F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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 |
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Smaller reporting company |
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Emerging growth company |
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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 11, 2024, the registrant had
Table of Contents
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PART I. |
1 |
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Item 1. |
1 |
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Unaudited condensed interim financial statements as of and for the three and nine months ended September 30, 2023 and September 30, 2024: |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
29 |
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Item 4. |
29 |
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PART II. |
33 |
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Item 1. |
33 |
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Item 1A. |
34 |
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Item 2. |
34 |
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Item 3. |
34 |
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Item 4. |
34 |
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Item 5. |
34 |
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Item 6. |
36 |
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37 |
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i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
HCW Biologics Inc.
Condensed Balance Sheets
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December 31, |
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September 30, |
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2023 |
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2024 |
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Unaudited |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Investments |
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Property, plant and equipment, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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Liabilities |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities and other current liabilities |
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Short-term debt, net |
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Total current liabilities |
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Debt, net |
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Total liabilities |
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(Note 8) |
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Stockholders’ equity (deficit): |
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Common stock: |
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Common, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity (deficit) |
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Total liabilities and stockholders’ equity (deficit) |
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$ |
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$ |
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See accompanying notes to the unaudited condensed interim financial statements.
1
HCW Biologics Inc.
Condensed Statements of Operations
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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2023 |
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2024 |
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2023 |
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2024 |
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Revenues: |
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Revenues |
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$ |
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$ |
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$ |
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$ |
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Cost of revenues |
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( |
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( |
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Net revenues |
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Operating expenses: |
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Research and development |
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General and administrative |
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Legal expenses |
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Nonoperating loss |
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Total operating expenses |
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Loss from operations |
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( |
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( |
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( |
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Interest expense |
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( |
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( |
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( |
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( |
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Other (expense) income, net |
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Net loss |
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$ |
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$ |
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$ |
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$ |
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Net loss per share, basic and diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average shares outstanding, basic and diluted |
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See accompanying notes to the unaudited condensed interim financial statements.
2
HCW Biologics Inc.
Condensed Statements of Changes in Stockholders’ Equity (Deficit)
For the Nine Months Ended September 30, 2023 and 2024
(Unaudited)
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Stockholders’ Equity |
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Common Stock |
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Additional |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
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Balance, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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Issuance of Common Stock upon exercise of stock options |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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Balance, March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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Issuance of Common Stock upon exercise of stock options |
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— |
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Stock-based compensation |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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Balance, June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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Issuance of Common Stock upon exercise of stock options |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Balance, September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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Stockholders’ Equity (Deficit) |
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Common Stock |
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Additional |
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Accumulated |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity (Deficit) |
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Balance, December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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Issuance of Common Stock upon exercise of stock options |
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— |
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Issuance of Common Stock upon equity subscription |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Balance, March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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Issuance of Common Stock upon exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Balance, June 30, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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Issuance of Common Stock upon exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Balance, September 30, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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See accompanying notes to the unaudited condensed interim financial statements.
3
HCW Biologics Inc.
Condensed Statements of Cash Flows
(Unaudited)
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Nine Months Ended September 30, |
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2023 |
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2024 |
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Cash flows from operating activities: |
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Net loss |
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$ |
( |
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$ |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Unrealized loss (gain) on investments, net |
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( |
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Realized loss (gain) on investments, net |
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( |
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Changes in the carrying amount of right-of-use asset |
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( |
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( |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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( |
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Deposit for interest reserve |
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( |
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Prepaid expenses and other assets |
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( |
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Accounts payable and other liabilities |
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Operating lease liability |
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( |
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( |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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( |
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Proceeds for sale or maturities of short-term investments |
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Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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Proceeds from issuance of debt |
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Offering costs |
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Debt repayment |
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( |
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( |
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Net cash provided by financing activities |
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Net (decrease) increase in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents at the beginning of the period |
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Cash and cash equivalents at the end of the period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest, net of amounts capitalized |
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$ |
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$ |
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Noncash operating, investing and financing activities: |
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Capital expenditures accrued, but not yet paid |
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$ |
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$ |
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Purchases of property and equipment included in accounts payable and other liabilities |
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$ |
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$ |
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See accompanying notes to the unaudited condensed interim financial statements.
4
HCW Biologics Inc.
Notes to Condensed Interim Financial Statements
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization
HCW Biologics Inc. (the “Company”) is a 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 and Going Concern
In accordance with FASB Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements – Going Concern (“Topic 205-40”), management is required to evaluate whether there are conditions and events, considered in the aggregate that raise substantial doubt about the Company’s ability to continue as a going concern for at least 12 months from the issuance date of the Company’s condensed interim financial statements. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
As of September 30, 2024, 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. During its development activities, the Company has sustained operating losses and expects to continue to incur operating losses for the foreseeable future. Since inception to September 30, 2024, the Company incurred cumulative net losses of $
On August 15, 2022, the Company entered into a loan and security agreement (the “2022 Loan Agreement”) with Cogent Bank, pursuant to which it received $
To date, the Company has funded operations primarily through the sale of stock, issuance of senior secured notes and revenues generated from the Company’s exclusive worldwide license with Wugen, Inc. (“Wugen”), pursuant to which Wugen licensed limited rights to develop, manufacture, and commercialize cell therapy treatments for cancer based on two of the Company’s internally-developed multi-cytokine fusion protein molecules, and its manufacturing and supply arrangement with Wugen. In the three months ended September 30, 2023 and 2024, the Company recognized revenues generated from the supply of clinical and research grade material to Wugen of $
The Company launched a financing plan in the third quarter of 2024. The plan includes several capital-raising activities, such as issuance of secured notes, equity financings, as well as business development transactions, such as license agreements with guaranteed minimum payments. Through October 31, 2024, the Company issued an aggregate of $
5
September 25, 2024, the Company entered into a nonbinding term sheet with a party interested in licensing one of the Company’s preclinical molecules. The Company expects to close this license transaction in the fourth quarter of 2024. The proposed license agreement includes guaranteed minimum payments which are expected within the first year of the term. On November 13, 2024, we entered into an engagement letter with the Maxim Group to act as the exclusive placement agent for a multi-step equity financing. If the Company is not successful in raising additional capital through these activities, management intends to revise its business plan. If such revisions are insufficient, the Company may have to curtail or cease operations.
The Company has received written notices from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) informing the Company it is not in compliance with continued listing requirements on the Nasdaq Global Market for the market value of listed securities. Under Nasdaq Listing Rules, the Company has a period of 180 calendar days from the date of notice in which to regain compliance, and its first deadline is currently scheduled for December 16, 2024. The Company intend to take all reasonable measures available to us to regain compliance with the continued listing requirements for the Nasdaq Global Market, including utilizing the right to appeal to Nasdaq to extend the deadline to regain compliance based on a solid financial plan to do so. While the Company is exercising diligent efforts to maintain the listing of its common stock on Nasdaq, there can be no assurance that the Company will be able to regain or maintain compliance with the applicable continued listing standards set forth in the Nasdaq Listing Rules.
As of September 30, 2024, the conclusion of a going concern assessment was that there is substantial doubt about the Company’s ability to continue as a going concern. The Company considered its financing plans for the next 12 months, along with expected continuing operating losses and the burden of expenses incurred in connection with past legal proceedings. Management concluded that there were no mitigating circumstances which alleviated the substantial doubt over its ability to continue as a going concern.
As reported in the Company’s Form 8-K filed on July 18, 2024 and further described in Part II, Item 1. – “Legal Proceedings” below, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with ImmunityBio and its affiliates. The Settlement Agreement includes mutual general releases by and among the parties thereto. No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in connection with the matter. The Company has substantially completed remediation procedures required to be in compliance with the terms of the Settlement Agreement.
The Company entered into the Settlement Agreement to avoid the costs, disruption and distraction of further litigation. In the accompanying condensed balance sheet as of September 30, 2024, the Company reported a balance of $
The accompanying interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. The Company believes that substantial doubt exists regarding its ability to continue as a going concern for at least 12 months from the date of issuance of the Company’s condensed interim financial statements and that the substantial doubt that existed in its going concern analysis was not alleviated.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed balance sheet as of September 30, 2024, the condensed statements of operations, and condensed statements of changes in stockholders’ equity (deficit) for the three and nine-month periods ended September 30, 2023 and 2024 and the condensed statements of cash flows for the nine months ended September 30, 2023 and 2024, and all related disclosures contained in the accompanying notes have been prepared in accordance with accounting principles that are 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-month periods ended September 30, 2024 are not necessarily indicative of the results expected for the full fiscal year or any subsequent interim period. The condensed interim balance sheet at December 31, 2023 has been derived from the audited financial statements at that date but does not include all disclosures required by
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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, 2023, which appear in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on May 15, 2024 (the “Annual Report”) and in other filings with the SEC.
Reclassification of Prior Period Presentation of Legal Expenses
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Management must apply significant judgment in this process. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from estimates.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“Topic 820”), establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between fair value measurements based on market data (observable inputs) and those based on the Company’s own assumptions (unobservable inputs). This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values takes into account the market for the Company’s financial assets and liabilities, the associated credit risk, and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Revenue Recognition
The Company accounts for revenues in accordance with ASC 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
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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 for the supply of materials for clinical development of licensed products. To meet all the criteria to qualify as a contract under Topic 606, the Company must enter into statements-of-work for purchases of clinical and research grade materials. The Company has determined that the manufacturing of the clinical and research materials 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.
Investments
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 its condensed interim 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
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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, 2023, the Company had a balance of $
As of September 30, 2024, the Company had a balance of $
3. Debt, Net
Cogent Bank Loan
On August 15, 2022, the Company entered into the 2022 Loan Agreement with Cogent Bank, pursuant to which it received $
As of September 30, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction of its new manufacturing facilities and upgraded research laboratories. The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements; however, as of the reporting date, the lender has not elected to do so. As of September 30, 2024, the Company has reflected this loan as Short-term debt, net, to reflect that the lender has the right to accelerate the loan under a discretionary default provision. As of September 30, 2024, $
Senior Secured Notes
On March 31, 2024, the Company entered into a Note Purchase Agreement with the Purchasers (as defined in the Note Purchase Agreement), pursuant to which the Company may issue secured notes up to an aggregate principal amount up to $
As of September 30, 2024, the Company received $
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As of July 2, 2024, existing investors in Secured Notes unanimously agreed to an Amended and Restated Note Purchase Agreement and related documents (“Amended and Restated Note Purchase Agreement”). On September 30, 2024, existing investors approved an amendment to the Amended and Restated Note Purchase Agreement which extended the last closing date to October 31, 2024. No other terms were changed. Under the terms of the Amended and Restated Note Purchase Agreement, the Secured Notes continue to bear interest at a rate of
If the Company elects to prepay the Senior Notes on or before December 31, 2024, there is a
As of September 30, 2024, the fair value of the embedded derivative, which incorporated the likelihood of certain events occurring, was immaterial. Thus, as of September 30, 2024, the Company did not recognize the embedded derivative in the accompanying condensed financial statements.
The Company accounts for the bonus payment to be paid if the Secured Notes are repaid on the Maturity Date by accreting the bonus payment to the full amount due on the Maturity Date, utilizing the effective interest rate method. As of September 30, 2024, the Company did not recognize accretion of the bonus payment, which was not considered material to the accompanying condensed financial statements.
4. Preferred Stock
5. Net Loss Per Share
The following table summarizes the computation of the basic and diluted net loss per share:
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2023 |
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2024 |
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2023 |
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2024 |
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Numerator: |
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Net loss |
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Denominator: |
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Weighted-average common shares outstanding |
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Net loss per share, basic and diluted |
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$ |
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$ |
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$ |
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$ |
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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:
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At September 30, |
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2023 |
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2024 |
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Common stock options |
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Potentially dilutive securities |
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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 and accrued liabilities, approximate fair value due to their short-term maturities.
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.
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At December 31, 2023: |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Assets: |
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Money market funds |
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$ |
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$ |
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$ |
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Total |
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$ |
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$ |
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$ |
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$ |
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At September 30, 2024: |
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Total |
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Assets: |
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Money market funds |
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$ |
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Total |
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7. Income Taxes
8. Commitments and Contingencies
Operating Leases
As of March 1, 2022, the Company entered a
On March 1, 2024, the Company entered a
For the three months ended September 30, 2023 and 2024, rent expense recognized by the Company was $
Contractual Commitments
The Company has commitments with a third-party manufacturing organization to supply us with clinical grade materials. As of September 30, 2024, it is under contract for obligations of $
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Project Financing
On January 10, 2024 (the “Termination Date”), the Company exercised its right to terminate its credit agreement (the “Credit Agreement”), dated April 21, 2023, with Prime Capital Ventures, LLC (the “Lender”), as permitted under the terms of the Credit Agreement. These funds were intended to finance the construction and renovation of the Company’s new headquarters (the “Property”). The termination followed repeated delays in funding and related concerns. There were no borrowings under the Credit Agreement as of the Termination Date, and the Company did not incur any penalties as a result of such termination under the terms of the Agreement. Upon exercising its right to terminate the Agreement, the Company was entitled to receive the return of the $
The Company continues to seek financing to complete the construction and renovation of its Property, where it intends to build a new headquarters, including a biologics manufacturing facility, upgraded research laboratory facilities, vivarium, and upgraded office and common areas.
Nonoperating Loss
As reported in the Company’s Form 8-K filed on May 1, 2024 with the SEC, the Company became aware that it was the victim of a criminal scheme involving the impersonation of a purchaser upon the default on a legally binding commitment to purchase $
Legal
Legal Proceedings
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.
Arbitration, Settlement and General Release
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 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 proceeded in arbitration before JAMS and consolidated with the arbitration Altor/NantCell initiated against Dr. Wong (the “Arbitration”). On March 26, 2024, Altor/NantCell filed a complaint (the “Complaint”) against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong.
As reported in the Company’s Form 8-K filed on July 18, 2024 and described in Part II, Item 1. – “Legal Proceedings” below, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with Altor BioScience, LLC (“Altor”), NantCell, Inc. (“NantCell”), and ImmunityBio, Inc. (the parent of Altor and NantCell, together with Altor and NantCell, “ImmunityBio”), to resolve the previously disclosed Arbitration before JAMS brought by Altor and NantCell as well as the Complaint Altor filed against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong. The Settlement Agreement includes mutual general releases by and among the parties thereto. No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in
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connection with the matter. The Company has substantially completed remediation procedures required to be in compliance with the terms of the Settlement Agreement. The Settlement Agreement provides that, upon completion of these procedures, the parties mutually agreed to stipulate that the Arbitration and Complaint should be dismissed.
As of the filing date, the parties to the Settlement Agreement are working together to finalize the notices and related final documentation to obtain dismissal of the Arbitration and Complaint.
Other Matters
As of September 30, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction of its new manufacturing facilities and upgraded research laboratories. The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements; however, as of the reporting date, to the Company’s knowledge, the lender has not elected to do so.
Inflationary Cost Environment, Banking Crisis, Supply Chain Disruption and the Macroeconomic Environment
The Company’s 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, China-Taiwan relations, 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 filed. In addition to the required recognition or disclosure disclosed in the footnotes herein, there were also the following subsequent events after the reporting date:
During October 2024, the Company issued $
On November 13, 2024, we entered into an engagement letter with the Maxim Group to act as the exclusive placement agent for a multi-step equity financing.
As of the filing date, the parties to the Settlement Agreement are working together to finalize the notices and related final documentation to obtain dismissal of the Arbitration and Complaint.
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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, 2023 included in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 15, 2024 (the “Annual Report”). 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 health span 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. The induction and retention of low-grade inflammation in an aging human body is mainly the result of the accumulation of non-proliferative but metabolically active senescent cells, which can also be caused by persistent activation of protein complexes, known as inflammasomes, in innate immune cells.
These two elements share common mechanisms in promoting secretion of proinflammatory proteins and in many cases interact to drive senescence, and thus, inflammaging. Our novel approach is to reduce senescent cells and eliminate the proinflammatory factors they secrete systemically through multiple pathways. We believe our approach has the potential to fundamentally change the treatment of age-related diseases. Accumulation of senescent cells with senescence-associated proinflammatory factors has been implicated as a major source of chronic sterile inflammation leading to many aging-related pathologies. The key to our immunotherapeutic approach is elimination of senescent cells and the proinflammatory factors they secrete.
The Settlement Agreement among the Company, Dr. Wong, Altor, NantCell and ImmunityBio, which was entered into as of July 13, 2024, and is described in Part II, Item 1. – “Legal Proceedings” below, eliminated the uncertainty of the outcome of the previously disclosed arbitration proceedings and provided clarity for the future direction and emphasis of our clinical development
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strategy. The settlement involved intellectual property the Company developed, including the proprietary TOBITM drug discovery platform and its unique Tissue-Factor scaffold used to create protein-fusion molecules that include several elements, such as multiple protein targets, including cytokines, single-chain antibodies, and ligands, as well as proprietary TOBI-based molecules.
The Backbone of the Company’s Clinical Development Program: Two Novel Proprietary Drug Discovery Platforms
Two Novel Drug Discovery Platforms. HCW Biologics created two novel drug discovery platforms, using two distinctly different scaffolds to anchor the composition of immunotherapeutic fusions. This results in the creation of molecules with different mechanisms of action, which opens up different pathways for treatment of diseases promoted by chronic inflammation.
TOBITM (Tissue factOr-Based fusIon) Platform. This patented drug discovery platform is built around a Tissue Factor scaffold. The TOBITM platform packs multiple protein targets, including cytokines, single-chain antibodies, and ligands, into a single fusion molecule. These molecules are capable of engaging immunostimulatory functions and addressing many signaling pathways simultaneously. Some of these fusion protein complexes have ex vivo and in vivo applications, although the Company is primarily focused on drugs developed using subcutaneous injection. Molecules created with the TOBITM platform are reproducible and suitable for cGMP manufacturing. We have manufactured quantities of four TOBI-based molecules in a cGMP manufacturing setting.
The Company’s clinical development program includes the following TOBI-based immunotherapeutics:
HCW9218. This is a clinical-stage bifunctional molecule that can impact senescence by reducing senescent cells (i.e., senescent-cell-reducing effect) and eliminating the proinflammatory factors they secrete (i.e., senomorphic effect). Subcutaneous administration of HCW9218 activates NK cells, innate lymphoid group-1, and CD8+ T cells, and neutralizes TGF-β. Our future HCW9218 program includes a Phase 2 study in ovarian cancer in a neoadjuvant setting. The primary focus for future clinical development of HCW9218 will be in other senescence-associated diseases and conditions beyond cancer.
The Company has exclusive rights to develop treatments for all other age-related diseases other than cancer using HCW9218. We will be able to use the Recommended Phase 2 Dose (“RP2D”) and other learnings based on findings in the Phase 1 studies which wrapped up at the beginning of 2024.
The Company has non-exclusive rights to develop HCW9218 treatments for ovarian cancer in a neoadjuvant setting. The University of Pittsburgh Medical Center (“UMPC”) is the sponsor for an ongoing Phase 2 clinical study to evaluate HCW9218 in the treatment of ovarian cancer in a neoadjuvant setting. For this study, HCW9218 will be administered in combination with neoadjuvant chemotherapy as a first-line treatment with neoadjuvant chemotherapy alone serving as a control arm. The Company has learned that UPMC may change the principal investigator for this study, due to some changes at the institution. Patient recruitment is in progress, but no patients have been enrolled in this study as of the reporting date. Under the terms of the Settlement Agreement, UPMC has until year end to launch this study.
The Settlement Agreement among the Company, Dr. Wong, Altor, NantCell and ImmunityBio, which was entered into as of July 13, 2024, and is described in Part II, Item 1. – “Legal Proceedings” below, eliminated the uncertainty of the outcome of the previously disclosed arbitration proceedings and provided clarity for the future direction and emphasis of our clinical development strategy. However, under the Settlement Agreement, the Company agreed to transfer the HCW9218 master cell line to ImmunityBio. In turn, ImmunityBio agreed to enter into a supply agreement with the Company by the end of January 2025 to ensure clinical supply of HCW9218 is available to carry on clinical studies.
HCW9302. HCW9302 is the basis for the Company’s autoimmune program. Subcutaneous administration of HCW9302 is designed to activate and expand Treg cells to reduce senescence by suppressing the activity of inflammasome-bearing immune cells and the inflammatory factors which they secrete.
The Company filed our IND application to the U.S. Food and Drug Administration (“FDA”), which is currently under review. The Company is seeking approval to conduct a clinical study to evaluate HCW9302 in an autoimmune indication. The Company cannot provide any assurance that the FDA will authorize it to initiate its planned clinical trials on a timely basis, or at all. In the event that the FDA does not accept the Company’s IND, the Company may also be required to seek feedback, and the feedback may be unfavorable. In the event that the Company does not receive feedback on a timely basis, or the Company is required to change the design of the clinical protocol or address other feedback, clinical development of the products would be delayed and the costs may increase. Moreover, if the FDA does not accept the Company’s IND, the Company may be required to conduct additional preclinical testing or other IND-enabling activities, which would result in further delay and additional costs.
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We intend to explore utility of HCW9302 for other aging-related diseases, such as neurodegenerative diseases, in relevant animal models. Our plan is to identify the RP2D in patients based on a Phase 1b clinical trial to evaluate HCW9302 in an autoimmune indication, then expand to a neurodegenerative disease indication in a Phase 2 trial utilizing this RP2D.
HCW9206. HCW Biologics maintains the rights to the injectable form of HCW9206. This form of HCW9206 is preclinical, and we are beginning IND-enabling activities. Ex vivo rights have been licensed to Wugen. This form of HCW9206 is clinical stage, and Wugen is evaluating it in combination with HCW9201 in a Phase 1 clinical trial. HCW9206 has a unique design consisting of a multi-functional compound constructed with three powerful cytokines: IL-7, IL-15, and IL-21. It is designed to stimulate T cell proliferation and activation, enhance NK cell cytotoxicity, and improve overall immune surveillance against pathogens or tumors. HCW9206 is being considered to be the basis of our future oncology and anti-infectious disease programs.
HCW9201. This is a clinical-stage molecule currently being evaluated by Wugen in a Phase 1 clinical trial in Acute Myeloid Leukemia, as a cell-based treatment. We have not yet initiated any clinical trials to evaluate HCW9201 in other indications. We retain the rights for administration by subcutaneous injection. HCW9201 has a unique design that results in a multi-functional compound with three powerful cytokines, IL-12, IL-15, and IL-18, in a single protein complex. We are exploring intra-tumoral injection of HCW9201 for treatment of cancer.
New Drug Discovery Platform with Novel Protein-Based Scaffold. Our recently discovered a new drug development platform uses a novel protein scaffold that is not based on tissue factor, which differentiates it from TOBITM platform. With immunotherapeutic compounds that are constructed with this new platform without tissue factor, we expand the diseases and conditions that may be treated. The Company has already used this novel protein scaffold to construct several immunotherapeutic fusions, which we are testing to determine the most promising programs, including those that could be licensed to others.
This scaffold has the capability to construct multiple classes of immunotherapeutic compounds, including:
The Company is conducting rigorous preclinical animal studies using several different models to characterize these new compounds and identify those that indicate the greatest potential to evaluate in treatments of cancer and other diseases promoted by chronic inflammation. The clinical development plan is for at least one molecule constructed with this novel platform to be in clinical development in 2026, either through a Company-owned program or through an out-licensing program.
Business and Financing Strategies
The Company is exploring numerous additional molecules with substantial potential applications. The Company considers business development transactions, such as out-licensing agreements, to be fundamental elements of our financing strategy to provide future non-dilutive capital required to fund clinical development of the Company’s lead immunotherapeutic programs.
We signed our first out-license agreement at the end of 2020, which was an exclusive worldwide license (the “Wugen License”) with Wugen, Inc. (“Wugen”), a company that specializes in cell-based therapies for cancer. As part of the upfront license fee, the Company received shares of Wugen’s common stock that currently represents a 5.6% ownership interest based on fully converted issued and outstanding shares. Wugen licensed limited rights to develop, manufacture, and commercialize cell-based therapy treatments for cancer based on two of our internally-developed, multi-cytokine fusion protein molecules, HCW9201 and HCW9206. The licensed molecules are the basis for Wugen’s memory-like NK cell therapy program. Wugen also has a promising CAR-T program, based on its lead molecule WU-CART-007. The WU-CART007 program was recognized by two regulatory designations by the FDA and EU, respectively, that have expedited regulatory review. Wugen has been cleared to initiate a pivotal Phase 2 study in the first quarter of 2025 for its first-in-class, investigational, anti-CD7 CAR-T cell therapy, WU-CART-007, in patients with relapsed or refractory (R/R) T cell acute lymphoblastic leukemia or T cell lymphoblastic lymphoma (T-ALL/LBL).
We plan to continue to work with the National Institutes of Health and the National Cancer Institute (“NCI”) for collaborative agreements and assistance with funding research and clinical studies. In 2022, the Company entered a Cooperative Research and Development Agreement (“CRADA”), and under the CRADA we collaborated with NCI on a Phase 1b/2 clinical study in patients with advanced/metastatic and chemo-refractory/chemo-resistant pancreatic cancer. Our plan is to leverage these relationships to benefit the clinical development of HCW9206 and immunotherapeutic fusions we create in the future in cancer indications.
16
The Company remains committed to establishing some control over our clinical supply of materials, and the supply of licensed molecules for our licensees. The Company has retained manufacturing rights for the licensed molecules under the Wugen License and intends to use the same framework in future if we enter other licensing agreements. On September 9, 2024, the House of Representatives passed the BIOSECURE Act (the “Act”). With strong bi-partisan support, the bill is expected to become law in 2024. Somewhat unusually, the Act names specific companies as automatically qualifying as “biotechnology companies of concern.” The expectation is that this provision of the Act would effectively prohibit U.S. companies from doing business with five Chinese firms, including WuXi AppTec, Complete Genomics and MGI Tech. For life sciences companies, WuXi is one of the largest global providers of contract development and manufacturing services in the world. By some estimates, WuXi, an important partner with many biotech and pharma companies, is involved in developing 25% of the drugs used in the United States. The Act would effectively ban WuXi from conducting business in the United States, which is expected to disrupt the supply chain for life sciences companies. The result is expected to produce delays, price increases, and supply shortages for many years as the industry replaces WuXi’s capacity as well as other firms named in the Act.
Business Highlights
Remediation and Dismissal of Arbitration
Financing
17
Clinical Development
Trends and Uncertainties
Inflationary Cost Environment, Banking Crisis, Supply Chain Disruption and the Macroeconomic Environment
Our 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 between Russia and Ukraine, the war in the Middle East, China-Taiwan relations, financial market volatility and currency movements. These headwinds, specifically the supply chain disruptions, have adversely impacted our ability to procure certain services and materials, which in some cases impacts the cost and timing of clinical trials and IND-enabling activities. In addition, we have been impacted by inflation when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Further, rising interest rates have also increased borrowing costs. The Company uses a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines. However, the extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable.
For discussion of risks related to potential impacts of supply chain, inflation, geopolitical and macroeconomic challenges on our operations, business results and financial condition, see Part II, Item 1A. – “Risk Factors” in the Company’s Annual Report.
Components of our Results of Operation
Revenues
We have no products approved for commercial sale and have not generated any revenue from commercial product sales of internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases. The principal source of our revenues to date have been generated from our Wugen License and Master Services Agreement (the “MSA”) with Wugen. See Note 1 to our condensed interim financial statements included elsewhere in this Quarterly Report for these definitions and more information.
We derive revenue from a license agreement granting rights to Wugen to further develop and commercialize products based on two of our internally-developed molecules. Consideration under our contract included a nonrefundable upfront payment, development, regulatory and commercial milestones, and royalties based on net sales of approved products. Additionally, HCW Biologics retained manufacturing rights and has agreed to provide Wugen with clinical and research grade materials for clinical development and commercialization of licensed products under separate agreements. We assessed which activities in the Wugen License should be considered distinct performance obligations that should be accounted for separately. We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the Wugen License.
Performance obligations relating to the granting a license and delivery of licensed product and R&D know-how were satisfied when transferred upon the execution of the Wugen License on December 24, 2020. The Company recognized revenue for the related consideration at a point in time. The revenue recognized from a transaction to supply clinical and research grade materials entered into under the MSA and covered by a Statement of Work, represents one performance obligation that is satisfied over time. The Company recognizes revenue generated for supply of material for clinical development 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.
18
Operating Expenses
Our operating expenses are reported as research and development expenses and general and administrative expenses.
Research and Development
Our research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
We expense research and development costs as they are incurred. Costs for contract manufacturing are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the agreement, and the pattern of payments for goods and services will change depending on the material. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed.
We expect research and development expenses to increase substantially for the foreseeable future as we continue the development of our product candidates. We cannot reasonably determine the nature, timing, and costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. Product candidates in later stages of development generally have higher development costs than those in earlier stages. See “Risk Factors – Risks Related to the Development and Clinical Testing of Our Product Candidates,” in our Annual Report for a discussion of some of the risks and uncertainties associated with the development and commercialization of our product candidates. Any changes in the outcome of any of these risks and uncertainties with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries, related benefits, and stock-based compensation expense for employees in the executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include third-party costs such as insurance costs, fees for professional services, such as legal fees in the ordinary course of business, auditing and tax services, facilities administrative costs, and other expenses.
We expect general and administrative expenses incurred in the normal course of business for other purposes, such as costs for recruitment and retention of personnel, service fees for consultants, advisors and accountants, as well as costs to comply with government regulations, corporate governance, internal control over financial reporting, insurance and other requirements for a public company, to continue to increase for the foreseeable future as we build our clinical programs.
Legal Expenses
Legal expenses consist of fees incurred by the Company in its own defense and that of officers and employees in connection with a legal matter brought against the Company and Dr. Hing C. Wong, our Founder and Chief Executive Officer, by a former employer of Dr. Wong.
19
During the period ended December 31, 2022, Altor/NantCell initiated legal proceedings against Dr. Wong and the Company. 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 U.S. District Court for the Southern District of Florida (the “Court”) with jurisdiction over the lawsuit against the Company 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. Proceedings against the Company and Dr. Wong were consolidated in the arbitration before JAMS (“Arbitration”). On March 26, 2024, Altor/NantCell filed a complaint (the “Complaint”) against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong. The arbitration hearing was held on May 20, 2024 to May 31, 2024, after which the parties entered into settlement negotiations.
As reported in the Company’s Form 8-K filed on July 18, 2024 and further described in Part II, Item 1. – “Legal Proceedings” below, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with Altor BioScience, LLC (“Altor”), NantCell, Inc. (“NantCell”), and ImmunityBio, Inc. (the parent of Altor and NantCell, together with Altor and NantCell, “ImmunityBio”), to resolve the previously disclosed Arbitration before JAMS brought by Altor and NantCell as well as a Complaint Altor filed against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong. The Settlement Agreement includes mutual general releases by and among the parties thereto. No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in connection with the matter. The Company has substantially completed remediation procedures required to be in compliance with the terms of the Settlement Agreement. Under the Settlement Agreement, upon completion of these procedures, the parties mutually agreed to stipulate that the Arbitration and Complaint should be dismissed. In accordance with 17 CFR 229.601 (Item 601), the Company has included the Settlement Agreement in this Quarterly Report on Form 10-Q. As of the filing date, the parties to the Settlement Agreement are working together to finalize the notices and related final documentation to obtain dismissal of the Arbitration and Complaint.
Nonoperating Loss
As reported in the Company’s Form 8-K filed on May 1, 2024 with the SEC, the Company became aware that it was the victim of a criminal scheme involving the impersonation of a purchaser upon the default on a legally binding commitment to purchase $8.0 million of secured notes from the Company. The scheme resulted in the misdirection of approximately $1.3 million held in Company accounts to a fraudulent account controlled by a third party. The Company is pursuing all available remedies to recover this loss. Given the limited success that these efforts have had to date for the recovery of funds, the Company recognized a loss of $1.3 million in the nine-month period ended September 30, 2024.
Interest Expense
Interest expense includes interest paid on debt. This includes interest due on the Cogent Bank loan and senior secured notes issued by the Company.
Other Income, Net
Other income, net consists of interest earned on our cash, cash equivalents, unrealized gains and losses related to our investments in U.S. government-backed securities, and other income and expenses related to non-operating activities.
20
Results of Operations
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenues |
|
$ |
853,102 |
|
|
$ |
426,423 |
|
|
$ |
1,517,792 |
|
|
$ |
2,171,988 |
|
|
Cost of revenues |
|
|
(678,325 |
) |
|
|
(341,138 |
) |
|
|
(1,210,077 |
) |
|
|
(1,291,546 |
) |
|
Net revenues |
|
|
174,777 |
|
|
|
85,285 |
|
|
|
307,715 |
|
|
|
880,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
1,667,442 |
|
|
|
1,186,913 |
|
|
|
5,539,919 |
|
|
|
5,339,383 |
|
|
General and administrative |
|
|
1,509,936 |
|
|
|
1,639,152 |
|
|
|
5,106,674 |
|
|
|
4,799,437 |
|
|
Legal expenses |
|
|
2,075,279 |
|
|
|
949,455 |
|
|
|
4,610,091 |
|
|
|
15,761,531 |
|
|
Nonoperating loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,300,000 |
|
|
Total operating expenses |
|
|
5,252,657 |
|
|
|
3,775,520 |
|
|
|
15,256,684 |
|
|
|
27,200,351 |
|
|
Loss from operations |
|
|
(5,077,880 |
) |
|
|
(3,690,235 |
) |
|
|
(14,948,969 |
) |
|
|
(26,319,909 |
) |
|
Interest expense |
|
|
(95,514 |
) |
|
|
(223,363 |
) |
|
|
(284,465 |
) |
|
|
(383,029 |
) |
|
Other income, net |
|
|
234,753 |
|
|
|
11,310 |
|
|
|
919,688 |
|
|
|
52,397 |
|
|
Net loss |
|
$ |
(4,938,641 |
) |
|
$ |
(3,902,288 |
) |
|
$ |
(14,313,746 |
) |
|
$ |
(26,650,541 |
) |
|
Comparison of the Three Months ended September 30, 2023 and September 30, 2024
Revenues
The Company recognized revenues of $853,102 and $426,423 for the three months ended September 30, 2023 and 2024, respectively. Revenues were derived exclusively from the sale of licensed molecules to Wugen. Under the terms of the supply agreement between Wugen and the Company, the Company earns an industry-standard gross margin. Occasionally, Wugen acquires product which is part of inventory we made for our own use. In these instances, we do not apply the standard costs since the cost of manufacturing these materials would have already been expensed in a prior period.
Research and Development Expenses
The following table summarizes our research and development expenses for the three months ended September 30, 2023 and September 30, 2024:
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2024 |
|
|
$ Change |
|
|
% Change |
|
||||
Salaries, benefits and related expenses |
|
$ |
692,607 |
|
|
$ |
652,867 |
|
|
$ |
(39,740 |
) |
|
|
(6 |
)% |
Manufacturing and materials |
|
|
206,150 |
|
|
|
47,748 |
|
|
|
(158,402 |
) |
|
|
(77 |
)% |
Preclinical expenses |
|
|
306,344 |
|
|
|
144,746 |
|
|
|
(161,598 |
) |
|
|
(53 |
)% |
Clinical trials |
|
|
343,821 |
|
|
|
164,139 |
|
|
|
(179,682 |
) |
|
|
(52 |
)% |
Other expenses |
|
|
118,520 |
|
|
|
177,413 |
|
|
|
58,893 |
|
|
|
50 |
% |
Total research and development expenses |
|
$ |
1,667,442 |
|
|
$ |
1,186,913 |
|
|
$ |
(480,529 |
) |
|
|
(29 |
)% |
Research and development expenses decreased by $480,529, or 29%, from $1.7 million for the three months ended September 30, 2023 to $1.2 million for the three months ended September 30, 2024. The decrease was primarily attributable to a decrease in expenses for manufacturing and materials, preclinical activities and clinical studies.
Salaries, benefits, and related expenses decreased by $39,740, or 6%, from $692,607 for the three months ended September 30, 2023 to $652,867 for the three months ended September 30, 2024. The decrease reflects cost cutting measures put in place in the second quarter of 2024, which resulted in a $11,572 decrease in salaries and related taxes and a $29,801 decrease in costs related to employee benefits for the three-month period ended September 30, 2024.
21
Manufacturing and materials expense decreased by $158,402, or 77%, from $206,150 for the three months ended September 30, 2023 to $47,748 for the three months ended September 30, 2024. In the three months ended September 30, 2023, costs were incurred primarily for master cell bank characterization for HCW9101H, a high-producing cell line of a key component of the manufacturing process for the Company's proprietary molecules including those licensed to Wugen, as well as ancillary activities such as shipping, insurance and storage. In the three months ended September 30, 2024, costs were associated with ancillary activities such as shipping and storage.
Expenses associated with preclinical activities decreased by $161,598, or 53%, from $306,344 for the three months ended September 30, 2023 to $144,746 for the three months ended September 30, 2024. In the three months ended September 30, 2023 and 2024, costs were incurred primarily for IND-enabling studies to prepare for the submission of an IND application to evaluate HCW9302 in a clinical study.
Expenses associated with clinical activities decreased by $179,682, or 52%, from $343,821 for the three months ended September 30, 2023 to $164,139 for the three months ended September 30, 2024. The decrease in costs was primarily attributable a $188,637 decrease in the expenses associated with patient fees, partially offset by a $9,290 increase in consulting and other professional fees.
Subject to our ability to successfully execute our plans to obtain financing, we anticipate expenses related to clinical activities will increase substantially in the future, in the event that we successfully advance our immunotherapeutic fusion molecules in clinical development. If we are unable to complete planned capital-raising transactions and business development transactions for out-licensing, we may have to curtail or cease operations.
Other expenses, which include overhead allocations, increased by $58,893, or 50%, from $118,520 for the three months ended September 30, 2023 to $177,413 for the three months ended September 30, 2024. This increase is primarily attributable to a change in allocation of overhead to cost of good sold and a $62,031 decrease in travel-related expenses partially offset by a $9,786 increase in costs associated with IT, office supplies and other office equipment.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the three months ended September 30, 2023 and September 30, 2024:
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2024 |
|
|
$ Change |
|
|
% Change |
|
||||
Salaries, benefits and related expenses |
|
$ |
775,956 |
|
|
$ |
619,070 |
|
|
$ |
(156,886 |
) |
|
|
(20 |
)% |
Professional services |
|
|
207,815 |
|
|
|
376,910 |
|
|
|
169,095 |
|
|
|
81 |
% |
Facilities and office expenses |
|
|
175,694 |
|
|
|
134,580 |
|
|
|
(41,114 |
) |
|
|
(23 |
)% |
Depreciation |
|
|
63,083 |
|
|
|
69,370 |
|
|
|
6,287 |
|
|
|
10 |
% |
Rent and occupancy expense |
|
|
36,372 |
|
|
|
49,160 |
|
|
|
12,788 |
|
|
|
35 |
% |
Other expenses |
|
|
251,016 |
|
|
|
390,062 |
|
|
|
139,046 |
|
|
|
55 |
% |
Total general and administrative expenses |
|
$ |
1,509,936 |
|
|
$ |
1,639,152 |
|
|
$ |
129,216 |
|
|
|
9 |
% |
General and administrative expenses related to the ordinary course of business increased by $129,216, or 9%, from $1.5 million for the three months ended September 30, 2023 to $1.6 million for the three months ended September 30, 2024. The increase is primarily attributable to an increase in professional services, mainly legal fees related to patents, and an increase in other expenses, mainly costs related to insurance, offset by a decrease in salaries and benefits.
Salaries, benefits and related expenses decreased by $156,886, or 20%, from $775,956 for the three months ended September 30, 2023 to $619,070 for the three months ended September 30, 2024. The decrease reflects cost cutting measures put in place in the second quarter of 2024, which resulted in a $152,332 decrease in salaries and related taxes and a $15,511 decrease in costs related to employee benefits for the three-month period ended September 30, 2024. These costs were offset by an increase of $10,957 in expenses related to stock-based compensation.
22
Professional services increased by $169,095, or 81%, from $207,815 for the three months ended September 30, 2023 to $376,910 for the three months ended September 30, 2024. Professional services include corporate legal services, legal services for procuring patents, as well as other professional services, such as auditing and tax advisory fees. The increase is primarily attributable to a $133,263 increase legal fees for services incurred in connection with procuring patents and a $35,832 increase in costs related to other professional services such as auditing and tax advisory fees. As a result of the Settlement Agreement, the Company agreed to maintain patent protection for rights retained under the agreement.
Facilities and office expenses decreased by $41,114, or 23%, from $175,694 for the three months ended September 30, 2023 to $134,580 for the three months ended September 30, 2024, primarily due to a $62,791 decrease in software and other licensing fees, partially offset by a $13,558 increase in other IT related expenses and a $10,818 increase in facilities expenses such as electricity and waste disposal.
Other expenses increased by $139,046, or 55%, from $251,016 for the three months ended September 30, 2023 to $390,046 for the three months ended September 30, 2024. The increase is primarily attributable to a $115,668 increase in insurance-related costs and a $37,730 increase in finance costs.
Legal Expenses
Legal expenses were $2.1 million in the three months ended September 30, 2023 and $1.0 million for the three months ended September 30, 2024. In the three months ended September 30, 2023, costs were incurred in connection with several legal proceedings which culminated by consolidating Altor/NantCell’s action against the Company with the Altor/NantCell arbitration demand against Dr. Wong. Thereafter, proceedings against the Company and Dr. Wong were consolidated in the arbitration before JAMS.
In the three months ended September 30, 2024, the Company reached a Settlement Agreement with the other parties to the arbitration and undertook the necessary steps for remediation and transfer of information required under the terms of the agreement. As of the filing date, the parties to the Settlement Agreement are working together to finalize the notices and related final documentation to obtain dismissal of the Arbitration and Complaint. While the Company has relief from the future burden of ongoing legal expenses related to these proceedings, we incurred significant legal expenses for our defense and for the defense of officers and employees. We require a reasonable payment plan to prevent these expenses from overwhelming the Company’s resources. We are engaged in discussions with the law firms involved with this matter to work out payment plans.
Interest Expense
On August 15, 2022, we entered into a loan and security agreement with Cogent Bank to partially fund our purchase of the property we acquired on that same date. We borrowed $6.5 million under this agreement. Amounts outstanding on the loan accrue interest at a rate per annum equal to 5.75%. We were obligated to make interest-only payments on this loan from September 2022 through August 2023 and principal and interest payments in 47 equal monthly installments, based on a 25-year maturity schedule, commencing September 15, 2023. We paid $95,514 and $93,936 in cash for interest on the Cogent Bank loan for the three months ended September 30, 2023 and 2024, respectively. For the three months ended September 30, and September 30, 2024, interest was expensed.
As of September 30, 2024, the Company had issued $6.5 million in senior secured notes which bear interest at an annual rate of 9%, payable quarter in arrears. We paid $87,386 in cash interest on the senior secured notes for the three months ended September 30, 2024. There were no senior secured notes outstanding in 2023.
Other Income, Net
Other income, net decreased from $234,753 for the three months ended September 30, 2023 to $11,310 for the three months ended September 30, 2024. The decrease is primarily attributable to a decline in interest earned from money market deposits and a decrease in unrealized gains from investments in U.S. government-backed securities. In addition, for the three months ended September 30, 2023, Other income included rental income. On August 15, 2022, the Company entered into a short-term, market-rate lease with the former owner of the building we purchased on the same date, which terminated in the year ended December 31, 2023. We received rental income of $60,003 for the three months ended September 30, 2023.
Comparison of the Nine Months ended September 30, 2023 and September 30, 2024
Revenues
The Company recognized $1.5 million and $2.2 million of revenues for the nine months ended September 30, 2023 and 2024, respectively. Revenues were derived exclusively from the sale of licensed molecules to Wugen. Under the terms of the supply
23
agreement between Wugen and the Company, the Company earns an industry-standard gross margin. Occasionally, Wugen acquires product which is part of inventory we made for our own use. In these instances, we do not apply the standard costs since the cost of manufacturing these materials would have already been expensed in a prior period.
Research and Development Expenses
The following table summarizes our research and development expenses for the nine months ended September 30, 2023 and September 30, 2024:
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2024 |
|
|
$ Change |
|
|
% Change |
|
||||
Salaries, benefits and related expenses |
|
$ |
2,195,265 |
|
|
$ |
2,189,250 |
|
|
$ |
(6,015 |
) |
|
|
(0 |
)% |
Manufacturing and materials |
|
|
623,785 |
|
|
|
1,375,830 |
|
|
|
752,045 |
|
|
|
121 |
% |
Preclinical expenses |
|
|
1,367,725 |
|
|
|
688,310 |
|
|
|
(679,415 |
) |
|
|
(50 |
)% |
Clinical trials |
|
|
788,116 |
|
|
|
495,910 |
|
|
|
(292,206 |
) |
|
|
(37 |
)% |
Other expenses |
|
|
565,028 |
|
|
|
590,083 |
|
|
|
25,055 |
|
|
|
4 |
% |
Total research and development expenses |
|
$ |
5,539,919 |
|
|
$ |
5,339,383 |
|
|
$ |
(200,536 |
) |
|
|
(4 |
)% |
Research and development expenses decreased by $200,536, or 4%, from $5.5 million for the nine months ended September 30, 2024 to $5.3 million for the nine months ended September 30, 2024, primarily due to an increase in manufacturing and materials expenses, partially offset by a decrease in preclinical and clinical expenses.
Salaries, benefits, and related expenses decreased by $6,015, or 0%, from $2.2 million for the nine months ended September 30, 2023 to $2.2 million for the nine months ended September 30, 2024. This decrease was primarily attributable to a difference in the costs allocated to cost of goods sold, as well as a $121,139 decrease in salaries, benefits and related expenses as a result of cost cutting measures put in place in the second quarter of 2024, consisting of a $83,893 decrease in salaries, bonuses and related taxes and a $29,185 decrease in costs related to employee benefits, for the nine-month period ended September 30, 2024.
Manufacturing and materials expense increased by $752,045, or 121%, from $623,785 for the nine months ended September 30, 2023 to $1.4 million for the nine months ended September 30, 2024. In the nine months ended September 30, 2023, costs were incurred primarily for production activities associated with the master cell bank characterization for a high production cell line for HCW9101; a 200L cGMP manufacturing run of HCW9302; and ancillary activities such as shipping, insurance and storage. In the nine months ended September 30, 2024, costs were primarily attributable to the costs of production and materials related to manufacturing the high producing cell-line of HCW9101, which is used in the manufacturing process for all TOBI-based molecules.
Expenses associated with preclinical activities decreased by $679,415, or 50%, from $1.4 million for the nine months ended September 30, 2023 to $688,310 for the nine months ended September 30, 2024. In the nine months ended September 30, 2023, costs were incurred to complete the toxicology study and for additional studies required for submission of the HCW9302 IND. In the nine months ended September 30, 2024, toxicology and other IND-enabling studies were winding down, and the IND application was finalized, submitted and is now under review.
Expenses associated with clinical activities decreased by $292,206, or 37%, from $788,116 for the nine months ended September 30, 2023 to $495,910 for the nine months ended September 30, 2024. The decrease was primarily attributable to a $341,271 decrease in patient fees, partially offset by a $61,080 increase costs for post-clinical studies that we conducted through collaborations. In the nine months ended September 30, 2023, there were two ongoing clinical trials, including a Phase 1 study sponsored by the University of Minnesota to evaluate HCW9218 in the treatment of various solid tumors, and a Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in chemo-refractory/chemo-resistant pancreatic cancer. In the nine months ended September 30, 2024, we completed enrollment in the Phase 1/1b clinical trials and the majority of our activities were focused on post-clinical correlative studies which we conducted through collaborations. As a result of the Settlement Agreement, ImmunityBio has the exclusive right to the use of HCW9218 in the treatment of pancreatic cancer. We will continue to evaluate HCW9218 in combination with neoadjuvant chemotherapy in the treatment of ovarian cancer.
Other expenses, which include overhead allocations, increased by $25,055, or 4%, from $565,028 for the nine months ended September 30, 2023 to $590,083 for the nine months ended September 30, 2024. The decrease in other expenses is primarily attributable to a decrease in the allocation of depreciation to cost of goods sold, partially offset by a $38,055 decrease in travel-related expenses.
24
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the nine months ended September 30, 2023 and September 30, 2024:
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2024 |
|
|
$ Change |
|
|
% Change |
|
||||
Salaries, benefits and related expenses |
|
$ |
2,408,622 |
|
|
$ |
1,855,660 |
|
|
$ |
(552,962 |
) |
|
|
(23 |
)% |
Professional services |
|
|
1,008,807 |
|
|
|
960,680 |
|
|
|
(48,127 |
) |
|
|
(5 |
)% |
Facilities and office expenses |
|
|
439,373 |
|
|
|
542,890 |
|
|
|
103,517 |
|
|
|
24 |
% |
Depreciation |
|
|
188,454 |
|
|
|
203,050 |
|
|
|
14,596 |
|
|
|
8 |
% |
Rent expense |
|
|
118,296 |
|
|
|
155,860 |
|
|
|
37,564 |
|
|
|
32 |
% |
Other expenses |
|
|
943,122 |
|
|
|
1,081,297 |
|
|
|
138,175 |
|
|
|
15 |
% |
Total general and administrative expenses |
|
$ |
5,106,674 |
|
|
$ |
4,799,437 |
|
|
$ |
(307,237 |
) |
|
|
(6 |
)% |
General and administrative expenses related to the ordinary course of business decreased by $307,237, or 6%, from $5.1 million for the nine months ended September 30, 2023 to $4.8 million for the nine months ended September 30, 2024. The decrease is primarily attributable to a decrease in salaries and bonuses as a result of cost-cutting measures put in place in the second quarter of 2024.
Salaries, benefits and related expenses decreased by $552,962, or 23%, from $2.4 million for the nine months ended September 30, 2023 to $1.9 million for the nine months ended September 30, 2024. The decrease is primarily attributable to a $212,014 decrease in salaries and related taxes, a $19,372 decrease in expenses for employee benefits, and a $304,175 decrease resulting from the waiver of performance-based bonuses earned in 2022 but deferred.
Professional services decreased by $48,127, or 5%, from $1,008,807 for the nine months ended September 30, 2023 to $960,680 for the nine months ended September 30, 2024. Professional services include corporate legal services, legal services for procuring patents, as well as other professional services, such as auditing and tax advisory fees. The decrease is primarily attributable to a $69,797 decrease in legal fees incurred in connection with procuring patents, partially offset by a $21,670 increase in fees for other professional services such as audit and tax advisory fees. As a result of the Settlement Agreement, the Company agreed to maintain patent protection for rights retained under the agreement.
Facilities and office expenses increased by $103,517, or 24%, from $439,373 for the nine months ended September 30, 2023 to $542,890 for the nine months ended September 30, 2024, primarily due to a $78,185 increase in software and other licensing fees and a $21,157 increase in costs for waste disposal.
Other expenses increased by $138,175, or 15%, from $943,122 for the nine months ended September 30, 2023 to $1.1 million for the nine months ended September 30, 2024. The increase is primarily attributable to a $227,470 increase in financing expenses primarily related to our search for a lender to complete the construction of the Company’s new headquarters and a $30,528 increase in insurance-related costs, partially offset by a $102,505 decrease in Delaware franchise taxes.
Legal Expenses
Legal expenses were $4.6 million in the nine months ended September 30, 2023 and $15.8 million for the nine months ended September 30, 2024. In the nine months ended September 30, 2023, costs were incurred in connection with several legal proceedings which culminated by consolidating Altor/NantCell’s action against the Company with the Altor/NantCell arbitration demand against Dr. Wong. Thereafter, proceedings against the Company and Dr. Wong were consolidated in the arbitration before JAMS.
In the nine months ended September 30, 2024, preparations for the arbitration were taking place with witness preparation and depositions. The arbitration hearing was held from May 20, 2024 to May 31, 2024, which required a large team of lawyers to represent the Company; Dr. Wong; Dr. Peter Rhode, our Chief Scientific Officer and Vice President of Clinical Affairs and an officer of the Company; as well as other employees. The hearing was followed by an extended period of intense negotiations which culminated in a Settlement Agreement entered into by the Company and Dr. Wong as of July 13, 2024 with Altor/NantCell and its parent, ImmunityBio. While the Company has relief from the future burden of ongoing legal expenses related to these proceedings, we incurred significant legal expenses for our defense and for the defense of officers and employees. We require a reasonable payment plan to prevent these expenses from overwhelming the Company’s resources. We are engaged in discussions with the law firms involved with this matter.
25
Interest Expense
On August 15, 2022, we entered into a loan and security agreement with Cogent Bank to partially fund our purchase of the property we acquired on that same date. We borrowed $6.5 million under this agreement. Amounts outstanding on the loan accrue interest at a rate per annum equal to 5.75%. We were obligated to make interest-only payments on this loan from September 2022 through August 2023 and principal and interest payments in 47 equal monthly installments, based on a 25-year maturity schedule, commencing September 15, 2023. We paid $284,465 and $282,098 in cash for interest related to the Cogent Bank loan for the nine months ended September 30, 2023 and 2024, respectively. For the nine months ended September 30,2023, interest was expensed. Interest was capitalized the last quarter of 2023 and ceased in the second quarter of 2024. In all other periods, interest was expensed.
As of September 30, 2024, the Company had issued $6.5 million in senior secured notes which bear interest at an annual rate of 9%, payable quarter in arrears. We paid $152,679 in cash interest on the senior secured notes for the nine months ended September 30, 2024. There were no senior secured notes outstanding in 2023.
Other Income, Net
Other income, net decreased from $919,688 for the nine months ended September 30, 2023, to $52,397 for the nine months ended September 30, 2024. The decrease is primarily attributable to a decrease interest earned for money market deposits and unrealized gains for investments in U.S. government-backed securities. Other income included rental income for the nine months ended September 30, 2023. On August 15, 2022, the Company entered into a short-term, market-rate lease with the former owner of the building we purchased on the same date, which terminated in the year ended December 31, 2023. We received rental income of $178,910 for the nine months ended September 30, 2023.
Liquidity and Capital Resources
Sources of Liquidity
As of September 30, 2024, we concluded that there is substantial doubt over as to whether the Company has sufficient capital to operate for the next 12 months from the issuance date of this Quarterly Report based on our liquidity, revenues and ongoing operating losses, as well as the legal fees incurred in conjunction with an arbitration with ImmunityBio prior to the Settlement Agreement executed in the third quarter of 2024. As of September 30, 2024, our principal source of liquidity was $1.0 million in cash and cash equivalents. To date, the Company has funded operations primarily through the sale of stock, issuance of senior secured notes and revenues generated the Wugen License, pursuant to which Wugen licensed limited rights to develop, manufacture, and commercialize cell therapy treatments for cancer based on two of the Company’s internally-developed multi-cytokine fusion protein molecules, and its manufacturing and supply arrangement with Wugen. As of September 30, 2024, 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.
On August 15, 2022, the Company entered into the 2022 Loan Agreement with Cogent Bank, pursuant to which it received $6.5 million in proceeds to purchase a building that will become the Company's new headquarters. The loan is secured by a first priority lien on the building. As of September 30, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction of its new manufacturing facilities and upgraded research laboratories. The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements; however, as of the reporting date, the lender has not elected to do so. As of September 30, 2024, the Company has reflected this loan as Short-term debt, net, to reflect that the lender has the right to accelerate the loan under a discretionary default provision. The Company continues to seek the financing required to complete the construction project, with the cooperation of the lender and lien holders. See Part I, Item 4. -- “Controls and Procedures.”
In 2024, we have raised $9.4 million in financings. On February 20, 2024, we completed a $2.5 million private placement of common stock in which we sold an aggregate of 1,785,718 shares to certain of our officers and directors, at a purchase price of $1.40 per share. As of September 30, 2024, we received $6.5 million from the issuance of Secured Notes, and subsequent to the reporting period, the Company issued an additional $375,000 in Secured Notes. Of the total issuance of Secured Notes, the Company issued $2.9 million to members of the Company’s board of directors and officers, including $2.4 million purchased by Dr. Hing C. Wong, Founder and CEO, $220,000 purchased by Rebecca Byam, Chief Financial Officer, $140,000 purchased by Scott T. Garrett, Chairman of the board of directors, $60,000 purchased by Gary M. Winer, member of the board of directors, $25,000 purchased by Lee Flowers, Senior Vice President for Business Development, and $25,000 purchased by Rick S. Greene, member of the board of directors. The Company expects the funds raised through the issuance of Secured Notes to be sufficient capital to reach a milestone in the fourth quarter of 2024. Management has made some reductions in costs and there may be further reductions or restructuring in the future after we complete the reassessment of our clinical development strategy.
26
A benefit of reaching a Settlement Agreement and concluding the Arbitration is a release from restrictions related to protection of privileged information, which hampered investor ability to conduct due diligence. As a result, we believe that other avenues of financing are now available to us, namely, capital-raising activities for equity and equity-like investments as well as business development transactions such as out-licensing agreements for rights for our proprietary molecules. However, there can be no assurance of our success in our capital-raising activities. If we are not successful in raising additional capital, we have the ability to revise our business plan and reduce costs. If such revisions are insufficient, we may have to curtail or cease operations.
The Company and Dr. Wong, our Founder and Chief Executive Officer, entered into a Settlement Agreement and Release on a previously reported Arbitration as of July 13, 2024. See Part II., Item 1. - “Legal Proceedings.” While the Settlement Agreement has resolved uncertainty regarding the outcome of these proceedings and the ongoing legal expenses, the Company incurred significant legal expenses in the period leading up to the Settlement Agreement. As of September 30, 2024, we reported a balance of $14.4 million for legal fees incurred but not yet paid in the accompany condensed balance sheet. In order not to overwhelm the Company’s resources, a reasonable payment plan will be required. The Company is engaged in discussions with the law firms involved with this matter.
We considered elements of our financing plan that were probable and likely to be implemented within the next year to determine if financing activities currently underway are sufficient mitigate the substantial doubt in our going concern analysis. The Company launched a financing plan in the third quarter of 2024. The plan includes several capital-raising activities, such as issuance of secured notes, equity financings, as well as business development transactions, such as license agreements with guaranteed minimum payments. Through October 31, 2024, the Company had issued an aggregate of $6.9 million in secured notes. On September 25, 2024, the Company entered into a nonbinding term sheet with a party interested in licensing one of the Company’s preclinical molecules. The Company expects to close this license transaction in the fourth quarter of 2024. The proposed terms of the license include a guaranteed minimum payments which are expected within the first year of the term. On November 13, 2024, we entered into an engagement letter with the Maxim Group to act as the exclusive placement agent for a multi-step equity financing. If the Company is not successful in raising additional capital through these activities, management intends to revise its business plan and reduce costs. If such revisions are insufficient, the Company may have to curtail or cease operations.
The accompanying interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. The Company believes that substantial doubt exists regarding its ability to continue as a going concern for at least 12 months from the date of issuance of the Company’s condensed interim financial statements, without additional funding or financial support. After considering management’s plan for financing and funds raised that are probable to occur within one year, as well as that the Company expects to continue to incur losses from operations for the foreseeable future, management concluded that the substantial doubt that existed in its going concern analysis was not alleviated.
Because of the numerous risks and uncertainties associated with the clinical development and commercialization of immunotherapeutics, we are unable to estimate the exact amount of capital requirements to pursue these activities. Our funding requirements will depend on many factors, including, but not limited to:
27
A change in the outcome of any of these or other factors with respect to the clinical development and commercialization of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures.
Comparison of the Cash Flows for the Nine Months Ended September 30, 2023 and September 30, 2024
The following table summarizes our cash flows for the nine months ended September 30, 2023 and September 30, 2024:
|
|
Nine Months Ended |
|
|||||
|
|
2023 |
|
|
2024 |
|
||
Cash used in operating activities |
|
$ |
(18,619,329 |
) |
|
$ |
(11,392,547 |
) |
Cash provided by (used in) investing activities |
|
|
7,513,050 |
|
|
|
(148,205 |
) |
Cash provided by financing activities |
|
|
716 |
|
|
|
8,943,872 |
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(11,105,563 |
) |
|
$ |
(2,596,880 |
) |
Operating Activities
Net cash used in operating activities were $18.6 million for the nine months ended September 30, 2023 and $11.4 million for the nine months ended September 30, 2024.
Cash used in operating activities for the nine months ended September 30, 2023 consisted primarily of a net loss of $14.3 million, as well as a deposit $5.3 million used to establish an interest reserve for future interest payments, as required under the terms of the Credit Agreement intended to be used to fund the construction and renovation of the Company’s new headquarters. In addition, other uses of cash include a $292,383 increase in accounts receivable and a $251,008 increase in prepaid expenses and other current assets, partially offset by cash provided by a $392,802 net increase in accounts payable and other current liabilities. Further offset to the use of cash resulted from net noncash adjustments of $1.1 million, consisting primarily of $860,634 of cash provided by an adjustment for depreciation and amortization, $742,477 of cash provided by an adjustment for stock-based compensation, reduced by $248,445 of cash used for an adjustment for unrealized gains on investments.
Cash used in operating activities for the nine months ended September 30, 2024 consisted primarily of net loss for the period of $26.7 million, partially offset by a $12.4 million increase in accounts payable and other liabilities, a decrease of $883,917 in accounts receivable and a decrease of $829,043 in prepaid expenses and other current assets. Further offset to the use of case resulted from noncash adjustments of $1.2 million, consisting primarily of $501,882 of cash provided by an adjustment for depreciation and amortization and $716,940 of cash provided by an adjustment for stock-based compensation.
Investing Activities
Cash used by investing activities for the nine months ended September 30, 2023, consisted of $10.0 million of cash provided when short-term investments reached maturity, partially offset by $2.5 million of cash used to purchase equipment.
Cash used by investment activities for the nine months ended September 30, 2024 consisted of $148,205 used for purchases of property and equipment.
Financing Activities
Cash provided by financing activities for the nine months ended September 30, 2023 resulted from issuance of common stock upon exercise of vested employee stock options, partially offset by a principal repayment under the 2022 Loan Agreement related to the acquisition financing used to purchase a building.
Cash provided by financing activities for the nine months ended September 30, 2024 resulted from a $2.5 million private placement of the Company’s common stock and $6.5 million from the issuance of Secured Notes, partially offset a $88,388 principal repayment under the 2022 Loan Agreement related to the acquisition financing used to purchase a building.
Critical Accounting Policies, Significant Judgements and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed interim financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
28
contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgements and estimates.
Revenue Recognition
We recognize revenue under the guidance of Topic 606. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are 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) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer. See Note 1 to our condensed interim financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information.
Other than the above, there have been no material changes to our critical accounting policies and estimates from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies, Significant Judgements and Use of Estimates” in our Annual Report.
Recent Accounting Pronouncements
See Note 1 to our Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 30, 2024, we had cash and cash equivalents of $1.0 million including cash, cash equivalents and market investments. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. We are exposed to market risk related to the marketability of our Wugen common stock reported within Investments in the accompanying condensed interim balance sheet. Until such time as these shares become publicly traded, we will have limited access to liquidity for these securities.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2024, our management, with participation of our principal executive officer and principal financial officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a – 15(e) under the Exchange Act). While the Company implemented an Authorization Matrix and a Remediation Plan in the second quarter of 2024, our management believes the strengthened controls designed to address the material weaknesses identified in prior periods have not been in place for a sufficient time to conclude on whether or not they have been operating effectively as of September 30, 2024. Our management will continue to evaluate the effectiveness of the internal controls over financing reporting, including the Authorization Matrix and Remediation Plan, in future reporting periods.
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed under the supervision and
29
with the participation of our management, including our principal executive officer and our principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.
As of September 30, 2024, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment, two material weaknesses over financial reporting were identified (described below). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or condensed interim financial statements would not be prevented or detected on a timely basis.
Two of the material weaknesses were identified in a prior period, as the Company reported in a Current Report on Form 8-K filed with the SEC on May 1, 2024. The Company was a victim of a criminal scheme involving the impersonation of a purchaser of Secured Notes. The scheme resulted in the misdirection of approximately $1.3 million held in Company accounts to a fraudulent account controlled by a third party and a default on a legally binding commitment to purchase Secured Notes. As a result of the default and the related misdirection of funds, management re-evaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of December 31, 2023. Based on this assessment, management identified material weaknesses in two areas, including the methods used to review, evaluate and accept financing proposals from investors and lenders and the process used to enter unusual significant transactions. As a result of the material weakness to protect the Company’s assets from fraud committed by third parties, there was a $1.3 million loss recognized on the Company’s interim condensed financial statements.
During the period ended June 30, 2024, a Remediation Plan was implemented. See “Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting.” Our principal executive officer and principal financial officer concluded there was not yet enough evidence due to the infrequency of significant transactions to assess the effectiveness of internal controls during the period ended September 30, 2024. We will continue to assess the effectiveness of the internal controls in each reporting period, especially those related to significant or unusual transactions contained in the Remediation Plan.
As of September 30, 2024, the Company identified two additional material weaknesses in internal controls over financing reporting related to the classification of the Cogent Loan and accounting for the Secured Notes. On August 15, 2022, the Company entered into the 2022 Loan Agreement with Cogent Bank, pursuant to which we received $6.5 million in proceeds to purchase a building. The loan is secured by a first priority lien on the building. As of September 30, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction and improvements on the building. The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements. The Company did not identify and account for the loan as Short-term debt, net, to reflect that the lender has the right to accelerate the loan under a discretionary default provision as of September 30, 2024. As a result, we will enhance the controls we use to evaluate triggering events in debt agreements, to appropriately classify debt as current or noncurrent in the correct period.
The second material weakness identified as of September 30, 2024 related to accounting for complex transactions. This involved appropriately accounting for the Secured Notes and disclosing the amended terms that were executed during the third quarter of 2024. The Secured Notes were deemed to be a hybrid instrument, consisting of a debt host with embedded derivatives requiring bifurcation and accounting for separately. Prior to correcting the initial accounting treatment for the Secured Notes, as amended, the Company neglected to identify and account for the embedded derivatives. In addition, the disclosures for the Secured Notes would not have identified the embedded derivatives. The aggregation of these factors could have resulted in a material misstatement in the Company’s financial statements. As of September 30, 2024, there was no impact to the financial statements related to correcting the accounting treatment for embedded derivatives. Another amended term for the Secured Notes is a fixed bonus payment that holders will receive if the Secured Notes are repaid on the Maturity Date. The Company determined that the fixed bonus payment should be accreted to the principal owed to holders over the term. As of and for the three and nine months ended September 30, 2024, the Company did not accrete the fixed bonus payment. Accretion during this reporting period does not materially misstate the amount owed to the holders. In subsequent periods, the Company will accrete the fixed bonus payment as it will be material. If the Company did not correct the accounting treatment, we would understate our obligations. Over the term, this could have resulted in a material misstatement in the Company’s financial statements. Management resolved to allow for more time and resources to determine proper accounting for complex transactions.
30
Remediation Plan for Material Weakness in Internal Control over Financial Reporting
We are committed to establishing and maintaining a strong internal control environment. In response to the identified material weakness as described above, the Company’s Board of Directors and its Audit Committee have conducted an internal investigation to determine the root cause of the material weaknesses, with advice from outside advisors. Along with the advice of outside advisors, the board of directors worked with management to evaluate internal controls over financial reporting based on criteria set forth in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result, the following two actions were taken by the board of directors:
On May 13, 2024, the board of directors adopted a Delegation of Management Authorities (“Authorization Matrix”), which provides for authorization thresholds for significant and unusual transactions, budget and strategic plans, audit and policies, personnel actions, contracts, litigation, major projects, credit or loans, and consulting agreements.
On June 11, 2024, the board of directors adopted a Remediation Plan designed to implement and strengthen controls and prevent re-occurrence of fraud on the Company:
Inherent Limitations of Internal Controls
While we strive to create a stronger control environment, we recognize that it is impossible for our internal controls over financial reporting to prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. While we are committed to continuously improve and strengthen our control environment, over time, our internal controls over financial reporting may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls over financial reporting may become inadequate because of
31
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the three months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
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. Such proceedings can be costly, time consuming, and unpredictable. Therefore, no assurance can be given on the outcome of any proceeding or the potential impact on our results of operations or financial condition.
During the period ended December 31, 2022, Altor/NantCell initiated legal proceedings against Dr. Wong and the Company. 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 U.S. District Court for the Southern District of Florida (the “Court”) with jurisdiction over the lawsuit against the Company 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. Proceedings against the Company and Dr. Wong were consolidated in the arbitration before JAMS. The arbitration hearing was held from May 20, 2024 to May 31, 2024, after which the parties entered into settlement negotiations.
As reported in the Company’s Form 8-K filed on July 18, 2024, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with Altor BioScience, LLC (“Altor”), NantCell, Inc. (“NantCell”), and ImmunityBio, Inc. (the parent of Altor and NantCell, together with Altor and NantCell, “ImmunityBio”), to resolve the previously disclosed arbitration before JAMS brought by Altor and NantCell (the “Arbitration”) as well as a complaint Altor filed against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong (“Complaint”). The Settlement Agreement includes mutual general releases by and among the parties thereto. No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in connection with the matter. The Company has completed the required remediation procedures. As of the filing date, the parties to the Settlement Agreement are working together to finalize the notices and related final documentation to obtain dismissal of the Arbitration and Complaint. In accordance with 17 CFR 229.601 (Item 601), the Company has included the Settlement Agreement in the Quarterly Report on this Form 10-Q.
Pursuant to the Settlement Agreement, the Company transferred and assigned to ImmunityBio ownership of certain intellectual property (including issued patents, pending patent applications, and know-how) for TOBITM-based molecules for use in the oncology field. The Company retains the worldwide, perpetual, irrevocable, fully paid-up, royalty-free, exclusive right and license to exploit HCW9218 for all age-related diseases other than cancer, with the exception of the treatment of ovarian cancer, which is also retained by the Company and is currently being studied in a Phase 2 clinical trial at the University of Pittsburgh Medical Center. The Company also retains the right to develop treatments for all indications with respect to HCW9302 and HCW9206, which, along with HCW9218, are the lead product candidates in the Company’s clinical development pipeline. ImmunityBio has the exclusive right to pursue oncology indications with all of the TOBITM-based molecules designed with a TGF-β domain, including HCW9218, with the exception of the treatment of ovarian cancer with HCW9218 in combination with neoadjuvant chemotherapy, which is retained by the Company. Under the Settlement Agreement, ImmunityBio also receives an exclusive license to exploit fusion proteins, molecules and/or antibodies created utilizing the TOBITM Platform directed to the receptors of PDL-1, IL-7, IL-12, IL-18, and IL-21, and one additional target to be selected by ImmunityBio within six months from the date of the Settlement Agreement, at its sole discretion, in the oncology field. The Company’s ownership and rights with respect to HCW9302, HCW9206 and HCW9201 are expressly excluded from the rights transferred to ImmunityBio for oncology indications. In addition, ImmunityBio received a non-exclusive license to exploit HCW9201 administered by injection for oncology indications.
The Company retains ownership and control of the TOBITM platform and TOBI-based molecules, with no restrictions under the Settlement Agreement on our ability to use the TOBITM platform for protein-fusion molecules for non-oncology indications. We have rights to pursue oncology indications, in particular using HCW9302, HCW9206 and HCW9201. Further, the Company retains ownership of the Wugen license and shares of Wugen common stock transferred to the Company as the upfront licensing fee from Wugen for granting the Wugen license. For our lead molecule, HCW9218, we maintain the non-exclusive right to use HCW9218 in combination with neoadjuvant chemotherapy in ovarian cancer, in addition to exclusive rights for clinical development and use of HCW9218 in the treatment of all non-oncological diseases. We retain ownership of our lead molecule, HCW9302, which expands Treg cells and is designed to treat autoimmune diseases and other proinflammatory diseases, including cancer, and the ownership of HCW9206, a preclinical molecule which we are developing for the treatment of cancer and other age-related diseases. The Company agreed to provide ImmunityBio with a right of first refusal to enter a licensing agreement for oncology indications for HCW9206. We have no restrictions on the development of HCW9206 for our own clinical development activities, including oncology indications. Under the terms of the Settlement Agreement, ImmunityBio will own the cell line and supply for HCW9218, and the
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parties agreed that within six months from the date of the Settlement Agreement they will enter into a supply agreement providing the Company with a continuing supply of HCW9218 molecules. The Company also retains in vivo rights to HCW9201, a combination of IL-12, IL-15, and IL-18 in a single protein complex which is designed to stimulate activation and proliferation signals in human NK cells. The Company retains ownership of the cell lines for HCW9302, HCW9206 and HCW9201, and thus will retain independent control over manufacturing and supply for these compounds.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed by us in our Annual Report. The risk factors included the Annual Report continue to apply to us and describe risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statements contained in this Quarterly Report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
On February 20, 2024 (the “Purchase Date”), we entered into subscription agreements (the “Subscription Agreements”) with certain officers and directors of the Company, including our Founder and Chief Executive Officer, our Chief Financial Officer and the Chairman of the Company’s Board of Directors, pursuant to which the Company sold an aggregate of 1,785,718 shares (the “Shares”) of our common stock, par value $0.0001 per share (the “Common Stock”), at a purchase price of $1.40 per share for an aggregate purchase price of $2.5 million. The per share purchase price represents a 25% premium to the per share closing price of the Common Stock as reported on the Nasdaq Global Market on the Purchase Date and a 19% premium to the 5-day volume weighted average closing price per share of the Common Stock as reported on the Nasdaq Global Market for the period ending on the Purchase Date.
The Shares issued pursuant to the Subscription Agreements were not registered under the Securities Act of 1933, as amended, in reliance upon exemptions provided by Section 4(a)(2) of the Securities Act of 1933, as amended.
Issuer Repurchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Insider Adoption or Termination of Trading Arrangements
During the fiscal quarter ended September 30, 2024, none of our directors or officers informed us of the
Secured Notes Issuance
The following information is being included in this Item 5 in lieu of filing such information on a Current Report on Form 8-K under Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant and Item 8.01:
On March 28, 2024, the Company entered into a senior secured note purchase agreement (the “Note Purchase Agreement”) with the Purchasers (as defined in the Note Purchase Agreement), pursuant to which we agreed to issue senior secured notes in an aggregate principal amount of up to $10.0 million (“Secured Notes”) to certain accredited investors, including unrelated parties as well
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as officers and directors of the Company. As of March 31, 2024, the Company had an initial closing and issued $2.0 million in Initial Secured Notes. As of June 30, 2024, all existing investors approved an Amended and Restated Note Purchase Agreement (“Amended and Restated Note Purchase Agreement”), with terms described below. As of September 30, 2024, the Amended and Restated Note Purchase Agreement was amended to extend the last closing date to issue Additional Secured Notes to October 31, 2024. No other terms were amended. The material terms of the Additional Secured Notes are identical to the terms of the Initial Secured Notes.
As of September 30, 2024, the Company issued an aggregate of $6.5 million of Secured Notes, with $2.8 million from the Company’s officers and members of the board of directors, including $2.4 million purchased by Dr. Hing C. Wong, Founder and CEO, $220,000 purchased by Rebecca Byam, Chief Financial Officer, $140,000 purchased by Scott T. Garrett, Chairman of the board of directors, $60,000 purchased by Gary M. Winer, member of the board of directors, $25,000 purchased by Lee Flowers, Senior Vice President for Business Development, and $25,000 purchased by Rick S. Greene, member of the board of directors.
During October 2024, the Company issued $375,000 of Additional Secured Notes, including $50,000 purchased by Dr. Wong on October 31, 2024.
The Senior Notes bear interest at a rate of 9% per annum, payable quarterly in arrears, and mature on August 30, 2026 (the “Maturity Date”), on which date the principal balance, accrued but unpaid interest, and other amounts that may be due under the terms of the Amended and Restated Note Purchase Agreement shall be due and payable. The Secured Notes may be prepaid on or prior to December 31, 2024, but will be subject to a 5% prepayment penalty (“Premium Amount”). Thereafter, the Senior Notes may be repaid upon a Mandatory Redemption event or at the end of the term.
As a condition to entering into the Amended and Restated Note Purchase Agreement, the Company, Mercedes M. Sellek, P.A. (“Escrow Agent”), and the Purchasers entered into that certain Escrow Agreement and Amended and Restated Pledge Agreement, dated July 2, 2024, pursuant to which the Company agreed to pledge our equity ownership interest in Wugen, which was equivalent to a 5.6% ownership stake in that company as of September 30, 2024 (the “Pledged Collateral”), to be held and released by Escrow Agent according to the terms of the Escrow Agreement, as security for the Secured Notes.
Upon a qualifying event Mandatory Redemption involving a transaction such as an acquisition, merger or initial public offering in which the Pledged Collateral can be sold or liquidated prior to the Maturity Date, subject to certain limitations (such as a threshold price per share in the case of an initial public offering), the Company agreed to repay all indebtedness (including accrued interest) related to the Secured Notes plus a Bonus Payment (as defined in the Amended and Restated Note Purchase Agreement). If there is no such Mandatory Redemption prior to the Maturity Date, the Company agreed to pay the holders of Secured Note a Bonus Payment under certain circumstances.
Upon a bona fide equity offering (as defined in the Amended and Restated Note Purchase Agreement), Senior Note holders have the right to convert to shares of the Company’s common stock (as defined in the Amended and Restated Note Purchase Agreement). The Amended and Restated Note Purchase Agreement sets forth preliminary terms that are subject to final documentation.
Upon an Event of Default (as defined in the Amended and Restated Note Purchase Agreement), the Company will have a thirty (30) day cure period (the “Cure Period”), and if the Event of Default is not so cured at the end of the Cure Period, the Company is required to distribute the Pledged Collateral to the Purchasers on a pro rata basis, determined based on the issuance of $10.0 million in Secured Notes, in full satisfaction of the indebtedness evidenced by the Secured Notes.
The foregoing descriptions of the Amended and Restated Note Purchase Agreement, Amended and Restated Senior Notes, Escrow Agreement and Amended and Restated Pledge Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the Form of Amended and Restated Senior Secured Note Purchase Agreement, Form of Senior Secured Promissory Note, Form of the Amended and Restated Pledge Agreement and Form of Amended and Restated Escrow Agreement, copies of which are filed as Exhibit 10.1, Exhibit 10.2, Exhibit 10.3 and Exhibit 10.4, respectively, to this Quarterly Report and are incorporated herein by reference.
The issuance of the Additional Secured Notes was exempt from the registration requirements of the Securities Act of 1933, as amended, in accordance with Section 4(a)(2), as a transaction by an issuer not involving a public offering. In addition, our Board of Directors and the Audit Committee of our Board of Directors reviewed the transaction under our policy for Related Party Transactions (the “Policy”) and determined that the issuance of the Additional Secured Notes was in compliance with the Policy.
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Item 6. Exhibits.
The exhibits filed or furnished as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which Exhibit Index is incorporated herein by reference.
Exhibit Number |
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Incorporated by Reference |
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Filed Herewith |
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Description |
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Form |
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Exhibit No. |
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Filing Date |
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10.1 |
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Form of Amended and Restated Senior Secured Note Purchase Agreement, dated July 2, 2024, by and between the Company and the Purchaser party thereto |
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10-Q |
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001-40591 |
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10.1 |
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8/14/2024 |
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10.2 |
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Form of Senior Secured Promissory Note by and between the Company and the Holder party thereof |
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10-Q |
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001-40591 |
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10.2 |
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8/14/2024 |
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10.3 |
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Form of Amended and Restated Pledge Agreement, dated July 2, 2024, by and among the Company, Escrow Agent and Noteholder parties thereto |
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10-Q |
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001-40591 |
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10.3 |
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8/14/2024 |
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10.4 |
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Form of Amended and Restated Escrow Agreement, dated July 2, 2024, by and among the Company, Escrow Agent and Noteholder parties thereto |
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10-Q |
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001-40591 |
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10.4 |
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8/14/2024 |
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10.5 |
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X |
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10.6# |
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X |
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31.1 |
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31.2 |
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X |
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32.1* |
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X |
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32.2* |
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X |
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101 |
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The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Interim Balance Sheets as of December 31, 2023 and September 30, 2024 (unaudited); (ii) the Condensed Interim Statements of Operations for the three and nine months ended September 30, 2023 (unaudited) and September 30, 2024 (unaudited); (iv) the Condensed Interim Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2023 (unaudited) and September 30, 2024 (unaudited); (v) the Condensed Interim Statements of Cash Flows for the nine months ended September 30, 2023 (unaudited) and September 30, 2024 (unaudited); and (vi) the notes to the Condensed Interim Financial Statements (unaudited). |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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X |
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* |
This certification is deemed not filed for purpose of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
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# |
Certain information in this document has been excluded pursuant to Item 601(a)(5) or (a)(6) of Regulation S-K. The Registrant agrees to furnish supplementally such information to the SEC upon request. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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HCW Biologics Inc. |
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Date: November 14, 2024 |
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By: |
/s/ Hing C. Wong |
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Hing C. Wong |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Date: November 14, 2024 |
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By: |
/s/ Rebecca Byam |
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Rebecca Byam |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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