balance sheet, consisting primarily of $416,000 for legal expenses, $277,500 for clinical expenses, $524,000 for bonus expenses, $134,000 for salary and benefits, and $178,000 for a lease liability.

As of September 30, 2023, the Company had a balance of $2.3 million in Accrued liabilities and other current liabilities in the accompanying condensed balance sheet, consisting primarily of the following: $208,000 for retainage related to renovation of the Company's headquarters; $892,000 related to legal matters further described in Note 8. Commitments and Contingencies - Legal herein; $246,000 for clinical expenses; $365,000 related to performance-based bonuses; $81,000 for salary and benefits; $71,000 for a lease liability; $117,680 for the current portion of long-term debt; and $40,000 for legal fees related to patent prosecution as well as other legal expenses incurred in the ordinary course of business.

 

7


 

 

3. Debt, Net

On August 15, 2022, the Company entered into a loan and security agreement (the "2022 Loan Agreement") with Cogent Bank ("Cogent"), pursuant to which it received $6.5 million in gross proceeds to purchase a building that will become the Company's new headquarters. The Cogent loan is secured by a first priority lien on the building.

Under the terms of the 2022 Loan Agreement, the interest-only period is one year followed by 48 months of equal payments of principal and interest beginning on September 15, 2023 based on a 25-year amortization rate. The unamortized balance is due on August 15, 2027 (the “Cogent Maturity Date”), and bears interest at a fixed per annum rate equal to 5.75%. At the Cogent Maturity Date, a final payment of unamortized principal will be due. The Company has the option to prepay the outstanding balance of the loan prior to the Cogent Maturity Date without penalty. The Company is in compliance with all covenants under the 2022 Loan Agreement as of September 30, 2023.

As of December 31, 2022, the 2022 Loan Agreement consisted of $6.5 million which is included in Debt, net on the accompanying condensed balance sheet. As of September 30, 2023, it consisted of a current portion of $117,680 which is included in Accrued liabilities and other current liabilities and a noncurrent portion of $6.3 million which is included in Debt, net in the accompanying condensed balance sheet.

4. Preferred Stock

At December 31, 2022 and September 30, 2023, the Company had 10,000,000 shares of preferred stock authorized and no shares issued.

5. Net Loss Per Share

The following table summarizes the computation of the basic and diluted net loss per share:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(3,914,194

)

 

$

(4,938,641

)

 

$

(9,481,962

)

 

$

(14,313,746

)

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

35,835,135

 

 

 

35,926,921

 

 

 

35,809,216

 

 

 

35,907,123

 

 

Net loss per share, basic and diluted

 

$

(0.11

)

 

$

(0.14

)

 

$

(0.26

)

 

$

(0.40

)

 

 

 

The following table summarizes the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their inclusion would be anti-dilutive:

 

 

At September 30,

 

 

 

2022

 

 

2023

 

Common stock options

 

 

1,907,991

 

 

 

1,869,492

 

Potentially diluted securities

 

 

1,907,991

 

 

 

1,869,492

 

 

8


 

 

6. Fair Value of Financial Instruments

The carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, U.S. government-backed securities with maturity dates up to one year, accounts payable, accrued liabilities and other current liabilities, approximate fair value due to their short-term maturities. The balance of funds included in Deposit for interest reserve is held in a non-interest bearing account and its carrying value approximates its fair value.

Money market funds included in cash and cash equivalents and U.S. government-backed securities are measured at fair value based on quoted prices in active markets, which are considered Level 1 inputs. No transfers between levels occurred during the periods presented. The following table presents the Company’s assets which were measured at fair value at December 31, 2022 and September 30, 2023:

 

 

 

At December 31, 2022:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

19,458,020

 

 

$

 

 

$

 

 

$

19,458,020

 

Treasury notes

 

 

9,735,930

 

 

 

 

 

 

 

 

 

9,735,930

 

 Total

 

$

29,193,950

 

 

$

 

 

$

 

 

$

29,193,950

 

 

 

 

At September 30, 2023:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

9,999,421

 

 

$

 

 

$

 

 

$

9,999,421

 

 Total

 

$

9,999,421

 

 

$

 

 

$

 

 

$

9,999,421

 

 

7. Income Taxes

The Company computes its quarterly income tax expense/(benefit) by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The Company did not have a provision for income taxes (current or deferred tax expense) as of December 31, 2022 and September 30, 2023. The Company will continue to maintain a 100% valuation allowance on total deferred tax assets. The Company believes it is more likely than not that the related deferred tax asset will not be realized. As a result, the Company’s effective tax rate will remain at 0.00% because no items either estimated or discrete items would impact the tax provision.

9


 

8. Commitments and Contingencies

Operating Leases

The Company has operating leases for approximately 12,250 square feet of space located in Miramar, Florida. The leases have a two-year term which commenced on March 1, 2022 and will terminate on February 29, 2024. Upon the commencement of the leases, the Company used its incremental borrowing rate of 6.0% to determine the amounts to recognize for a ROU asset and a lease liability. There are no obligations under finance leases.

The components of the lease expense for the three and nine months ended September 30, 2023 were as follows:

 

 

 

For the Three Months
Ended September 30, 2023

 

 

For the Nine Months Ended September 30, 2023

 

Operating lease cost

 

$

42,413

 

 

$

127,238

 

 

Supplemental cash flow information related to lease for the nine months ended September 30, 2023 was as follows:

 

 

 

For the Nine Months Ended September 30, 2023

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows

 

$

127,229

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

Operating lease

 

$

120,973

 

 

As of September 30, 2023, the supplemental balance sheet information related to leases was as follows:

 

 

 

As of September 30, 2023

 

Operating lease right-of-use assets

 

$

69,624

 

Operating lease liabilities, current

 

$

70,669

 

 

As of September 30, 2023, the remaining lease payments were as follows:

 

2023

 

$

42,831

 

2024

 

 

28,693

 

Total future minimum lease payments

 

$

71,524

 

 

 

For the three months ended September 30, 2022 and 2023, rent expense recognized by the Company was $43,700 and $42,400, respectively, of which $22,200 and $22,200, respectively, is included in research and development in the accompanying condensed statements of operations.

 

For the nine months ended September 30, 2022 and 2023, rent expense recognized by the Company was $130,300 and $127,200, respectively, of which $57,800 and $66,600, respectively, is included in research and development in the accompanying condensed statements of operations.

10


 

Contractual Commitments

The Company entered into an agreement with a third-party global contract development and manufacturer of biologics for the manufacture of the Company’s proprietary molecules for use in clinical trials. At December 31, 2022 and September 30, 2023, future payment obligations under such agreements were $406,000 and $1.8 million, respectively. In addition, as of December 31, 2022, the Company committed to purchase upstream processing and fluid management equipment for $1.6 million, and it advanced $495,000 for this purchase as of September 30, 2023.

Project Financing

On April 21, 2023, the Company entered into a secured Development Line of Credit Agreement (such agreement as amended from time to time, the "2023 Loan Agreement") with Prime Capital Ventures, LLC ("Prime"), pursuant to which Prime will advance loans to the Company in a principal amount not to exceed $26.3 million with a scheduled maturity of April 20, 2028 (the "Prime Maturity Date"). The Company has the option to prepay the balance of the loan prior to the Prime Maturity date without penalty. The note issued pursuant to the 2023 Loan Agreement bears interest at a fixed rate equal to 7.00% per annum, due monthly in arrears on the first day of each month. The primary purpose of the loan is to provide the funding required to complete the buildout of the Company's new headquarters, including improved research laboratories and a vivarium to support the Company's preclinical research efforts, and a manufacturing facility to produce GMP material to support the Company's clinical development as well as produce material to support the clinical development of its licensee, Wugen.

Under the 2023 Loan Agreement, the Company was required to fund an interest reserve bank account controlled by Prime in the amount of $5.3 million to fund the interest payments due thereunder. The balance of the reserve account is presented in Deposit for interest reserve in noncurrent assets on the accompanying condensed balance sheet. As of September 30, 2023, the Company had no outstanding borrowings under the 2023 Loan Agreement. On August 10, 2023, the Company obtained construction permits required to begin the buildout of its new headquarters. This satisfied the final condition precedent to accessing the $26.3 million line of credit. The Company will incur $1.8 million in debt issuance costs in connection to the Prime loan, which will be earned and payable upon the first draw down. In November 2023, the Company expects to begin to draw down funds available under the 2023 Loan Agreement.

Legal

 

From time to time, the Company is a party to or otherwise involved in legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. In addition, the Company enters into agreements that may include indemnification provisions, pursuant to which the Company agrees to indemnify, hold harmless and defend the indemnified parties for losses suffered or incurred by the indemnified party. When the Company believes that the outcome of such a matter will result in a liability that is probable to be incurred and result in a potential loss, or range of loss, that can be reasonably estimated, the Company will accrue a liability and make the appropriate disclosure in the footnotes to the financial statements.

 

On December 23, 2022, Altor BioScience, LLC and NantCell, Inc. (“Altor/NantCell”) initiated an arbitration against Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, in California alleging breach of contract and fiduciary duty, among other claims. On that same date, Altor/NantCell filed a lawsuit against the Company in federal court alleging misappropriation of trade secrets, inducement of breach of contract and breach of fiduciary duty, among other claims against the Company. On January 31, 2023, the Company filed a motion to compel arbitration, a motion for the stay of the litigation, and a motion to dismiss the complaint (“motion to compel”). On April 18, 2023, the U.S. District Court for the Southern District of Florida (the “Court”) heard oral argument on the Company’s motion to compel and ordered the parties to provide supplemental briefing by April 28, 2023. Before the Court ruled on the Company’s motion to compel, on April 26, 2023, the parties stipulated that Altor/NantCell’s action against the Company would be consolidated with the Altor/NantCell arbitration demand against Dr. Wong. On April 27, 2023, the Court approved the parties’ stipulation and ordered the parties to arbitration. On May 1, 2023, Altor/NantCell filed a demand against the Company before JAMS. On May 3, 2023, Altor/NantCell dismissed the federal court action without prejudice and the Court ordered the case dismissed without prejudice and closed the case. Altor/NantCell’s proceeding against the Company is now proceeding in arbitration before JAMS.

 

 

11


 

Inflationary Cost Environment, Geopolitical Risks and Other Macroeconomic Factors

The operations have been affected by many headwinds, including inflationary pressures, rising interest rates, ongoing global supply chain disruptions resulting from increased geopolitical tensions such as the war in the Middle East, the conflict between Russia and Ukraine, Chinese aggression towards Taiwan, financial market volatility and currency movements. The Company has been impacted by inflation, and may continue to be so, when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Management employs a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines. Future developments in these and other areas present material uncertainty and risk with respect to the Company's clinical trials, IND-enabling activities, buildout of the new headquarters, as well as the Company's financial condition and results of operations. The extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable.

9. Subsequent Events

Subsequent events have been evaluated through the date the financial statements were available to be issued. As of such date, there were no material subsequent events identified that required recognition or disclosure other than as disclosed in the footnotes herein.

 

12


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our unaudited condensed interim financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited financial statements and related notes and the discussion under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended December 31, 2022 included in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 28, 2023. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “HCW Biologics,” “HCWB”, “we,” “us” and “our” refer to HCW Biologics Inc.

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success of our clinical trials, plans and objectives of management for future operations, adequacy of our cash resources and working capital, future economic conditions or performance, and future results of anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A -“Risk Factors,” in this Quarterly Report on Form 10-Q and in other filings we make with the SEC from time to time. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. These forward-looking statements speak only as of the date hereof. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Overview

HCW Biologics Inc. is a clinical-stage biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen healthspan by disrupting the link between chronic, low-grade inflammation and age-related diseases. We believe age-related, chronic, low-grade inflammation, or “inflammaging,” is a significant contributing factor to several diseases and conditions, such as cancer, cardiovascular disease, diabetes, neurodegenerative diseases, and autoimmune diseases.