HCW Biologics Inc. 10-K

Item 8 Financial Statements and Supplementary Data. HCW Biologics Inc. Index to Financial Statements Years ended December 31, 2020 and 2021 Audited Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 102 Balance Sheets 103 Statements of Operations 104 Statement of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity 105 Statements of Cash Flows 106 101 RE PORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders HCW Biologics Inc. Opinion on the financial statements We have audited the accompanying balance sheets of HCW Biologics Inc. (the “Company”) as of December 31, 2021 and 2020, and the related statements of operations, changes in redeemable preferred stock and stockholders’ (deficit) equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2019. Miami, FL March 29, 2022 102 HCW Biologics Inc. Bal ance Sheets December 31, 2020 2021 ASSETS Current assets: Cash and cash equivalents $ 8,455,834 $ 11,730,677 Short-term investments — 24,983,520 Accounts receivable, net 2,500,000 133,000 Prepaid expenses 538,306 2,196,557 Other current assets 654,528 1,436,617 Total current assets 12,148,668 40,480,371 Investments 1,599,750 11,522,050 Property and equipment, net 1,615,426 1,119,090 Other assets 34,242 393,318 Total assets $ 15,398,086 $ 53,514,829 LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY Liabilities Current liabilities: Accounts payable $ 155,343 $ 223,664 Accrued liabilities and other current liabilities 845,741 2,097,925 Total current liabilities 1,001,084 2,321,589 Commitments and contingencies (Note 14) Redeemable preferred stock: Series A, $ 0.0001 par value; 14,738,948 shares authorized and 6,316,691 shares issued at December 31, 2020; nil shares authorized or issued at December 31, 2021 6,140,792 — Series B, $ 0.0001 par value; 28,029,449 shares authorized and 12,012,617 shares issued at December 31, 2020; nil shares authorized or issued at December 31, 2021 13,680,306 — Series C, $ 0.0001 par value; 18,181,818 shares authorized and 5,439,112 shares issued at December 31, 2020; nil shares authorized or issued at December 31, 2021 11,294,301 — Total redeemable preferred stock 31,115,399 — Stockholders’ (deficit) equity: Common stock: Class B convertible, $ 0.0001 par value; 10,000,000 shares authorized and 4,285,714 shares issued at December 31, 2020; nil shares authorized or issued at December 31, 2021 429 — Common, $ 0.0001 par value; 74,950,215 shares authorized and 507,680 shares issued at December 31, 2020; 250,000,000 shares authorized and 35,768,264 shares issued at December 31, 2021 51 3,577 Additional paid-in capital — 81,827,006 Accumulated deficit ( 16,718,877 ) ( 30,637,343 ) Total stockholders’ (deficit) equity ( 16,718,397 ) 51,193,240 Total liabilities, redeemable preferred stock and stockholders’ (deficit) equity $ 15,398,086 $ 53,514,829 The accompanying notes are an integral part of these financial statements. 103 HCW Biologics Inc. State ments of Operations Years Ended December 31, 2020 2021 Revenues: Revenues $ 4,099,750 $ — Total revenues 4,099,750 — Operating expenses: Research and development 7,255,227 8,173,624 General and administrative 2,669,048 5,194,210 Total operating expenses 9,924,275 13,367,834 Loss from operations ( 5,824,525 ) ( 13,367,834 ) Interest and other income, net 22,324 505,366 Net loss $ ( 5,802,201 ) $ ( 12,862,468 ) Less: cumulative preferred dividends earned in the period, net of forfeitures ( 1,271,675 ) — Net loss available for distribution to common stockholders $ ( 7,073,876 ) $ ( 12,862,468 ) Net loss per share, basic and diluted $ ( 1.49 ) $ ( 0.69 ) Weighted average shares outstanding, basic and diluted 4,739,285 18,770,935 The accompanying notes are an integral part of these financial statements. 104 HCW Biologics Inc. Statem ents of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity Redeemable Preferred Stock Stockholders’ Deficit Series A Series B Series C Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Equity Balance, December 31, 2019 6,316,691 $ 5,792,302 12,012,617 $ 12,883,859 — $ — 4,717,542 $ 472 $ — $ ( 9,676,766 ) $ ( 9,676,294 ) Issuance of Class A Common Stock upon exercise of stock options — — — — — — 75,851 8 9,895 — 9,903 Issuance of Series C Redeemable Preferred Stock, net of issuance costs — — — — 5,439,112 11,144,520 — — — — — Stock-based compensation — — — — — — — — 21,871 — 21,871 6% cumulative dividends on redeemable preferred stock — 348,490 — 776,804 — 146,381 — — ( 31,766 ) ( 1,239,910 ) ( 1,271,676 ) Accretion of issuance costs — — — 19,643 — 3,400 — — — — — Net loss — — — — — — — — — ( 5,802,201 ) ( 5,802,201 ) Balance, December 31, 2020 6,316,691 $ 6,140,792 12,012,617 $ 13,680,306 5,439,112 $ 11,294,301 4,793,393 $ 480 $ — $ ( 16,718,877 ) $ ( 16,718,397 ) Issuance of Class A Common Stock upon exercise of stock options — — — — — — 206,455 20 29,517 — 29,537 6% cumulative dividends on redeemable preferred stock — 193,050 — 430,319 — 336,651 — — ( 33,053 ) ( 926,966 ) ( 960,019 ) Accretion of issuance costs — — — 7,858 — 20,398 — — — — — Issuance of common stock upon initial public offering, net of issuance cost — — — — — — 7,000,000 700 49,239,247 — 49,239,947 Conversion of Series A Redeemable Preferred Stock, with forfeited cumulative dividends ( 6,316,691 ) ( 6,333,842 ) — — — — 6,316,691 632 6,353,474 ( 20,265 ) 6,333,841 Conversion of Series B Redeemable Preferred Stock, with forfeited cumulative dividends — — ( 12,012,617 ) ( 14,118,483 ) — — 12,012,613 1,201 14,170,312 ( 53,030 ) 14,118,483 Conversion of Series C Redeemable Preferred Stock, with forfeited cumulative dividends — — — — ( 5,439,112 ) ( 11,651,350 ) 5,439,112 544 11,706,534 ( 55,737 ) 11,651,341 Stock-based compensation — — — — — — — — 360,975 — 360,975 Net loss — — — — — — — — — ( 12,862,468 ) ( 12,862,468 ) Balance, December 31, 2021 — $ — — $ — — $ — 35,768,264 $ 3,577 $ 81,827,006 $ ( 30,637,343 ) $ 51,193,240 The accompanying notes are an integral part of these financial statements. 105 HCW Biologics Inc. State ments of Cash Flows Years Ended December 31, 2020 2021 Cash flows from operating activities: Net loss $ ( 5,802,201 ) $ ( 12,862,468 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 572,868 543,598 Stock-based compensation 21,875 360,975 Gain on extinguishment of debt — ( 567,311 ) Unrealized gain (loss) on investments, net — 65,832 Accretion of issuance costs 23,043 28,256 Changes in operating assets and liabilities: Accounts receivable ( 2,500,000 ) 2,367,000 Prepaid expenses and other assets ( 2,118,264 ) ( 2,799,415 ) Accounts payable and other liabilities ( 628,647 ) 1,887,816 Net cash used in operating activities ( 10,431,326 ) ( 10,975,717 ) Cash flows from investing activities: Purchases of property and equipment ( 186,682 ) ( 47,263 ) Purchases of short-term investments — ( 24,987,277 ) Purchases of long-term investments — ( 9,984,375 ) Net cash used in investing activities ( 186,682 ) ( 35,018,915 ) Cash flows from financing activities: Proceeds from PPP loan 563,590 — Proceeds from the sale of Series C Preferred Stock 11,144,520 — Proceeds from initial public offering — 56,000,000 Issuance costs of initial public offering — ( 6,760,053 ) Proceeds from issuance of common stock 9,898 29,528 Net cash provided by financing activities 11,718,008 49,269,475 Net changes in cash and cash equivalents 1,100,000 3,274,843 Cash and cash equivalents at the beginning of the period 7,355,834 8,455,834 Cash and cash equivalents at the end of the period $ 8,455,834 $ 11,730,677 Non-cash operating, investing and financing activities: In-kind payment for license fee $ 1,599,750 $ — Cumulative dividends earned, accrued and forfeited in the reporting period $ 1,271,676 $ — Forfeiture of cumulative dividends, upon conversion of Preferred Stock $ — $ 2,822,081 PPP loan forgiveness $ — $ 567,311 The accompanying notes are an integral part of these financial statements. 106 HCW Biologics Inc. Notes to the Financial Statements December 31, 2020 and 2021 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 health span 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. Reverse Stock Split In June 2021, the Company’s board of directors and stockholders approved an amendment to the Company’s certificate of incorporation to effect a 3-for-7 reverse stock split for all issued and outstanding common stock , redeemable preferred stock, and stock options, that was effective on June 25, 2021 (the “Reverse Stock Split”). The number of authorized shares and the par values of the common stock and redeemable preferred stock were not adjusted as a result of the Reverse Stock Split. The accompanying financial statements and notes to the financial statements give retroactive effect to the Reverse Stock Split for all periods presented. Liquidity On December 24, 2020, the Company entered into the Exclusive Worldwide License Agreement with Wugen Inc. (“Wugen License”). As a result of this transaction, as of December 31, 2020 and 2021, the Company holds a minority interest in Wugen Inc. (“Wugen”) carried at $ 1.6 million, the fair value on the effective date of the Wugen License. The underlying shares of common stock are not currently traded on any public market and thus have limited marketability. These shares were subject to an anti-dilution provision based on the terms of a subsequent financing. During the year ended December 31, 2021, the Company received additional shares in Wugen under the terms of the anti-dilution provision for no additional consideration. The Company deemed the additional shares to be a similar instrument to those shares already held. During the year ended December 31, 2021, the Company received cash payments of $ 2.5 million for amounts due under the terms of the Wugen License. As of December 31, 2021, the Company had not generated any revenue from sales of its immunotherapeutic products. In the course of its development activities, the Company has sustained operating losses and expects to continue to incur operating losses for the foreseeable future. Since inception, substantially all the Company’s activities have consisted of research, development, establishing large-scale cGMP production for clinical trials, and raising capital. On July 19, 2021, the Company’s registration statement on Form S-1 for its initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (the “SEC”). On July 22, 2021, the Company closed its IPO with the sale of 7,000,000 shares of common stock, at a public offering price of $ 8.00 per share, resulting in net proceeds of approximately $ 49.2 million, after deducting underwriting discounts and commissions and estimated offering expenses paid by the Company. The IPO met the provisions for mandatory conversion of all shares of redeemable preferred stock according to the designations for these securities. As a result of the conversion, the Company issued 23,768,416 shares of common stock to the former holders of redeemable preferred stock. In addition, as a result of conditions for mandatory conversion, the Company was relieved of its obligation to pay $ 2.8 million in cumulative dividends that were accrued and unpaid on the conversion date. As of December 31, 2021, the Company had cash and cash equivalents of $ 11.7 million, short-term investments of $ 25.0 million held in U.S. government-backed securities, and long-term investments of $ 9.9 million held in U.S. government-backed securities. Since inception to December 31, 2021, the Company incurred cumulative net losses of $ 27.9 million. Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise additional capital to fully implement its business plan. The Company intends to raise capital through the issuance of additional equity financing, sale of investment, and/or third-party collaboration funding. However, if such financing is not available at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of some of its products. The Company expects its cash and cash equivalents and current and long-term investments in government-backed securities as of December 31, 2021 will be sufficient to fund operating expenses and capital expenditure requirements for a period of at least one year from the issuance date of the financial statements. 107 Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Segment Reporting The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, reviews financial information on an aggregate basis for allocating capital and evaluating performance. 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. Cash and Cash Equivalents Cash and cash equivalents consist of demand deposits at financial institutions, money market funds, and highly liquid investments with original maturities of three months or less. 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, as disclosed in Note 3, 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. Concentration of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash, cash equivalents, accounts receivable, and investments. The Company’s cash and cash equivalents are deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. 108 Currently all of the Company's revenues are derived from the Wugen License. For the year ended December 31, 2020, the Company recognized revenues of $ 4.1 million, $ 1.6 million of which was consideration received in the form of shares of Wugen common stock. These shares have limited marketability, and there was no public market on which to trade these shares as of December 31, 2021. As of December 31, 2021, the Company received cash payments of $ 1.8 million for the sale of research and clinical-grade material, which are currently recognized as deferred revenue on the accompanying balance sheet since the criteria for revenue recognition have not been met. The Company is highly dependent on a third-party manufacturer to supply drug products for its research and development activities of its programs, including clinical and non-clinical studies. These programs could be adversely affected by a significant interruption in the supply of such drug products. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Property and Equipment, Net Property and equipment is stated at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 7 years. Leasehold improvements are amortized on a straight-line method over the shorter of the useful life of the leasehold improvement or the term of the lease. Upon retirement or sale of the assets, the cost and related accumulated depreciation and amortization are removed from the accompanying balance sheets and the resulting gain or loss is recorded to the statements of operations. Repairs and maintenance are expensed as incurred. Impairment of Long-Lived Assets Long-lived assets are reviewed for indications of possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the future undiscounted cash flows attributable to these assets. An impairment loss is recognized to the extent an asset group is not recoverable, and the carrying amount exceeds the projected discounted future cash flows arising from these assets. Impairment losses, if any, are recognized in earnings. There were no impairment losses for any of the periods presented. Redeemable Preferred Stock The Company applied the relevant accounting standards to distinguish liabilities from equity when we assessed the classification and measurement of preferred stock. Preferred Stock subject to mandatory redemptions was considered a liability and measured at fair value. Conditionally redeemable preferred stock issued by the Company was considered mezzanine or temporary equity and presented outside of the equity section of the accompanying balance sheet as of December 31, 2020. Cumulative Dividends on Preferred Stock The Company’s Preferred Stock earned a 6 % cumulative dividend that compounded annually, whether or not declared by the Board of Directors. The Company considered cumulative dividends a legal obligation that should be recognized and accrued until such time as the dividends were declared and paid or liquidation occurred. If Preferred Stock was classified as other than equity, this obligation was presented within Redeemable preferred stock. If Preferred Stock was included within equity, this obligation was treated as a long-term liability and presented within other liabilities in the accompanying balance sheet. As of December 31, 2020, all of the Company’s Preferred Stock was classified as other than equity, or mezzanine equity. Holders of Preferred Stock earned cumulative dividends beginning on June 7, 2019, with the original issuance of Series B Preferred Stock. During the year ended December 31, 2020, Series A Preferred Stock earned $ 348,490 in cumulative dividends; Series B Preferred Stock earned $ 776,804 in cumulative dividends; and Series C Preferred Stock earned $ 146,381 in cumulative dividends. Upon the IPO, all of the Company’s preferred stock converted to common stock. At that time, Series A Preferred Stock forfeited $ 753,307 of cumulative dividends; Series B Preferred Stock forfeited $ 1,550,403 of cumulative dividends; and Series C Preferred Stock forfeited $ 518,371 of cumulative dividends. No dividends were declared as of the conversion date. 109 Collaborative Arrangements When the Company enters into collaboration arrangements, it assesses whether the arrangements fall within the scope of FASB issued ASC 808, Collaborative Arrangements, based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. If the payments from the collaboration partner to the Company represent consideration from a customer, such as license fees and contract research and development activities, the Company accounts for those payments within the scope of FASB issued ASC 606, Revenue from Contracts with Customers (“Topic 606”). However, if the Company concludes that the payments are not from a customer, for certain activities and associated payments, such as for certain collaborative research, development, manufacturing, and commercial activities, these payments are presented as a reduction of research and development expense or general and administrative expense, based on where the Company presents the underlying expense. Revenue Recognition The Company recognizes revenue when its customer or collaborator obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of Topic 606, it 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 within the contract; and v. recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of Topic 606 and it is probable of collection, the Company assesses the goods or services promised within the contract to determine whether each promised good or service is a performance obligation. The promised goods or services in the Company’s arrangements may consist of a license, or options to license, the Company’s intellectual property and research, development, and manufacturing services. The Company may provide options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promises in a contract to transfer a distinct good or service to the customer that (i) the customer can benefit from on its own or together with other readily available resources, and (ii) is separately identifiable from other promises in the contract. Goods or services that are not individually distinct performance obligations are combined with other promised goods or services until such combined group of promises meet the requirements of a performance obligation. The Company determines the transaction price based on the amount of consideration the Company expects to receive for transferring the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include variable consideration, the Company estimates the probability and extent of consideration it expects to receive under the contract utilizing either the most likely amount method or expected amount method, whichever best estimates the amount expected to be received. The Company then considers any constraints on the variable consideration and includes in the transaction price variable consideration to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company then allocates the transaction price to each performance obligation based on the relative standalone selling price and recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and the performance obligation is satisfied. For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. 110 The Company records amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded as deferred revenue. Deferred Revenue Deferred revenue represents amounts billed, or in certain cases, yet to be billed to the Company’s customer for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance period of the underlying performance obligations. As December 31, 2021, current deferred revenue includes amounts of $ 1.8 million allocated to the development supply agreement performance obligation under the Wugen License that is included within Accrued liabilities and other current liabilities. Investments The Company holds a minority interest in Wugen. The underlying shares of common stock are not traded on any public market and thus have limited marketability. The Company does not have significant influence over the operating and financial policies of Wugen. As a result, the Company has accounted for this investment using the measurement alternative whereby the investment is recorded at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee. No impairment was recognized during the years ended December 31, 2020 and 2021. The Company invests net proceeds of its IPO in bills and notes issued by the U.S. Treasury which are classified as trading securities. As of December 31, 2021, the Company holds, $ 25.0 million in U.S. Treasury bills included in Short-term investments and $ 9.9 million in U.S. Treasury notes included in Investments in the accompanying balance sheet. Research and Development Expenses Research and development costs are expensed as incurred and include salaries, benefits, and other operating costs such as outside services, supplies and allocated overhead expenses. The Company may perform research and development for its own proprietary drug candidates and technology development or for certain third parties under collaborative arrangements. For its proprietary drug candidates and its internal technology development programs, the Company invests its own funds without reimbursement from a third party. Where the Company performs research and development activities under a clinical joint development collaboration, it records the partner’s share of collaboration expenses as a reduction to research and development expense when reimbursement amounts are due under the agreement. The Company records an accrued expense for the estimated costs of its contract manufacturing activities performed by third parties. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows to vendors. Payments under the contracts include upfront payments and milestone payments, which depend on factors such as the achievement of the completion of certain stages of the manufacturing process. For purposes of recognizing expense, the Company assesses whether the production process is sufficiently defined to be considered the delivery of a good, as evidenced by predictive or contractually required yields in the production process, or the delivery of a service, where processes and yields are developing and less certain. If the Company considers the process to be the delivery of a good, the Company recognizes the expense when the drug product is delivered, or otherwise bears risk of loss. If the Company considers the process to be the delivery of a service, the expense is recognized based on its best estimates of the contract manufacturer’s progress towards completion of the stages in the contracts. The Company recognizes and amortizes upfront payments and accrues for liabilities based on the specific terms of each arrangement. Arrangements may provide upfront payments for certain stages of the arrangement and milestone payments for the completion of certain stages, and, accordingly, may result in advance payments for services that have not been completed or goods not delivered and liabilities for stages where the contract manufacturer is entitled to a milestone payment. Advance payments for goods or services that will be used or rendered for future research and development activities are capitalized as prepaid expenses and recognized as expense as the related goods are delivered or the related services are performed. The Company bases its estimates on the best information available at the time. However, additional information may become available to the Company which may allow it to make a more accurate estimate in future periods. In this event, the Company may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain. Such increases or decreases in cost are generally considered to be changes in estimates and will be reflected in research and development expenses in the period identified. 111 Patent Costs Costs related to filing and pursuing patent applications are recorded as general and administrative expenses in the accompanying statements of operations, and expensed as incurred since recoverability of such expenditures is uncertain. Stock-based Compensation The Company measures its stock-based awards granted to employees and directors based on the estimated fair value of the option on the date of grant (grant date fair value) and recognizes compensation expense over the vesting period. Compensation expense is recorded as either research and development or general and administrative expenses in the accompanying statements of operations based on the function to which the related services are provided. Forfeitures are accounted for as they occur. The Company has granted options with service-based and performance-based vesting conditions. The Company uses the Black-Scholes option pricing model for the respective grant to determine the grant date fair value. The Black-Scholes option pricing model requires the input of highly subjective assumptions. These variables include, but are not limited to, its stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Management will continue to assess the assumptions and methodologies used to calculate the estimated grant date fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and materially impact the Company’s grant date fair value determination. For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria is probable of being met. Deferred Offering Costs The Company defers offering costs consisting of legal, accounting and other fees and costs directly attributable to its IPO. The deferred offering costs will be offset against the proceeds received upon the completion of the IPO. Deferred offering costs will be recorded under other non-current assets on the accompanying balance sheets. In the event the IPO is terminated, all of the deferred offering costs will be expensed within the Company’s statements of operations. As of December 31, 2020, there were no deferred offering costs recorded on the accompanying balance sheets. As of December 31, 2021, deferred offering costs related to underwriting discounts and commissions and offering expenses of $ 6.8 million were offset against IPO proceeds upon the consummation of the IPO. Income Taxes The Company accounts for income taxes using an asset and liability approach in accordance with applicable guidance prescribed by FASB issued ASC 740, Income Taxes (“Topic 740”). Topic 740 requires that the deferred tax consequences of temporary differences between the amounts recorded in the financial statements and the amounts included in the federal and state income tax returns to be recognized in the balance sheet. The Company makes judgments regarding the realizability of its deferred tax assets. The balance sheet carrying value of its deferred tax assets is based on whether the Company believes it is more likely than not that the Company will generate sufficient future taxable income to realize these deferred tax assets after consideration of all available evidence. The Company regularly reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Generally, cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed. 112 The Company’s tax positions may be subject to income tax audits. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its tax provision. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. The provision for income taxes includes the effects of any accruals that the Company believes are appropriate, as well as the related net interest and penalties. Tax Credit Receivable The Company is eligible for research and development credits for its research and development activities, in accordance with Internal Revenue Code (“I.R.C.”) § 41(c). The credits are generally available to offset income tax liabilities. The Company has applied approximate ly $ 250,000 o f research and development credits to offset its federal payroll tax expenses for both years ended December 31, 2020 and 2021, due to its small business status. As of December 31, 2020 and 2021, the current portion of outstanding payroll tax receivables is recorded in Other current assets in the accompanying balance sheets and the noncurrent portion is recorded in Other noncurrent assets. Net Loss Per Share Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted average number of common shares plus the potential dilutive effects of potential dilutive securities outstanding during the period. Potential dilutive securities are excluded from diluted earnings or loss per share if the effect of such inclusion is anti-dilutive. The Company’s potentially dilutive securities, which include convertible redeemable preferred stock and outstanding stock options under the 2019 Equity Incentive Plan (“2019 Plan”) and the 2021 Equity Incentive Plan (“2021 Plan”), have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position. Recently Issued Accounting Pronouncements In June 2016, FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments , as clarified in subsequent amendments to the initial guidance (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecast. The Company adopted Topic 326 using a modified retrospective approach which requires a cumulative effect adjustment as of the beginning of the reporting period in which the guidance is adopted. Topic 326 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company adopted Topic 326 effective January 1, 2020. The adoption did not have a material impact on our financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (“Topic 842”), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. Topic 842 is effective for the Company in the fiscal years beginning after December 15, 2021, with early adoption permitted. The Company will adopt Topic 842 for the fiscal year ended December 31, 2022. The Company plans to use a practical expedient provided by FASB, and it will not recast comparative periods to reflect the impact of the new lease standard. Effective March 1, 2022, the Company entered into a non-cancelable operating lease for its current location with a two-year term. This is the only lease in scope of Topic 842. The Company expects accounting for the new lease under Topic 842 will materially affect the reported amount of total assets and total liabilities within the balance sheet, but it does not expect a material impact to the statement of operations . 113 2. Property and Equipment, Net Property and equipment, net consists of the following: At December 31, 2020 2021 Laboratory equipment $ 1,924,596 $ 1,949,318 Office equipment 152,003 175,245 Furniture and fixtures 292,866 292,165 Leasehold improvements 349,976 349,976 $ 2,719,441 $ 2,766,704 Less: Accumulated depreciation and amortization ( 1,104,015 ) ( 1,647,614 ) Property and equipment, net $ 1,615,426 $ 1,119,090 Depreciation and amortization expense for the year ended December 31, 2020 was $ 572,867 of which $ 362,892 is included in research and development expenses. Depreciation and amortization expense for the year ended December 31, 2021 was $ 543,598 , of which $ 353,388 is included in research and development expenses. 3. 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. The following table presents the Company’s assets which were measured at fair value at December 31, 2020 and 2021: At December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Money market funds $ 6,752,266 $ — $ — $ 6,752,266 Investment in Wugen — — 1,599,750 — Total $ 6,752,266 $ — $ 1,599,750 $ 6,752,266 At December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Money market funds $ 9,506,499 $ — $ — $ 9,506,499 Treasury bills 24,983,520 — — 24,983,520 Treasury notes 9,922,300 — — 9,922,300 Total $ 44,412,319 $ — $ — $ 44,412,319 4. Investments As of December 31, 2020, Investments consisted of a balance of $ 1.6 million. In December 2020, the Company entered into the Wugen License for limited rights to develop, manufacture and commercialize cellular therapy products based on two of the Company’s fusion protein molecules. As part of the consideration received for the Wugen License, the Company received shares of Wugen common stock, which were recognized at $ 1.6 million, the fair value of the securities as of December 24, 2020, the effective date for the Wugen License. Initial recognition was at fair value based on level 3 inputs, since there was no public market on which to trade these shares at the time they were received. The fair value was determined based primarily on the pricing and terms of a third-party financing completed by Wugen in 2020. So long as there continues to be no public market for these securities, the Company will classify this asset as a cost method investment, recorded at cost less impairment adjusted for observable market changes. 114 As of December 31, 2021, Investments had a balance of $ 11.5 million in the accompanying balance sheet, consisting of $ 1.6 million for the investment in Wugen, which the Company continues to carry at cost since no public market exists for these securities, and no impairment adjusted was necessary. In addition, Investments include $ 9.9 million in U.S. Treasury notes as of December 31, 2021. These securities are classified as trading securities. 5. Related Party Transactions As of December 31, 2020, related parties held capital stock in the Company. The Company's Founder and Chief Executive Officer, Hing C. Wong, PhD., held all Class B Common Stock and Series A Preferred Stock issued by the Company. In addition, Dr. Wong purchased shares of Series B Preferred Stock and Series C Preferred Stock on the same terms and conditions for third-party investors. All shares of Preferred Shares held by Dr. Wong earned cumulative dividends. During the year ended December 31, 2021, all shares purchased by Dr. Wong prior to the IPO were converted to common stock, and the Company was relieved of its obligation to pay cumulative dividends on Preferred Shares that were accrued and unpaid as of the conversion date. Dr. Wong purchased additional shares of the Company's common stock in the IPO and in the open market post IPO, in compliance with SEC regulations and the Company's insider trading policies. 6. Accrued Liabilities and Other Current Liabilities In May 2020, the Company received an SBA Paycheck Protection Loan (“PPP loan”) in the principal amount of $ 563,590 . As of December 31, 2020, the Company had $ 845,741 of Accrued liabilities and other current liabilities, primarily consisting of the PPP loan of $ 567,311 , including principal and accrued but unpaid interest, and accrued liabilities of $ 273,907 . As of December 31, 2021, the Company had a balance of $ 2.1 million in Accrued liabilities and other current liabilities, consisting of $ 1.8 million related to deferred revenue, $ 48,750 related to manufacturing materials, $ 51,000 related to legal fees, and $ 50,000 for other expenses. On January 8, 2021, the Company received full loan forgiveness of $ 567,311 for obligations related to the PPP loan. The Company accounted for the PPP loan as debt, and the loan forgiveness was accounted for as a debt extinguishment. The amount of loan and interest forgiven is recognized as a gain upon debt extinguishment and is reported within Interest and other income, net in the accompanying statement of operations for the year ended December 31, 2021. 7. License Agreement On December 24, 2020, the Company entered into the Wugen License transferring rights to Wugen to develop, manufacture, and commercialize certain cellular therapy products based on two of the Company’s fusion protein molecules. The term of the agreement will expire on a product-by-product and country-by-country basis, upon the later of (i) ten (10) years from the first commercial sale of the product or (ii) the expiration of the last-to-expire valid patent claim of such product. The Company retained regulatory T cell-based cellular therapy, injectable rights, and manufacturing rights, not granted to Wugen under the terms of the Wugen License. The Company and Wugen will enter into two supply agreements under industry-standard terms, under which the Company will provide cGMP and non-cGMP grade materials, including a development supply agreement and a commercial supply agreement. According to the terms of the agreement, Wugen will fund all future clinical development and commercialization activities for cellular therapy treatments for any indications utilizing the licensed fusion protein molecules covered by the Wugen License. In January 2021, two Phase 2 clinical trials related to treatment for relapsed / refractory acute myeloid leukemia based on one of the licensed molecules were initiated by the School of Medicine at Washington University in St. Louis and supported by Wugen. The Company concluded that Wugen is a customer and the Wugen License is a functional license under the provisions of Topic 606. The Company identified the following performance obligations at the inception of the agreement: • Provide Wugen with exclusive worldwide license rights for certain fusion proteins. • Sell vials of HCW9201 clinical grade product available immediately. • Transfer R&D know-how. • Supply of cGMP and non-cGMP grade materials for development. 115 • Supply of cGMP grade materials for commercialization. For the year ended December 31, 2020 the Company recognized $ 4.1 million for performance obligations satisfied in the period. This is the first time the Company has entered into an out-license arrangement and the first time the Company has established prices for its goods and services. Accordingly, the standalone selling price of the various performance obligations is uncertain, and the Company determined that an observable standalone selling price is not available for the identified performance obligations under the Wugen License. Where a standalone selling price is not directly observable, then the Company estimates the standalone selling price considering marketing conditions, entity-specific factors, and information about the customer that is reasonably available. The process for determining a standalone selling price involves significant judgment and includes consideration of multiple factors, including assumptions related to the market opportunity and the time needed to commercialize a product candidate pursuant to the relevant license, estimated direct expenses and other costs. The Company first determined the standalone selling price of $ 2.5 million for the vials of HCW9201 and the R&D know-how. The price was determined based on the cost of developing the know-how and the costs incurred in producing the vials. The standalone selling price for the license was determined using the residual approach and was priced at $ 1.6 million. As of December 31, 2020, the Company and Wugen had not finalized the development supply agreement. Therefore, there was no contract for purchase of materials during Wugen's development phase. The Company will defer recognition of revenues and costs for supply of materials during development until a contract is in place. The commercial supply agreement will be entered into in the future, pursuant to the terms of the Wugen License. For the year ended December 31, 2021, the Company entered into a master services agreement with Wugen related to the development supply agreement to provide cGMP and non-cGMP grade licensed material based on industry-standard terms. However, as of December 31, 2021, the Company and Wugen have not finalized any statements of work under the master services agreement, thus no contract exists. Until such time that the Company enters statements of work for Wugen orders related to licensed material for clinical development, the Company will defer recognition of revenues. The Wugen License includes milestone payments and royalties. The Company uses judgment to determine whether milestones or other variable consideration should be included in the transaction price. For revenue-based royalties, including milestone payments based on the level of sales, the Company will include royalties in the transaction price at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty is allocated has been satisfied (or partially satisfied). As part of management’s evaluation of the transaction price, the Company considers numerous factors, including whether the achievement of the milestones is outside of our control, contingent upon the efforts of others or subject to scientific risks of success. If the Company concludes it is probable that a significant revenue reversal would not occur, the associated milestone payment is included in the transaction price. Milestone payments that are not within our control, such as regulatory approvals, are generally not considered probable until those milestones are achieved. The Company reevaluates the transaction price, including estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur. 8. Redeemable Preferred Stock In a series of closings which took place in 2020, the Company completed the private placement of Series C Preferred Stock. The terms of the redeemable preferred stock provided for an adjustment to the conversion price upon the occurrence of certain transactions or events, such as stock splits, split-up, certain dividends, or distributions. Cumulative dividends accrued whether or not declared by the Board of Directors. Giving effect to the Reverse Stock Split, a total of 5,439,112 shares of Series C Preferred Stock were issued at $ 2.05 per share, for $ 11.2 million, net of offering costs. The Company’s Series C Preferred Stock was convertible into shares of Class A common stock and earned cumulative dividends at a rate of 6% per annum and compound annually until converted or redeemed. On July 22, 2021, the Company closed on its IPO, and the requirements for mandatory conversion were met. All outstanding shares of Series A, Series B, and Series C Preferred Stock converted into an equal number of shares of common stock. As a result, the rights, preferences, and terms ascribed to these shares are no longer applicable. Cumulative dividends of $ 2.8 million accrued as of the conversion date were forfeited and such forfeiture was recognized through Additional paid-in capital. At December 31, 2021, the Company has 10,000,000 shares of preferred stock authorized and no shares issued. 116 9. Net Loss Per Share The following table summarizes the computation of the basic and diluted net loss per share: Years Ended December 31, 2020 2021 Numerator: Net loss $ ( 5,802,201 ) $ ( 12,862,468 ) Less: cumulative preferred dividends earned in the period, net of forfeitures ( 1,271,675 ) — Net loss available for distribution to common stock holders $ ( 7,073,876 ) $ ( 12,862,468 ) Denominator: Weighted-average common shares outstanding 4,739,285 18,770,935 Net loss per share, basic and diluted $ ( 1.49 ) $ ( 0.69 ) 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: As of December 31, 2020 2021 Redeemable Preferred Stock 23,768,416 — Common stock options 742,114 1,770,739 Potentially diluted securities 24,510,530 1,770,739 10. Stock-based Compensation On June 21, 2021, the 2021 Plan was adopted by the Company’s board of directors and approved by the Company’s stockholders. As of the adoption date, the 2019 Plan was terminated. No terms were changed for grants previously awarded under the 2019 Plan, and the Company concluded a modification did not occur. Under the 2019 Plan, the Company primarily granted employees incentive stock options, which had a maximum term of ten years from the date of the grant. Generally, the incentive stock options granted under the 2019 Plan have a four year , service-based vesting period. All of the options granted under the 2019 Plan had an exercise price equal to the fair value of a share of common stock on the date of the grant, according to Company policy. The 2021 Plan permits the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, and stock bonus awards. The 2021 Plan initially reserved 3,444,343 shares of Common Stock, including the transfer of remaining shares reserved under the 2019 Plan. In addition, the number of shares reserved for issuance under the 2021 Plan will increase automatically on the first day of each fiscal year beginning with the 2022 fiscal year. Under the 2021 Plan, the term of each stock option must be stated in the stock award agreement. In the case of an incentive stock option, the term will be ten years from the date of grant, or such shorter term as may be provided in the stock award agreement. Moreover, in the case of an incentive stock option granted to a participant who owns stock representing more than 10 % of the total combined voting power of all classes of our stock or the stock of any of our affiliates, the term of the incentive stock option will be five years from the date of grant or such shorter term as may be provided in the stock award agreement. Under the 2021 Plan, the Company continues to have a policy to grant options with an exercise price equal to the fair value of a share of common stock, as determined by the closing price on NASDAQ on the grant date. 117 The following summarizes the Company’s stock option activity for the year ended December 31, 2021: Shares Weighted Weighted Average Issuable Average Remaining Aggregate under Exercise Contract Intrinsic Options Price Term Value Outstanding at December 31, 2019 586,662 0.13 9.6 years $ 5,500 Granted 263,976 0.20 Exercised ( 75,851 ) 0.13 Forfeited or cancelled ( 32,740 ) 0.12 Outstanding at December 31, 2020 742,047 0.16 9.1 years $ 39,078 Exercisable at December 31, 2020 88,531 0.15 9.0 years $ 5,413 Outstanding at December 31, 2020 742,047 0.16 9.1 years $ 39,078 Granted 1,249,287 4.16 Exercised ( 206,455 ) 0.13 Forfeited or cancelled ( 14,140 ) 0.19 Outstanding at December 31, 2021 1,770,739 2.96 9.0 years $ 1,124,215 Exercisable at December 31, 2021 41,084 0.17 7.9 years $ 87,522 The aggregate intrinsic value is calculated based on the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options as of the reporting date. The intrinsic value of stock options exercised during the years ended December 31, 2020 and 2021 was $ 6,032 and $ 447,115 , respectively. The weighted-average fair value of options granted during the years ended December 31, 2020 and 2021 was $ 0.20 and $ 4.16 per share, respectively. For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria is probable of being met. In determining the grant date fair value of the stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and its determination generally requires significant judgment. Fair Value of Common Stock —Prior to our initial public offering, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuation of our common stock as well as our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent third-party valuation to the date of the grant. Since the completion of our initial public offering on July 19, 2021, the fair value of each share of common stock underlying stock option grants is based the quoted market price on the primary stock exchange on which our common stock is traded on the day the stock award or option is granted. Expec t ed term —The expected term of stock options is determined using the “simplified” method, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data. Expected volatility —We have limited information on the income volatility of our stock as shares of our common stock were not actively traded on any public markets prior to July 19, 2021. The expected volatility was derived from the historical stock volatilities of comparable peer public companies within our industry. Risk-free interest rate —The risk-free interest rate is based on the U.S. Treasury Bond in effect at the time of grant for periods corresponding with the expected term. Dividend yield —The expected dividend yield is 0 % because the Company has not historically paid, and does not expect, for the foreseeable future, to pay a dividend on its common stock. 118 For the years ended December 31, 2020 and 2021, the fair value of employee and director stock option awards was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions: Years Ended December 31, 2020 2021 Expected term (years) 6.25 6.24 Expected volatility 87.30 % 83.18 % Risk-free interest rate 0.50 % 1.02 % Dividend yield — — Fair value underlying common stock $ 0.18 $ 2.95 For the year ended December 31, 2020, for options with service-based vesting conditions, the Company recognized $ 9,590 of employee stock-based compensation expense in research and development expenses and $ 12,285 of employee stock-based compensation in general and administrative expenses in the accompanying statements of operations. For the year ended December 31, 2021, for options with service-based vesting conditions, the Company recognized $ 25,239 of employee stock-based compensation expense in research and development expenses and $ 335,736 of employee stock-based compensation in general and administrative expenses in the accompanying statements of operations. As of December 31, 2020, the Company had an aggregate of $ 103,045 of unrecognized employee stock-based compensation cost for options with service-based vesting, which is expected to be recognized over a weighted average vesting period of 5.12 years. As of December 31, 2020 and 2021, there was no unrecognized employee stock-based compensation cost for options with performance-based vesting conditions, as no performance-based options were unvested. For the years ended December 31, 2020 and 2021, the Company recognized an aggregate of $ 6,750 and nil of employee stock-based compensation cost, respectively, for options with performance-based vesting conditions which vested immediately upon achieving the performance target, respectively. 11. Employee Benefit Plan The Company offers a defined contribution savings plan (the “Benefit Plan”) under Section 401 of the Internal Revenue Code for all eligible employees. The Benefit Plan allows for discretionary contributions which are limited to the maximum allowable for federal tax purposes. The total expense related to the discretionary payments made by the Company to the Benefit Plan for the years ended December 31, 2020 and 2021 was $ 146,400 and $ 173,400 , respectively. 12. Collaborative Arrangements In March 2020, the Company entered into two collaborative arrangements relating to IND-enabling activities which continued in 2021. Pursuant to these agreements, the Company supplied materials for the studies and reimbursed the collaboration partner costs in connection with the projects. In turn, the partner will provide written reports and a body of scientific data for the results of the projects. 13. Income Taxes The Company did no t have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2020 and 2021. The following table summarizes the differences between the statutory federal income tax rate and the Company's effective income tax rate (percent data): Rate Reconciliation 2020 2021 Net Loss Before Taxes $ ( 5,802,201 ) $ ( 12,862,468 ) Benefit at statutory rate ( 1,218,462 ) 21.00 % ( 2,701,118 ) 21.00 % State tax benefit net of federal benefit ( 264,152 ) 4.55 % ( 590,728 ) 4.59 % Permanent book/tax differences 10,161 ( 0.18 %) ( 85,678 ) 0.67 % Other adjustments ( 34,591 ) 0.60 % 2,093 ( 0.02 %) R&D credit carryforward ( 46,608 ) 0.80 % ( 85,000 ) 0.66 % Change in valuation allowance 1,555,740 ( 26.81 %) 3,460,431 ( 26.90 %) Other ( 2,088 ) 0.04 % — 0.00 % Income tax expense/(benefit) $ — 0.00 % $ — 0.00 % 119 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2021 are presented below: 2020 2021 Deferred tax assets: Federal net operating loss carryforward $ 3,102,649 $ 5,479,664 State net operating loss carryforward 658,595 1,164,970 Accrued expenses 24,585 12,356 Stock-based compensation 2,821 84,612 Deferred rent 2,089 307 R&D credit 133,015 218,015 Unrealized gain/loss — 16,708 Deferred revenue — 397,464 Net deferred tax assets 3,923,754 7,374,096 Deferred tax liabilities: Depreciable assets ( 10,054 ) 35 Net deferred tax liabilities ( 10,054 ) 35 Less: valuation allowance ( 3,913,700 ) ( 7,374,131 ) Net deferred tax asset (after valuation allowance) $ — $ — A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2021, after consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $ 7.4 million is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized. During the year ended December 31, 2021, the valuation allowance increased by $ 3.5 million. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law. Certain provisions of the CARES Act could impact the 2019 income tax provision computations of the Company and will be reflected in the period of enactment (tax year 2020). The CARES Act, among other things, contains modifications on the limitation of business interest expense under Section 163(j), allow for net operating loss ("NOL") carryovers and carrybacks to offset 100 % of taxable income for taxable years before 2021, and includes a technical correction to the TCJA with respect to Qualified Improvement Property ("QIP") where such property has a 15-year recovery period for purposes of the general depreciation system of Section 168(a). The Company is currently evaluating the impact of the CARES Act, and aside from the 15-year QIP technical correction, it believes that none of other modifications or tax law changes will result in any material benefit or apply. As of December 31, 2020 and 2021, the Company had available federal NOL carryforwards of $ 14.8 million and $ 26.1 million. The Company also has available state NOLs carryforwards of approximately $ 15.2 million and $ 26.8 million, as of December 31, 2020 and 2021, respectively. The federal and state NOLs will carry forward indefinitely and be available to offset up to 100 % of taxable income for taxable years before 2021 and 80 % of taxable years staring after 2020. In addition, the Company had federal research and development credits carryforwards of $ 133,015 and $ 218,015 , as of Decem ber 31, 2020 and 2021, respectively, to reduce future federal income taxes, if any. These carryforwards expire from 2038 through 2041 and are subject to review and possible adjustment. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the Code), substantial changes in the Company’s ownership may limit the amount of net operating loss and research and development credit carryforwards that could be used annually in the future to offset taxable income. A formal Section 382 study has not been completed to determine if an ownership change has occurred and if its net operating losses are subject to an annual limitation. Such annual limitations could affect the utilization of NOL and tax credit carryforwards in the future. 14. Commitments and Contingencies Leases The Company leases its operating facilities in Miramar, Florida under non-cancelable operating lease agreements and a short-term sublease agreement for additional office space. Rent expense is recognized for leases with increasing annual rents on a straight-line basis over the term of the lease. The amount of rent expense in excess of cash payments is classified as deferred rent. Lease incentives received are deferred and amortized over the term of the lease. 120 The future minimum payments for the lease and sublease agreements at December 31, 2021 are as follows: 2022 (remaining 2 months) $ 36,000 For the year ended December 31, 2020 and 2021, rental expense, including common area maintenance costs, recognized by the Company was $ 183,943 and $ 208,348 , of which $ 82,971 and $ 100,457 , respectively, are included in Research and development, in the accompanying statements of operations. Contractual Commitments During the year ended December 31, 2021, the Company entered into several agreements with a third-party global contract development and manufacturer of biologics for the manufacture of the Company’s proprietary molecules for use in clinical trials. At December 31, 2020, the future minimum payments under such agreements were $ 3.9 million. At December 31, 2021, future payment obligations under such agreements were $ 2.5 million of which approximately $ 181,600 was paid in January 2022. Legal Management has no knowledge of any pending or unasserted claims against the Company. Other In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States and the world. The spread of COVID-19 has caused significant volatility in the U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, the Company is unable to determine if it will have a material impact to its operations. 15. Subsequent Events Subsequent events have been evaluated through the date the financial statements were issued. As of such date, there were no material subsequent events identified that required recognition or disclosure other than as disclosed below or in the footnotes herein. Effective March 1, 2022, the Company entered into a non-cancelable operating lease agreement for its current location with a two-year term and future minimum payments of $ 339,300 . 121 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.