What changed in this filing

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Item 1. Financial Statements

2022-05-13 compared with 2021-11-12 · 271 added, 589 removed, 274 unchanged (76% of the section changed)

2 unchanged sentences

Condensed Balance Sheets

September 30,

Current assets:

Cash and cash equivalents

Short-term investment

Short-term investments

Accounts receivable, net

3 unchanged sentences

Property and equipment, net

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’

(DEFICIT) EQUITY

LIABILITIES AND STOCKHOLDERS’

Current liabilities:

2 unchanged sentences

Total current liabilities

Other liabilities

Total liabilities

Commitments and contingencies (Note 7)

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

September 30, 2021

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

September 30, 2021

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

September 30, 2021

Total redeemable preferred stock

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

September 30, 2021

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 35,728,112 shares issued at September 30, 2021

and 35,768,264 shares issued at December 31, 2021;

250,000,000 shares

authorized and 35,779,489 shares issued at March 31, 2022

Additional paid-in capital

1 unchanged sentence

Total stockholders’

(deficit) equity

Total liabilities, redeemable preferred stock and stockholders’

(deficit) equity

Total liabilities and stockholders’

See accompanying notes to the unaudited condensed interim financial statements.

2 unchanged sentences

Three Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenues

Operating expenses:

3 unchanged sentences

Loss from operations

Interest and other income, net

cumulative preferred dividends earned in the period, net of forfeitures

Interest and other income (loss), net

cumulative preferred dividends earned in the period

Net loss available for distribution to common stockholders

5 unchanged sentences

(Deficit) Equity

For the Nine Months Ended September 30, 2020 and 2021

For the Three Months Ended March 31, 2021 and 2022

Redeemable Preferred Stock

2 unchanged sentences

Balance, December 31, 2020

Stock-based compensation

6% cumulative dividends on

redeemable preferred

Accretion of issuance costs

Balance, March 31, 2020

Issuance of Class A

Common Stock upon

exercise of stock

Stock-based compensation

6% cumulative dividends on

redeemable preferred

Accretion of issuance costs

Balance, June 30, 2020

Issuance of Series C Redeemable

Preferred Stock, net of issuance

Commitment of Series C Redeemable

Preferred Stock

Issuance of Class A

Common Stock upon

exercise of stock

exercise of stock options

Stock-based compensation

2 unchanged sentences

Accretion of issuance costs

Balance, September 30, 2020

See accompanying notes to the unaudited condensed interim financial statements

HCW Biologics Inc.

Condensed Statements of Changes in Redeemable Preferred Stock and Stockholders’

(Deficit) Equity

For the Nine Months Ended September 30, 2020 and 2021 Continued

Balance, March 31, 2021

Redeemable Preferred Stock

1 unchanged sentence

Stockholders’

(Deficit) Equity

Balance, December 31, 2021

3 unchanged sentences

Stock-based compensation

6% cumulative dividends

on redeemable preferred

Accretion of issuance costs

Balance, March 31, 2022

Issuance of Class A

Common Stock upon

exercise of stock options

Stock-based compensation

6% cumulative dividends

on redeemable preferred

Accretion of issuance costs

Balance, June 30, 2021

Issuance of common

stock upon initial

public offering, net of

issuance cost

Conversion of Series A

Redeemable Preferred

Stock, with forfeited

cumulative dividends

Conversion of Series B

Redeemable Preferred

Stock, with forfeited

cumulative dividends

Conversion of Series C

Redeemable Preferred

Stock, with forfeited

cumulative dividends

Issuance of Class A

Common Stock upon

exercise of stock options

Stock-based compensation

Balance, September 30, 2021

See accompanying notes to the unaudited condensed interim financial statements.

1 unchanged sentence

Condensed Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

1 unchanged sentence

Depreciation and amortization

Stock-based compensation

Gain on extinguishment of debt

Unrealized loss on investments, net

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

Changes in operating assets and liabilities:

2 unchanged sentences

Accounts payable and other liabilities

Operating lease liability

Net cash used in operating activities

1 unchanged sentence

Purchases of property and equipment

Purchases of short-term investments

Purchases of long-term investments

Net cash used in investing activities

Proceeds for sale or maturities of short-term investments

Net cash (used in) provided by investing activities

Cash flows from financing activities:

Proceeds from the sale of Series C Preferred Stock

Proceeds from initial public offering

Issuance costs of initial public offering

Proceeds from issuance of common stock

Net cash provided by (used in) financing activities

Offering Costs

Net cash (used in) provided by financing activities

Net changes in cash and cash equivalents

2 unchanged sentences

Non-cash operating, investing and financing activities:

Committed proceeds from redeemable preferred stock

Cumulative dividends earned, accrued and forfeited in the reporting period

Forfeiture of cumulative dividends, upon conversion of Series A Preferred Stock

Forfeiture of cumulative dividends, upon conversion of Series B Preferred Stock

Forfeiture of cumulative dividends, upon conversion of Series C Preferred Stock

Cumulative dividends earned and accrued in the reporting period

PPP loan forgiveness

Offering costs

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

See accompanying notes to the unaudited condensed interim financial statements.

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The accompanying condensed interim financial statements and notes to the condensed interim financial statements give retroactive effect to the Reverse Stock Split for all periods presented.

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 September 30, 2021, the Company holds a minority interest in Wugen carried at $ 1.6 million, the fair value on the effective date of the Wugen License.

These shares were subject to an anti-dilution provision under which the Company was awarded additional shares for no consideration.

The underlying shares of common stock is not currently traded on any public market and thus has limited marketability.

During the nine-month period ended September 30, 2021, the Company received additional shares in Wugen under the terms of the anti-dilution provision.

Also during this period, the Company received payments of $ 2.5 million due for payment under the terms of the Wugen License for performance obligations completed on the effective date.

As of September 30, 2021, the Company had not generated any revenue from sales of its immunotherapeutic products.

As of March 31, 2022, the Company had not generated any revenue from commercial product sales of its internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases.

In the course of its development activities, the Company has sustained operating losses and expects to continue to incur operating losses for the foreseeable future.

Since inception, substantially all the Company’s activities have consisted of research, development, establishing large-scale cGMP production for clinical trials, and raising capital.

The Company's total revenues to date have been generated principally from the Wugen License and manufacturing and supply arrangement with Wugen.

In the three months ended March 31, 2022, the Company recognized revenues of $ 3.1 million from manufacturing and supply of materials for Wugen.

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”).

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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 cumu lative dividends that were accrued and unpaid on the conversion date.

As of September 30, 2021, the Company had cash and cash equivalents of $ 15.1 million , short-term investments of $ 25.0 million held in U.S.

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 March 31, 2022 , the Company had cash and cash equivalents of $ 18.1 million, short-term investments of $ 17.0 million held in U.S.

government-backed securities, and long-term investments of $ 9.8 million held in U.S.

government-backed securities.

Since inception to September 30, 2021, the Company incurred cumulative net losses of $ 24.7 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.

Since inception to March 31, 2022, the Company incurred cumulative net losses of $ 30.0 million.

Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise addition al capital to fully implement its business plan.

The Company intends to raise capital through the issuance of additional equity financing and/or third-party collaboration funding.

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Unaudited Interim Financial Information

The accompanying unaudited condensed interim financial statements as of September 30, 2021 and for the three months and nine months ended September 30, 2020 and 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

The accompanying unaudited condensed interim financial statements as of March 31, 2022 and for the three months ended March 31, 2021 and 2022 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) for interim financial information and pursuant to Article 10 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”).

1 unchanged sentence

GAAP for complete financial statements.

These unaudited condensed financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Company’s financial position and the results of its operations and cash flows.

The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected for the full fiscal year or any subsequent interim period.

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 months ended March 31, 2022 are not necessarily indicative of the results expected for the full fiscal year or any subsequent interim period.

The condensed balance sheet at December 31, 2021 has been derived from the audited financial statements at that date but does not include all disclosures required by U.S.

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Because all of the disclosures required by U.S.

GAAP for complete financial statements are not included herein, these unaudited condensed 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, 2020 which appear in the Company’s registration statement on Form S-1 (File No.

333-256510) for its IPO which was declared effective on July 19, 2021.

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, 2021 which appear in the Company’s Annual Report on Form 10-K (No.

333-256510) filed for the year ended December 31, 2021 with the Securities and Exchange Commission (the "SEC") on March 29, 2022 and in other filings with the SEC.

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:

identify the contract(s) with a customer;

identify the performance obligations in the contract;

determine the transaction price;

allocate the transaction price to the performance obligations within the contract;

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.

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.

The Company did no t recognize any revenues for the three or nine months ended September 30, 2020 or 2021.

The Company accounts for revenues in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”).

To determine revenue recognition for arrangements that fall within the scope of Topic 606, the Company performs the following five steps:

(i) identify the contract(s) with a customer;

(ii) identify the performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services transferred to the customer.

At contract inception, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct.

The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

To date, the Company's revenues have been generated solely from the Wugen License.

The Wugen License includes licenses of intellectual property, cost reimbursements, upfront signing fees, milestone payments and royalties on future licensee’s product sales.

In addition, the Company and Wugen have an agreement for supply of materials.

License Grants:

For out-licensing arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement.

For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement.

Milestone and Contingent Payments:

At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method.

If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price.

At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price.

Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event.

When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation.

Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period.

The Company’s licensees will generally pay milestones payments subsequent to achievement of the triggering event.

Materials Supply:

The Company provides clinical and research grade materials so that licensees may develop products based on the licensed molecules.

The Company plans to enter into commercialization supply agreements when licensees enter the commercial stage of their company.

The amounts billed are recognized as revenue as the performance obligations are satisfied by the Company, once the Company determines that a contract exists.

On June 18, 2021, the Company entered into a master services agreement ("MSA") for the supply of materials for clinical development of licensed products.

On March 14, 2022, the Company entered into statements-of-work ("SOWs") contemplated under the MSA for all current and historical purchases of clinical and research grade materials.

The Company determined that upon entering into the SOWs all requirements were met to qualify as a contract under Topic 606.

No contract existed in prior reporting periods and all amounts received for the supply of materials were recorded as deferred revenue.

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.

For the three months ended March 31, 2022, the Company recognized $ 3.1 m illion in revenue related to sale of development supply materials.

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.

The long-term portion of deferred revenue represents amounts to be recognized after one year.

As of September 30, 2021, current deferred revenue includes a mounts of $ 1.1 million allocated to the development supply agreement performance obligation under the Wugen License that is included within Accrued liabilities and other current liabilities.

There was no long-term deferred revenue as of September 30, 2021 .

The Company holds a minority interest in Wugen.

The underlying shares of common stock is not traded on any public market and thus has 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 nine months ended September 30, 2021.

The Company had deferred revenue of $ 239,000 and nil as of March 31, 2021 and 2022, respectively.

All deferred revenue balances are current liabilities and reported within Accrued liabilities and other current liabilities.

The Company holds a minority interest in Wugen which is accounted for using the measurement alternative whereby the investment is recorded at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee.

No impairment has been recognized.

As of March 31, 2021 and 2022, the Company included $ 1.6 million for the investment in Wugen in Investments in the accompanying condensed balance sheet.

The Company invests net proceeds of its IPO in bills and notes issued by the U.S.

As of September 30, 2021, the Company holds $ 3.0 million in U.S.

Treasury bills which is included in Cash and cash equivalents, $ 25.0 million in Short-term investments and $ 10.0 million in U.S.

Treasury notes which is included in Long-term investments in the accompanying condensed balance sheet.

Treasury which are classified as trading securities.

As of March 31, 2022, the Company held $ 17.0 million in U.S.

Treasury bills included in Short-term investments and $ 9.8 million in U.S.

Treasury notes included in Investments in the accompanying condensed balance sheet.

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 balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.

As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments.

The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.

The Company has a lease agreement with lease and non-lease components, which are accounted for separately.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders, including both Class A and Class B common stock, 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.

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.

Recently Issued Accounting Pronouncements

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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 is currently in the process of evaluating the impact of the adoption of Topic 842 on the Company’s financial statements and related disclosures .

The Company adopted Topic 842 as of January 1, 2022.

Effective March 1, 2022, the Company entered into noncancelable operating leases for its current location with a two-year term.

These are the only leases in scope of Topic 842 or above the Company's capitalization threshold.

Accrued Liabilities and Other Current Liabilities

In May 2020, HCW Biologics Inc.

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 condensed statement of operations for the nine months ended September 30, 2021.

As of September 30, 2021, the Company had a balance of $ 1.8 million in Accrued liabilities and other current liabilities, consisting of $ 1.1 million related to deferred revenue, $ 240,000 related to manufacturing materials, $ 214,408 related to salaries and employee benefits, and $ 86,666 related to legal fees.

As of March 31, 2022, the Company had a balance of $ 674,000 in Accrued liabilities and other current liabilities, consisting of $ 229,000 related to salary and benefits, $ 167,000 related to short term lease liability, and $ 278,000 related to other current liabilities which were primarily accrued legal fees and clinical fees.

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 provide 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 accrue 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 gross proceeds of $ 11.2 million, net of offering costs.

The Company’s Series C Preferred Stock is convertible into shares of Class A common stock and earns cumulative dividends at a rate of 6% per annum and compound annually.

No dividends have been paid or declared as of the reporting date.

Upon conversion, accrued and unpaid cumulative dividends will be forfeited.

On July 22, 2021, the Company closed on its IPO, and the requirements for mandatory conversion were met.

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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 September 30, 2021, the Company has 10 million shares of preferred stock authorized and no shares issued.

At December 31, 2021 and March 31, 2022 , the Company has 10,000,000 shares of preferred stock authorized and no shares issued.

Net Loss Per Share

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

Three Months Ended September 30,

Nine Months Ended September 30,

cumulative preferred dividends earned in the

period, net of forfeitures

Net loss available for distribution to common stock

Three Months Ended March 31,

cumulative preferred dividends earned in the period

Net loss available for distribution to common stock holders

Weighted-average common shares outstanding

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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:

At September 30,

Redeemable Preferred Stock

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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 September 30, 2021:

The following table presents the Company’s assets which were measured at fair value at December 31, 2021 and March 31, 2022:

At December 31, 2021:

Money market funds

At September 30, 2021:

Treasury bills

Treasury notes

At March 31, 2022:

Money market funds

Short-term cash investment

Short-term investment

Long-term investment

Treasury bills

Treasury notes

The Company computes its quarterly income tax expense/(benefit) by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter.

The Company did no t have a provision for income taxes (current or deferred tax expense) as of December 31, 2020 and September 30, 2021.

The Company did no t have a provision for income taxes (current or deferred tax expense) as of December 31, 2021 and March 31, 2022.

The Company will continue to maintain a 100 % valuation allowance on total deferred tax assets.

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Commitments and Contingencies

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.

The future minimum payments for the lease and sublease agreements at September 30, 2021 were as follows:

Operating Leases

The Company has operating leases for approximately 12,250 square feet of space located in Miramar, Florida.

The leases have a two-year term which commenced on March 1, 2022 and will terminate on February 29, 2024 .

Upon the commencement of the leases, the Company used its incremental borrowing rate of 6.0 % to determine the amounts to recognize for a ROU asset and a lease liability.

There are no obligations under finance leases.

The components of the lease expense for the three months ended March 31, 2022 were as follows:

Three Months Ended

Operating lease cost

Supplemental cash flow information related to lease was as follows:

Three Months Ended

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

Operating cash flows

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

Operating lease

As of March 31, 2022, the supplemental balance sheet information related to leases were as follows:

March 31, 2022

Operating lease right-of-use assets

Other current liabilities

Operating lease liabilities, net of current portion

Total operating lease liabilities

As of March 31, 2022, the remaining lease payments were as follows:

2022 (remaining 9 months)

Total future minimum lease payments

For the three months ended September 30, 2020 and 2021, rental expense, including common area maintenance costs, recognized by the Company was $ 45,914 and $ 52,963 , respectively, of which $ 20,682 and $ 28,070 , respectively, is included in research and development in the accompanying condensed statements of operations .

For the nine months ended September 30, 2020 and 2021, rental expense, including common area maintenance costs, recognized by the Company was $ 137,987 and $ 154,533 , respectively, of which $ 62,289 and $ 79,822 , respectively, is included in research and development, in the accompanying condensed statements of operations.

Manufacturing Commitment

The Company entered into an agreement with a third-party global contract development and manufacturer of biologics for the manufacture of the Company’s proprietary molecules for use in its clinical trials.

At September 30, 2020 and 2021, future payment obligations under statements-of-work agreements were $ 2.0 million and $ 1.5 million, respectively.

In the three months ended September 30, 2020, the Company continued with manufacturing activities, fill/finish and testing for a HCW9101 200-liter, cGMP production run and initiation of testing for a 1000-liter, cGMP production run.

Additionally, the cGMP process for HCW9218 was initiated, including master cell bank production and characterization, and technology transfer from the Company to its contract manufacturer.

In the three months ended September 30, 2021, the Company completed necessary procedures to release clinical materials for HCW9218.

Additionally, the Company conducted several manufacturing activities for HCW9302, including initiating the master cell bank characterization, completing technology transfer from the Company to its contract manufacturer, and performing a 200-liter, cGMP production run along with required testing procedures.

For the three months ended March 31, 2021 and 2022, rent expense recognized by the Company was $ 31,516 and $ 38,883 , respectively, of which $ 14,431 and $ 19,207 , respectively, is included in research and development in the accompanying condensed statements of operations .

Contractual Commitments

The Company operates under the provisions of 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, 2021, future payment obligations under such agreements were $ 2.5 million of which approximately $ 181,600 was paid in January 2022.

A t March 31, 2022, future payment obligations under such agreements were $ 2.1 million.

Management has no knowledge of any pending or unasserted claims against the Company.

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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 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 management’s discussion and analysis of financial condition and results of operations included in our final prospectus filed with the Securities and Exchange Commission, or the SEC, on July 21, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, which we refer to as our Prospectus.

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 (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, 2021 included in the Annual Report on Form 10-K filed with the U.S.

Securities and Exchange Commission on March 29, 2022.

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,”

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refer to HCW Biologics Inc.

In preparing the Management’s Discussion and Analysis below, we presume the readers have access to and have read the Management’s Discussion and Analysis in our Prospectus, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.

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 and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

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, plans and objectives of management for future operations, adequacy of our cash resources and working capital, impact of COVID-19 pandemic on our research and development activities and business operations, and future results of anticipated products, are forward-looking statements.

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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,”

and in our Prospectus and elsewhere in this Quarterly Report on Form 10-Q and in other filings we make with the SEC from time to time.

in our Annual Report on Form 10-K, elsewhere in this Quarterly Report on Form 10-Q and in other filings we make with the Securities and Exchange Commission, or 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.

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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.

We are an innovative, 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 low-grade chronic inflammation, or “inflammaging,”

is a significant contributing factor to several chronic diseases and conditions, such as cancer, fibrotic disease (NAFLD and liver cancer), cardiovascular disease, diabetes, neurodegenerative disease, and autoimmune disease.

We believe our approach has the potential to provide an innovative treatment of these age-related diseases.

Our gateway indication is oncology.

Advances in immuno-stimulatory and anti-immunosuppressive therapeutics have revolutionized cancer treatment.

Our lead molecule, HCW9218, is designed with both of these functionalities –

it rejuvenates the immune system to reduce senescence, and it captures transforming growth factor-ß

(“TGF-ß”) to neutralize its immunosuppressive activity.

HCW9218 is an injectable, fusion protein complex designed to drive bifunctional antitumor activity by activating desired immune responses to attack cancer cells while simultaneously blocking unwanted immunosuppressive activities.

In the clinical development of HCW9218, we will attempt to minimize the side effects of chemotherapy through stimulating anti-tumor effector immune cell responses, blocking TGF-ß

immunosuppressive activity, eliminating chemotherapy-induced senescent cells in tumors and normal tissues (i.e., senolytic effect), and reducing SASP factor activity (i.e., senomorphic effect).

We are leveraging extensive clinical expertise to structure clinical trials with clear, objective, and measurable endpoints.

We will manage these clinical trials internally, relying on our in-house expertise in managing clinical trials conducted in collaboration with National Cancer Institute (NCI)-Designated Comprehensive Cancer Centers.

Currently, we are engaged in discussions with leading institutions who have shown interest in participating in our clinical trials as clinical sites.

The individuals identified as Principal Investigators from these

institutions worked with us to establish clinical development strategies for our product candidates and to refine study protocols for pancreatic, ovarian, breast, prostate, and colorectal cancer trials.

We are not certain we will be successful in reaching an agreement with any or all of these institutions, thus we might need to identify alternative clinical sites.

This process could impact the start date for initiating our clinical trials.

Any delays in our clinical trials could increase our costs and slow down the development and approval process, which could harm our commercial prospects.

We have been cleared by the FDA to proceed to evaluate our lead drug candidate HCW9218 in a first-in-human phase 1b clinical trial in patients with advanced pancreatic cancer.

We plan to initiate a Company-sponsored Phase 1b/2 clinical trials for oncology indications in the second half of 2021, working with National Cancer Institute designated comprehensive cancer centers , first in patients with pancreatic cancer, then expanding to patients with breast, ovarian, prostate, and colorectal cancers.

The aim of these studies is to evaluate HCW9218 as an adjunct therapy to chemotherapy.

In the pancreatic cancer trial, the Phase 1b portion will be a dose escalation study of HCW9218 as monotherapy in refractory patients with advanced pancreatic cancer.

The Phase 2 portion of this clinical trial will include a cohort of patients receiving HCW9218 as monotherapy and a cohort of patients receiving HCW9218 as an adjunct to chemotherapy.

We plan to have an additional clinical trial to evaluate HCW9218 in solid tumors with an investigator-sponsored IND.

Our ability to proceed with this trial depends on the submission and acceptance of the investigator-initiated solid tumor clinical trial as well as finalizing our agreement with the sponsor.

We are currently engaged in discussions with an institution that has expressed interest to be a sponsor for an IND using HCW9218 as an adjunct to chemotherapy in patients with solid tumors (breast, ovarian, prostate, and colorectal cancers).

However, these discussions are not final, and we may not succeed in reaching an agreement with this institution.

Depending on the course of these discussions and whether we need to seek an alternative sponsor for an IND, there could be a delay in initiating a Phase 1b/2 clinical trial to evaluate HCW9218 in patients with solid tumors.

Any delays in our clinical trials could increase our costs and slow down the development and approval process, which could harm our commercial prospects.

The Company is also advancing IND-enabling studies for our second lead molecule, HCW9302.

We are developing HCW9302 as an IL-2-based immunotherapeutic to stimulate regulatory T (“T reg ”) cells to suppress the activity of inflammasome-bearing cells and inflammatory factors.

Inflammasomes are expressed in innate immune cells.

When these cells are stimulated by various signals, the inflammasomes become active and the cells release inflammatory factors.

In certain conditions, these signaling pathways persist leading to chronic inflammatory responses and associated tissue destruction.

HCW9302 expands T reg cells in vivo and ex vivo as an injectable or cell-based strategy to reduce inflammation.

The FDA-required IND-enabling animal studies in mice are expected to be completed by the end of 2021, and we anticipate nonclinical toxicology studies in nonhuman primates to be completed in the second half of 2022.

We have combined our deep understanding of disease-related immunology with our expertise in advanced protein engineering to internally develop our TOBI TM ( T issue fact O r- B ased fus I on) discovery platform for the design of immunotherapeutic drugs.

This modular and tunable technology has allowed us to generate a novel pipeline of internally-developed product candidates capable of activating and targeting desired immune responses and blocking unwanted immunosuppressive activities.

Using our TOBI platform, we have successfully developed molecules that can be administered by subcutaneous injection as well as adoptive cell therapy approaches.

We have selected two molecules as our lead product candidates:

HCW9218 and HCW9302.

We have chosen these product candidates because we believe they have the potential to become transformative immunotherapeutics, which can be administered by subcutaneous injection.

As of September 30, 2021, we have funded our operations primarily with proceeds of $29.4 million from the sale and issuance of redeemable preferred stock, $56.0 million in gross proceeds from an IPO, and to a lesser extent, the proceeds of upfront payments from an out-license agreement.

We have incurred significant operating losses to date.

Our cumulative net losses for the year ended December 31, 2020 and the nine months ended September 30, 2021 were $15.1 million and $24.7 million, respectively.

Our net losses for the three months ended September 30, 2020 and 2021 were $2.7 million and $4.1 million, respectively.

Our net losses for the nine months ended September 30, 2020 and 2021 were $7.9 million and $9.7 million, respectively.

As of September 30, 2021, we had an accumulated deficit of $24.7 million and cash and cash equivalents of $15.1 million, short-term investments in U.S.

government-backed securities of $25.0 million, and long-term investments in U.S.

government-backed securities of $10.0 million.

We expect to continue to incur significant expenses and operating losses for the foreseeable future, as we continue our clinical development activities, particularly if and as we:

Advance the development of our lead product candidate, HCW9218, and clinical trials for oncology, and if approved by the FDA, commercialization;

Advance preclinical development of other indications for HCW9218, including fibrotic indications, especially those resulting in NAFLD and liver cancer;

Advance the preclinical development of our second lead product candidate, HCW9302, for autoimmune diseases, such as alopecia areata, and metabolic diseases, such as Type 2 Diabetes and coronary artery disease;

Establish our own domestic manufacturing capability;

Maintain, expand, and protect our intellectual property portfolio;

Scale up our clinical and regulatory capabilities;

Expand operational and management information systems as well as investor relations, legal, accounting, and audit services required to operate as a public company.

As a result of these anticipated expenditures, we will need substantial additional financing to support our continuing operations and pursuit of our clinical development strategy.

Until such time as we can generate significant revenues from product sales, if ever, we expect to finance our operations through a combination of equity offerings, collaborations, strategic alliances, co-development deals, and out-licensing arrangements.

We may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all.

Our inability to raise capital as and when needed would have a negative impact on our financial condition, and we may need to significantly delay, reduce, or eliminate the development and commercialization of one or more of our product candidates.

Our IPO was effective on July 19, 2021, with net proceeds of $49.0 million.

We believe that the net proceeds of the offering and our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for 24 months.

We expect to continue to incur losses for the foreseeable future and will require additional financial resources to continue to advance our products and intellectual property.

If we have based this estimate on assumptions that may prove to be wrong, we could exhaust our available capital resources sooner than we expect.

See “Liquidity and Capital Resources.”

Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations and fund capital expenditure requirements.

Because of the numerous risks and uncertainties associated with our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the preclinical and clinical development of our product candidates.

Recent Developments

HCW Biologics Inc.

HCWB) was added to the S&P Total Market Index (“TMI”) on September 20, 2021.

On October 28, 2021, we issued a press release announcing that we were cleared by the FDA to proceed to evaluate our lead drug candidate HCW9218 in a first-in-human Phase 1b clinical trial in patients with advanced pancreatic cancer.

We are actively engaged in negotiations with several National Cancer Institute designated comprehensive cancer centers as potential clinical sites.

The proposed primary investigators from these institutions participated in the clinical design and protocols for this trial.

We expanded our board with the addition of two new independent board members in October 2021.

Giles has extensive experience in pharmaceutical, diagnostic, device, and other healthcare industries.

She held senior leadership positions in strategic planning, operations, and commercial planning.

In addition, she brings a wealth of corporate governance experience, having served as a board member for several public companies.

Winer has led and built successful, multinational businesses in the biopharma and diagnostic healthcare sectors as a Chief Executive Officer or President, including senior leadership positions with AbbVie and Abbott.

He brings valuable insights and experience for operations as well as support and advice for strategic transactions.

Wong, our CEO and Founder, has accepted an invitation to present at the Cambridge Healthtech Institute’s 24 th Annual PepTalk scheduled for January 17-19, 2022 in San Diego, California.

Wong’s presentation, entitled “A Novel Platform to Create Multi-functional Immunotherapies for Cancer,”

will focus on the TOBI discovery platform and HCW9218, one of the novel bifunctional immunotherapeutics created using this platform.

Wong has accepted an invitation to present at the BioFlorida Annual Conference scheduled for December 8-10, 2021 in Orlando, Florida.

He will be one of the featured speakers in the keynote session, “

New Strategies in the Fight Against Cancer .”

We continue to expand our intellectual property portfolio through filing provisional U.S.

applications based upon new research, filing non-U.S.

national stage phase patent applications, and filing U.S.

trademark applications.

As of September 30, 2021, we own 60 pending patent applications worldwide, including 11 pending U.S.

utility patent applications, 2 pending provisional U.S.

patent applications, 7 pending PCT applications, 36 pending non-U.S.

national phase patent applications, and 4 pending Hong Kong patent applications.

We also own 5 U.S.

trademark applications for our corporate name and logo, and the TOBI platform.

("HCW Biologics", "HCW", the "Company, or "we") i s a bi opharmaceutical 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 senescent cells and persistent activation of protein complexes, known as inflammasomes, in innate immune cells.

These two elements share common mechanisms in promoting secretion of pro-inflammatory proteins and in many cases interact to drive inflammaging.

Our novel approach is to treat both of these elements.

We believe our approach has the potential to fundamentally change the treatment of age-related diseases.

Senescence is a physiologic process important in promoting wound healing, tissue homeostasis, regeneration, embryogenesis, fibrosis regulation, and tumorigenesis suppression.

However, accumulation of senescent cells with a senescence-associated pro-inflammatory factors has been implicated as a major source of chronic sterile inflammation leading to many aging-related pathologies.

Subcutaneous administration of our lead drug candidate, HCW9218, activates Natural Killer ("NK") cells, innate lymphoid group-1, and CD8 + T cells, and neutralizes transforming growth factor beta ("TGF-β").

This bifunctionality gives HCW9218 the ability to reduce senescent cells, that is function as a senolytic, as well as eliminate senescence-associated pro-inflammatory factors, that is function as a senomorphic.

As a result, HCW9218 has the ability to lower chronic inflammation and restore tissue homeostasis.

HCW9218 is expected to reach the clinical stage of its development in the first half of 2022, with the

initiation of a Phase 1 clinical trial by the Masonic Cancer Center to evaluate HCW9218 in the treatment of solid tumor cancers that progressed after standard-of-care treatment, and the initiation of a Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in patients with advanced pancreatic cancer.

We expect to gain human data from these two clinical trials in cancer that will guide the future development of HCW9218 for other age-related pathologies.

(See ClinicalTrials.gov:

HCW9218 for Advanced Pancreatic Cancer (NCT05304936) and HCW9218 in Select Advanced Solid Tumors (NCT05322408)) .

We believe that HCW9218 may represent a new class of safe and effective senolytic and senomorphic drugs for the treatment of a broad range of inflammaging indications, including cancer, metabolic dysfunctions, fibrosis-related pathologies, as well as neuro-inflammation and neurodegenerative diseases.

HCW9302 is anothe r lead drug candidate which is designed to activate and expand regulatory T (“T reg ”) cells to suppress the activity of inflammasome-bearing cells and the inflammatory factors which they secrete.

This molecule is a single-chain, IL-2-based fusion protein.

Preclinical studies in mouse models have demonstrated the ability of HCW9302 to activate T reg cells and reduce inflammation-related diseases, supporting the potential of HCW9302 to treat a wide variety of autoimmune and age-related diseases, such as atherosclerosis.

IND-enabling activities are currently in progress and are expected to be completed by the end of 2022.

If we are successful in completing IND-enabling activities on the expected schedule, we intend to file an Investigational New Drug Application ("IND") to obtain approval from the Federal Drug Administration ("FDA") for a Phase 1b/2 clinical trial to evaluate HCW9302 in an autoimmune disorder in the first half of 2023.

Recent Developments

At the 105th Annual Meeting of the American Association of Immunologists held in May 2022, HCW Biologics showcased two novel groups of fusion molecules created with the Company’s proprietary and versatile TOBI TM discovery platform.

Two posters were presented at the conference and are available on the Company’s website:

A “kick and expand”

strategy to generate large numbers of Cytokine-Induced-Memory-Like NK cells for adoptive cell therapy for the treatment of cancer using novel fusion proteins HCW9201 and HCW9206.

Robust human regulatory T cell expansion with fusion proteins HCW9302 and HCW9213 circumvents need for magnetic-bead or feeder cell approaches for adoptive cell therapy.

On April 19, 2022, Dr.

Hing Wong, the Company's Founder and CEO, presented, “Bifunctional Immunotherapeutic HCW9218 for Cancer and Inflammaging,”

at the Third Annual International Conference on Cell and Experimental Biology.

Wong presented preclinical data for the first time that showed results of the Company's investigational work related to the treatment of inflammaging indications in naturally-aged mice.

We believe these results demonstrate the potential of HCW9218 to fundamentally change the treatment of a broad range of diseases and conditions associated with aging, even aging itself, to enhance health span that has been diminished with aging.

Trends and Uncertainties –

COVID-19 Pandemic

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.

The spread of COVID-19 and its numerous variants has caused significant volatility in the U.S.

and international markets since March 2020.

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, we are unable to determine if it will have a material impact on our operations.

The ultimate extent of the impact of the COVID-19 pandemic will depend on future developments which are highly uncertain, including new information that may emerge concerning the severity and expected duration of the COVID-19 pandemic, and public health actions taken to contain or prevent its spread, among others.

Accordingly, we cannot fully predict the full extent to which our business and results of operations will be affected.

In particular, we have seen many clinical trial sites delay patient enrollment in clinical trials as a result of the COVID-19 pandemic.

Other required IND-enabling activities, such as toxicology studies, were slowed due to the volume of COVID-19 related trials that have been initiated during the pandemic.

The COVID-19 pandemic or local outbreaks associated with the COVID-19 pandemic could result in difficulty manufacturing our product candidates, securing clinical trial site locations, and securing critical vendors and consultants supporting our clinical trials.

In addition, outbreaks or the perception of an outbreak near a clinical trial site location could impact our ability to enroll patients or to complete all scheduled physician visits for currently enrolled patients.

These situations, or others associated with COVID-19 pandemic, could cause delays in our clinical trial plans and could increase expected costs, all of which could have a material adverse effect on our business and its financial condition.

At the current time, we are unable to quantify the potential effects of the COVID-19 pandemic on our future operations.

The extent to which the COVID-19 or outbreaks of its variants may affect our clinical trials, business, financial condition, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, such as the potential spread of the vaccine/treatment-resistant disease, the duration of the outbreaks, travel restrictions, and actions to contain the outbreaks or treat their impact, such as social distancing and quarantines or lock-downs in the United States and other countries, business closures, or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

Future developments in these and other areas present material uncertainty and risk with respect to our clinical trials, business, financial condition, and results of operations.

Components of our Results of Operation

To date, we have not generated any revenue from product sales and do not expect to generate revenue from product sales for the foreseeable future.

Until that occurs, our sole source of revenue will be derived from out-licenses, collaborative agreements, and co-development deals.

We have retained the manufacturing rights under the terms of the Wugen License.

On June 18, 2021, we entered into a master services agreement with Wugen related to a development supply agreement to provide cGMP and non-cGMP grade licensed molecules based on industry-standard terms.

We have not finalized any statements of work under the master services agreement, which will specify the performance obligations required to be completed by the Company for supplies ordered by Wugen.

We also intend to enter into a supply agreement with Wugen for commercial supply when commercialization commences.

In future periods, under the terms of the Wugen License, we may be eligible to receive additional cash payments that will be recognized as revenue, including development and commercialization milestones and single-digit royalties based on annual net sales of licensed products.

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.

Our total revenues to date have been generated principally from our Wugen License and manufacturing and supply for Wugen.

We derive revenue from a license agreement granting rights to Wugen to further develop and commercialize products based on two of our proprietary 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 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.

Operating Expenses

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Product candidates in later stages of development generally have higher development costs than those in earlier stages.

We expect our research and development expenses will increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our lead product candidates, advance into later stages of development, begin to conduct larger clinical trials, expand our product pipeline, continue to maintain, expand, protect, and enforce our intellectual property portfolio, and establish our own manufacturing capabilities.

In particular, we expect our research and development expenses will increase substantially as we progress to Phase 2 and Phase 2/3 clinical trials for our lead product candidates, primarily due to the increased size and duration of later-stage clinical trials.

The duration, costs, and timing of the clinical development of our product candidates are highly uncertain and will depend on a variety of factors, including, but not limited to:

Number and scope of preclinical and IND-enabling studies;

Successful and timely patient enrollment in, and completion of, clinical trials;

Per subject trial costs;

Number of trials required for regulatory approval;

Number of sites included in the trials;

Number of subjects needed for each trial;

Cost and timing of manufacturing of cGMP materials for clinical trials;

Receipt of regulatory approvals from applicable regulatory authorities;

Establishing commercial manufacturing capabilities;

Costs to maintain, defend, and enforce our intellectual property rights.

A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate.

See “Risk Factors -- Risks Related to the Development and Clinical Testing of Our Product Candidates," in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC 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

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We anticipate increased expenses relating to our operations as a public company, including increased costs for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with additional regulations, corporate governance, internal control and similar requirements applicable to public companies, as well as increased costs for insurance.

Interest and Other Income, Net

Interest and Other Income (Loss), Net

Interest and other income, net consists of interest earned on our cash, cash equivalents, unrealized gains and losses related to our investments in U.S.

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Three Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenues

Operating expenses:

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Loss from operations

Interest and other income, net

Comparison of the Three Months ended September 30, 2020 and September 30, 2021

On June 18, 2021, the Company entered into a master services agreement with Wugen related to supply of licensed molecules for use in research and clinical development.

The Company has not finalized any statements of work, which will specify the performance obligations required to be completed by the Company for supplies ordered by Wugen.

The standalone selling price for these materials has been determined using industry-standard “cost plus”

terms for supply agreements.

In the three months ended September 30, 2021, we continued to receive orders from Wugen for research and clinical grade materials.

For the three months ended September 30, 2021, we recognized $435,000 of additional deferred revenue, increasing the balance of deferred revenue to $1.1 million included within accrued liabilities and other current liabilities on the unaudited condensed balance sheet as of September 30, 2021 that appears elsewhere in this Quarterly Report.

Deferred revenue represents the payments received in advance of the satisfaction of performance obligations for delivery and acceptance of research and clinical grade materials.

Interest and other income (loss), net

Comparison of the Three Months ended March 31, 2021 and March 31, 2022

As of March 31, 2021, the Company did not recognize any revenues.

For the three months ended March 31, 2022, the Company recognized $3.1 million of revenues in the unaudited statements of operation that appear elsewhere is this Quarterly Report.

For those transactions for which revenue was not recognized because one or more of the criteria for revenue recognition had not been met, the Company records deferred revenue.

There were no deferred revenues as of March 31, 2022.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended September 30, 2020 and September 30, 2021:

The following table summarizes our research and development expenses for the three months ended March 31, 2021 and March 31, 2022:

Three Months Ended

September 30,

Salaries, benefits and related expenses

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Other expenses

Total research and development

Research and development expenses increased $588,653, or 28%, from $2.1 million for the three months ended September 30, 2020 to $2.7 million for the three months ended September 30, 2021.

The increase was due primarily to an increase in expenses related to manufacturing and IND-enabling activities, offset by a decrease in salaries, benefits and related expenses, clinical activities, and other expenses.

Salaries, benefits, and related expenses decreased by $46,735, or 6%, from $721,890 for the three months ended September 30, 2020 to $675,155 for the three months ended September 30, 2021.

The decrease was due primarily to the $70,000 reimbursement we received for certain expenses incurred under the terms of the Wugen License, offset by a $33,308 increase in salaries and wages.

Manufacturing and materials expense increased $209,221, or 25%, from $824,859 for the three months ended September 30, 2020 to $1.0 million for the three months ended September 30, 2021.

Additionally, the cGMP process for HCW9218 was initiated, including master cell bank production and characterization, and technology transfer to our contract manufacturer required for internally-developed manufacturing processes .

In the three months ended September 30, 2021, the Company completed necessary procedures to release clinical materials for HCW9218.

Additionally, the Company conducted several manufacturing activities for HCW9302, including initiating the master cell bank characterization, effecting a technology transfer to our contract manufacturer, performing a 200-liter, cGMP production run as well as other testing procedures.

Expenses associated with preclinical activities increased by $446,192, or 138%, from $322,987 for the three months ended September 30, 2020 to $769,179 for the three months ended September 30, 2021.

The increase is due primarily to an increase in expenses for the toxicology studies for HCW9218 required for our IND application to evaluate HCW9218 in a pancreatic cancer trial.

For our other lead molecule, HCW9302, we are currently designing a multi-dose nonhuman primate toxicology study, and we are targeting the initiation of this study in late 2021.

This study will last several months.

We may continue to deal with COVID-related delays which may impact the expected completion date for the toxicology final report for HCW9302, a requirement for filing our IND for the Phase 1b/2 clinical trial to evaluate HCW9302 in the autoimmune disease, alopecia areata.

We are currently expecting the IND to be filed in the second half of 2022.

Expenses associated with clinical activities decreased by $18,432, or 21%, from $87,933 for the three months ended September 30, 2020 to $69,556 for the three months ended September 30, 2021.

The decrease is due primarily to a decrease in expenses for outsourcing.

Other expenses, which includes overhead allocations, decreased by $1,593, or 1%, from $140,964 for the three months ended September 30, 2020 to $139,371 for the three months ended September 30, 2021.

The decrease in other expenses is due to an increase of $16,698 in primarily from an increase in the allocation for rent expense as well as the expenses for repairs and maintenance, and a decrease of $18,684 primarily from a decrease in the allocation of depreciation.

Total research and development expenses

Research and development expenses decreased $540,134, or 23%, from $2.3 million for the three months ended March 31, 2021 to $1.8 million for the three months ended March 31, 2022.

This decrease was primarily due to a decrease in manufacturing and materials expenses and preclinical expenses.

These decreases were offset by increases in salaries, benefits and related expenses;

clinical trials expenses;

and other expenses.

Salaries, benefits, and related expenses increased by $75,978, or 11%, from $696,971 for the three months ended March 31, 2021 to $772,949 for the three months ended March 31, 2022.

This increase was primarily attributable to a $68,353 increase in salaries and wages due to an increase in headcount.

There was an increase of $17,324 due to increases in health insurance costs, 401(K) employers match, and employers contribution to health savings accounts.

Compensation expense arising from vesting of stock options increased by $9,237.

These increases were offset by a reimbursement from Wugen for certain expenses incurred under the terms of the Wugen License that was $16,000 greater for the three months ended March 31, 2022 versus the comparable period in 2021.

Manufacturing and materials expense decreased by $543,014, or 71%, from $762,052 for the three months ended March 31, 2021 to $219,038 for the three months ended March 31, 2022.

In the three months ended March 31, 2021, costs were primarily from a 200-liter cGMP run for HCW9218, establishment of the HCW9206 Master Cell Bank, the initiation of the technology transfer and development runs for HCW9206, and the initiation of manufacturing of HCW9302.

In the three months ended March 31, 2022, costs were primarily from HCW9302 technology transfer and development process closeout through finalization of reports and the project initiation of a 1000L run for HCW9218.

Looking ahead for the remainder of 2022, costs will primarily be associated with HCW9302 GMP process closeout through finalization of reports, HCW9302 Fill/Finish activities, HCW9302 drug substance and drug product release testing, and a full 1000L GMP manufacturing run and fill/finish activities for HCW9218.

Expenses associated with preclinical activities decreased by $163,225, or 24%, from $676,342 for the three months ended March 31, 2021 to $513,117 for the three months ended March 31, 2022.

In the three months ended March 31, 2021, expenses were related primarily to the c ost of toxicology studies and experimental materials for IND-enabling activities required to prepare our IND for clinical trials to evaluate HCW9218 in difficult-to-treat solid tumor cancers.

In the three months ended March 31, 2022, expenses were related primarily to the cost of toxicology studies and experimental materials related to IND-enabling activities required to prepare our IND for clinical trials to evaluate HCW9302 in an autoimmune indication, alopecia areata.

Expenses associated with clinical activities increased $59,402, or 119%, from $49,965 for the three months ended March 31, 2021 to $109,367 for the three months ended March 31, 2022.

We anticipate expenses related to clinical ac tivities will increase substantially in the future.

HCW9218, our lead drug candidate, is expected to enter the clinical stage in the first half of 2022, upon the initiation of an Investiga tor-sponsored Phase 1 clinical trial at the Masonic Cancer Center, University of Minnesota for a dose escalation study of HCW9218 as a monotherapy in solid tumors, such as breast, ovarian, prostate and colorectal cancers.

The trial is designed as a dose escalation study of HCW9218 to identify the maximum tolerated dose for future evaluation.

Depending on the toxicities observed in the treated patients, between 12 and 24 patients may be enrolled.

We also intend to initiate a Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in advanced pancreatic cancer in the first half of 2022.

We plan to enroll up to 24 patients in five NCI-designated centers, with the primary objectives of the study being to determine safety, maximum tolerated dose, and the recommended Phase 2 dose.

Other expenses, which include overhead allocations, increased by $30,725, or 21%, from $144,482 for the three months ended March 31, 2021 to $175,207 for the three months ended March 31, 2022.

The increase in other expenses is due primarily to an increase of $7,000 in occupancy expenses, an increase of $13,525 in repairs and maintenance, and a $7,465 increase in employee conferences and training.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended September 30, 2020 and September 30, 2021:

The following table summarizes our general and administrative expenses for the three months ended March 31, 2021 and March 31, 2022:

Three Months Ended

September 30,

Salaries, benefits and related expenses

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Total general and administrative expenses

* Not meaningful.

General and administrative expenses increased $794,879, or 130%, from $609,944 for the three months ended September 30, 2020 to $1.4 million for the three months ended September 30, 2021.

The increase was primarily due to an increase in salaries brought about by the payment of a performance-based bonus and the initiation of Board compensation;

increase in professional services expenses arising from legal services required for patent filings;

and an increase in other expenses primarily due to an increase in insurance premiums.

Comparison of Nine Months Ended September 30, 2020 and September 30, 2021

As of September 30, 2021, we recognized $1.1 million of deferred revenue, included within accrued liabilities and other current liabilities on the unaudited condensed balance sheet as of September 30, 2021.

This was an increase of $435,000 over the amount recognized as of June 30, 2021.

Deferred revenue represents the payments received in advance of the satisfaction of performance obligations for delivery and acceptance of research and clinical grade materials.

Research and Development Expenses

The following table summarizes our research and development expenses for the nine months ended September 30, 2020 and September 30, 2021:

Nine Months Ended

September 30,

Salaries, benefits and related expenses

Manufacturing and materials

Preclinical expenses

Clinical trials

Other expenses

Total research and development

Research and development expenses increased by $844,422, or 14%, from $5.9 million for the nine months ended September 30, 2020 to $6.7 million for the nine months ended September 30, 2021.

The increase was due primarily to the increase in preclinical activities, offset by a decrease in manufacturing and materials expenses.

Salaries, benefits and related expenses decreased by $15,666, or 1%, for the nine months ended September 30, 2020 compared with the nine months ended September 30, 2021.

The change was primarily due to an increase of $125,225 in salaries and bonuses and an increase of $27,411 for Company-sponsored employee benefits, offset by a $170,000 reimbursement of certain expenses as required under the terms of the Wugen License.

Manufacturing and materials expense decreased by $165,123, or 7%, from $2.3 million for the nine months ended September 30, 2020 to $2.1 million for the nine months ended September 30, 2021.

In nine months ended September 30, 2020, we began to initiate manufacturing activities for five internally-developed molecules.

We accomplished several milestones for HCW9101 and HCW9201, including master cell bank production and characterization reports;

preparation for drug testing, and cGMP manufacturing runs in multiple quantities.

In addition, the fill/finish and testing was completed for HCW9201.

We initiated the cGMP process for HCW9218 , including master cell bank production and characterization and conducted several manufacturing activities related to HCW9302, including initiating the master cell bank characterization, effecting a technology transfer to our contract manufacturer required for internally-developed manufacturing processes .

In the nine months ended September 30, 2021, we completed manufacturing activities related to establishing master cell banks for several molecules, effecting a technology transfer to our contract manufacturer, and successfully completing multiple cGMP production runs for several of our molecules.

In addition, the Company completed necessary procedures to release clinical materials for HCW9218.

The Company also conducted several manufacturing activities related to HCW9302, including initiating the master cell bank characterization, effecting a technology transfer to our contract manufacturer, performing a 200-liter, cGMP production run as well as other testing procedures.

Expenses associated with preclinical activities increased $909,615, or 106%, from $854,502 for the nine months ended September 30, 2020 to $1.8 million for the nine months ended September 30, 2021.

The majority of the increase in costs was attributable to the toxicology study required to complete our application for an IND for clinical trials to evaluate HCW9218 in advanced pancreatic cancer.

Expenses associated with clinical activities increased $74,882, or 49%, from $152,226 for the nine months ended September 30, 2020 to $227,108 for the nine months ended September 30, 2021.

The majority of this increase was attributable to the costs of a collaboration with Washington University.

Professional fees for outside services also contributed to this increase.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2020 and September 30, 2021:

Nine Months Ended

September 30,

Salaries, benefits and related expenses

Professional services

Facilities and office expenses

Other expenses

Total general and administrative expenses

General and administrative expenses increased $1.5 million or 75%, from $2.0 million for the nine months ended September 30, 2020 to $3.5 million for the nine months ended September 30, 2021.

The increase is primarily due to increases in salaries, benefits, and related expenses, professional fees, and other expenses.

The increase in salaries, benefits, and related expenses is primarily attributable to performance-based bonuses earned in connection with entering the Wugen License and completion of our IPO.

Professional services increased primarily due to legal services required for patent filings.

Other expenses increase is primarily due to an increase in insurance premiums.

We expect to incur increasing general and administrative expenses as a result of operating as a public company, including expenses for SEC reporting, investor relations, additional insurance requirements, and other administrative expenses.

We expect to increase our administrative function to support the growth in our business and public company reporting requirements.

Interest and Other Income, Net

For the nine months ended September 30, 2020 and 2021, interest and other income, net increased by $543,641 primarily due to the forgiveness of the PPP loan and accrued interest.

NM - Not meaningful.

General and administrative expenses increased $798,241, or 74%, from $1.1 million for the three months ended March 31, 2021 to $1.9 million for the three months ended March 31, 2022.

The increase was primarily due to an increase in salaries,

benefits and related expenses as a result of stock-based compensation expense associated with an equity award to the CEO upon completion of the IPO and an increase for Board compensation under our non-employee director compensation program, offset by a reduction in performance bonuses.

Professional services increased $65,540, or 17%, from $393,624 for the three months ended March 31, 2021 to $459,164 for the three months ended March 31, 2022, primarily due to a $101,074 increase for corporate legal services, an $85,863 increase in expenses for other professional services, such as auditing, and a $114,240 increase in other consulting services, such as investor relations advisory services.

These increases were offset by a decrease of $240,338 in fees for legal services related to patent filings.

Other expenses increased by $502,737, primarily due to increase in insurance costs required by a public company.

Liquidity and Capital Resources

Sources of Liquidity

Since inception, we have funded our operations primarily from the issuance of redeemable preferred stock, and as of July 19, 2021, an IPO.

From our inception in 2018 to July 19, 2021, the effective date of our IPO, we raised net proceeds of approximately $83.8 million, including $49.0 million of net proceeds from the IPO.

As of September 30, 2021, we had cash and cash equivalents of $15.1 million, short-term investments in U.S.

The Company closed an IPO on July 22, 2021, resulting in net proceeds of approximately $49.2 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.

As of March 31, 2022, we had cash and cash equivalents of $18.1 million, short-term investments in U.S.

government-backed securities of $17.0 million, and long-term investments in U.S.

government-backed securities of $9.8 million.

After giving effect to our IPO, we estimate that we will have adequate capital to meet our operating expenses, capital expenditure requirements, and contractual obligations for a period of at least 22 months following the date our most recent financial statements were issued.

We have based our projections of operation expenses and capital expenditure requirements on assumptions that may prove to be incorrect, and we may use all of our available capital sooner than we expect.

We estimate that we will have adequate capital to meet our operating expenses and contractual obligations until the end of 2023.

We have based our projections of operation expenses requirements on assumptions that may prove to be incorrect, and we may use all of our available capital sooner than we expect.

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.

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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 Nine Months Ended September 30, 2020 and September 30, 2021

The following table summarizes our cash flows for the nine months ended September 30, 2020 and 2021:

Nine Months Ended

September 30,

Comparison of the Cash Flows for the Three Months Ended March 31, 2021 and March 31, 2022

The following table summarizes our cash flows for the three months ended March 31, 2021 and March 31, 2022:

Three Months Ended

Cash used in operating activities

Cash used in investing activities

Cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash (used in) provided by investing activities

Cash (used in) provided by financing activities

Net decrease in cash and cash equivalents

Operating Activities

Net cash used in operating activities was $6.9 million and $7.6 million for the nine months ended September 30, 2020 and September 30, 2021, respectively.

Cash used in operating activities for the nine months ended September 30, 2020 consisted primarily of a net loss of $7.9 million, offset by cash provided by an increase accounts payable and other liabilities of $517,017 and a noncash adjustment of $432,225 for depreciation and amortization.

Cash used in operating activities for the nine months ended September 30, 2021 consisted primarily of a net loss of $9.7 million, $2.2 million from an increase in prepaid expenses and other assets, and $567,311 from extinguishment of debt.

The $2.2 million increase in prepaid expenses primarily relates to an increase in insurance premiums.

These were offset by cash provided from a $2.5 million decrease in accounts receivable, a $2.0 million increase in accounts payable, and a noncash adjustment of $448,013 for depreciation and amortization.

The decrease in accounts receivable reflects collection of the $2.5 million cash payment due from Wugen under the terms of the Wugen License.

The increase in accounts payable and other liabilities primarily reflects an increase in deferred revenue and purchase of manufacturing materials.

Net cash used in operating activities were $1.5 million for the three months ended March 31, 2021 and $1.6 million for the three months ended March 31, 2022, respectively.

Cash used in operating activities for the three months ended March 31, 2021 consisted primarily of net loss for the period of $2.8 million, a decrease of $150,356 due to an increase in prepaid expenses and other assets, and an adjustment for a non-cash charge of $567,311 resulting from the forgiveness of the PPP loan and accrued interest.

These were offset by cash provided by operating activities resulting from a decrease in accounts receivable, an increase in accounts payable and other liabilities, and an adjustment for a non-cash charge for depreciation and amortization.

Accounts receivable decreased by $1.2 million, primarily due to the collection of a payment of $1.2 million from Wugen Inc.

Accounts payable and other liabilities increased by $713,055 primarily due to increases of $239,000 in deferred revenue, $194,000 in accrued legal expenses, and $221,000 in accounts payable.

An adjustment for non-cash charges for depreciation and amortization provided cash from operations of $158,806.

Cash used in operating activities for the three months ended March 31, 2022 consisted primarily of net loss for the period of $2.1 million, $420,000 due to an increase in accounts receivable arising from billed but unpaid amounts that were recognized in revenue for delivery of clinical development materials purchased by Wugen, and $1.1 million due to a decrease in accounts payable and other liabilities.

Cash provided by operations consisted primarily of a decrease of $1.4 million in prep aid expenses and other assets.

In addition, there were adjustments for non-cash transactions that increased cash provided by operating activities primarily arising from $185,122 for net unrealized loss on investments, $142,785 for depreciation and amortization expense, and $260,348 for compensation expense due to stock-based compensation.

Investing Activities

During the nine months ended September 30, 2020 cash used in investing activities reflects the purchase of scientific lab equipment and general office equipment.

During the nine months ended September 30, 2021 cash used in investing activities reflects the purchase of U.S.

government-backed securities with the proceeds of our IPO and the purchase of scientific lab equipment and general office equipment.

As of September 30, 2021, we held $35.0 million in short-term U.S.

government-backed securities.

Cash used in investing activities for the three months ended March 31, 2021 consisted of purchases of equipment.

Cash provided by investing activities for the three months ended March 31, 2022, consisted of $8.0 million of cash provided when short-term investments reached maturity, offset by $23,554 of cash used to purchase equipment.

Financing Activities

During the nine months ended September 30, 2020 cash provided by financing activities primarily of $6.2 million resulted from the completion of the private placement of Series C Preferred Stock.

During the nine months ended September 30, 2021 cash provided by financing activities primarily resulted from our IPO, offset by offering costs.

On July 19, 2021, the Company’s registration statement on Form S-1 for its 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 $49.0 million, after deducting underwriting discounts and commissions and estimated offering expenses paid by the Company.

Emerging Growth Company Status

The JOBS Act permits us, as an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies and thereby allows us to delay the adoption of those standards until those standards would apply to private companies.

We have elected to use this extended transition period under the JOBS Act.

As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.

During the three months ended March 31, 2021, cash used by financing activities is due to the offering costs, offset by cash provided by issuance of common stock upon the exercise of vested employee stock options.

During the three months ended March 31, 2022, cash provided by financing activities is due to issuance of common stock upon exercise of vested employee stock options.

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 financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America.

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.

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 contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods.

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Revenue Recognition

For the year ended December 31, 2020, we adopted provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“Topic 606”).

Under Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.

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:

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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.

Identification of the Contracts with the Customers

We evaluate every contract to determine whether it in its entirety or in part represents a contract with a customer, or a collaboration agreement and, based on this determination, apply appropriate accounting guidance.

We account for a contract with a customer that is within the scope of Topic 606 when all of the following criteria are met:

(i) the arrangement has been approved by the parties and the parties are committed to perform their respective obligations, (ii) each party’s rights regarding the goods or services to be transferred can be identified, (iii) the payment terms for the goods or services to be transferred can be identified, (iv) the arrangement has commercial substance, and (v) collection of substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer is probable.

Identification of the Performance Obligations

The promised goods or services in our collaboration and option arrangements consist of research and development services.

The arrangements also have options for additional items (i.e., license rights).

Options are considered to be marketing offers and are to be accounted for as separate contracts when the customer elects such options, unless we determine the option provides a material right which would not be provided without entering into the contract.

The determination as to whether such options are material rights requires significant management judgment, and management considers factors such as other similar arrangements, market data, and the terms of the contractual arrangement to make such conclusion.

Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer.

Promised goods or services are considered distinct when:

(i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract.

In assessing whether promised goods or services are distinct, we consider factors such as the stage of development of the underlying intellectual property, the capabilities of our customer to develop the intellectual property on their own, and whether the required expertise is readily available.

Determination of the Transaction Price

We estimate the transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the contract.

The consideration may include both fixed consideration and variable consideration.

At the inception of each arrangement that includes variable consideration, we evaluate the amount of the potential payments and the likelihood that the payments will be received.

We utilize either the most likely amount method or expected value method to estimate the transaction price based on which method better predicts the amount of consideration expected to be received.

If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price.

All contingent future payments, which include research, development, regulatory, and sales-based royalty payments, have not been considered in the initial analysis, as they are contingent upon option(s) being exercised or are subject to significant risk of achievement.

Allocation of Transaction Price

We allocate the transaction price based on the estimated standalone selling price.

We must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract.

We utilize key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction, and the estimated costs.

Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration related to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts we would expect to receive for satisfying each performance obligation.

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.

FASB ASC Topic 820, Fair Value Measurements and Disclosures, 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 our 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:

Observable inputs such as quoted prices in active markets;

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;

Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.

Under the Wugen License, we received shares of common stock of Wugen on the effective date of the Wugen License.

We estimated that the fair value of the stock was $1.6 million.

As the common stock of Wugen is not currently publicly traded, the fair value was determined based on inputs other than a public market price.

We relied primarily on the most recent third-party financing completed by Wugen.

In addition, we considered the results of a third-party valuation assessment.

Since our ownership interest in Wugen is less than 20% and we do not have significant influence over the operations of Wugen, we account for these securities as a cost method investment.

We will carry this investment at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee.

In the event that a public market becomes available for the common stock of Wugen in the future and the shares are freely tradeable, we will recognize changes in fair value according to the market price in other income in the statements of operations.

Research and Development Costs

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.

We may perform research and development for our own internally-developed drug candidates and technology development or for certain third parties under collaborative arrangements.

For our internally-developed drug candidates and our internal technology development programs, we invest own funds without reimbursement from a third party.

Where we perform research and development activities under a clinical joint development collaboration, we record the partner’s share of collaboration expenses as a reduction to research and development expense when reimbursement amounts are due under the agreement.

We record an accrued expense for the estimated costs of our 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, we assess 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 we consider the process to be the delivery of a good, we recognize the expense when the drug product is delivered, or otherwise bears risk of loss.

If we consider 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.

We recognize and amortize upfront payments and accrue 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.

We base our estimates on the best information available at the time.

However, additional information may become available to us which may allow us to make a more accurate estimate in future periods.

In this event, we 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.

Stock-based Compensation

We maintain a stock-based compensation plan as a long-term incentive for employees, non-employees, and directors.

The plan allows for grants of incentive stock options, non-qualified stock options, and other forms of equity awards.

We have granted options with service-based and performance-based vesting conditions.

We measure our 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 recognize compensation expense over the vesting period.

Compensation expense is recorded as either research and development or general and administrative expenses in the statements of operations based on the function to which the related services are provided.

Forfeitures are accounted for as they occur.

Prior to the IPO, we estimated grant date fair value using the Black-Scholes option-pricing model.

Upon completion of our IPO, our board of directors now determines the fair value of each share of underlying common stock based on its closing price as reported on the date of grant according to the quoted market price on the primary stock exchange on which our common stock is traded.

For stock option grants with service-based and performance-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 the vesting period based on the evaluation of the probability of achievement of each respective milestone and the related estimated date of achievement.

Prior to the IPO, in determining the fair value of the stock-based awards, we use the Black-Scholes option-pricing model and assumptions discussed below.

Each of these inputs is subjective and its determination generally requires significant judgment.

These assumptions include, but are not limited to:

Expected term —The expected term of stock options with service-based vesting 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 —Since there is no trading history for our common stock, the expected volatility was estimated based on the historical equity volatility for comparable publicly traded biotechnology companies.

The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.

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 of the exit event.

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.

Determination of the Fair Value of Our Common Stock

Prior to our IPO, there was no public market for our common stock, and 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 a third-party valuation of common stock and our board of directors’

assessment of additional objective and subjective third-party financing events and other factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant.

Prior to the IPO, for third-party valuations performed in connection with the valuation of our common stock, we used the Black-Scholes option-pricing model.

Third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’

Accounting Practice Aid entitled, Valuation of Privately-Held-Company Equity Securities Issued as Compensation .

Prior to our IPO, in addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, which may be as a date later than the most recent third-party valuation date, including:

the prices at which we sold shares of redeemable preferred stock and the superior rights and preferences of the redeemable preferred stock relative to our common stock at the time of each grant;

the progress of our research and development programs, including the status of preclinical and planned clinical trials for our product candidates;

our stage of development and commercialization and our business strategy;

external market conditions affecting the biotechnology industry, and trends within the biotechnology industry;

our financial position, including cash on hand, and our historical and forecasted performance and operating results;

the lack of an active public market for our common stock and our redeemable preferred stock;

the likelihood of achieving a liquidity event, such as an initial public offering (“IPO”), or a sale of our company considering prevailing market conditions;

the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.

Prior to IPO, for financial reporting purposes, it is our policy to perform a contemporaneous valuation when a material number of stock awards or options are granted.

As a private company, we relied primarily on the evidence of third-party financings to support valuation of common stock.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment.

As a result, if factors or expected outcomes change, and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.

We recognize deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards.

In evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.

Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance.

Under Sections 382 and 383 of the Code, substantial changes in our ownership may limit the amount of NOL and research and development credit carryforwards that could be used annually in the future to offset taxable income.

The tax benefits related to future utilization of federal and state NOL carryforwards, credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period.

We have not completed a Section 382/383 analysis under the Code regarding the limitation of NOL and credit carryforwards.

If a change in ownership were to have occurred, the annual limitation may result in the expiration of NOL carryforwards and credits before utilization.

We record unrecognized tax benefits as liabilities or reduce the underlying tax attribute, as applicable, and adjust them when our judgment changes as a result of the evaluation of new information not previously available.

Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the

unrecognized tax benefit liabilities.

These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

During the three months ended March 31, 2022, the Company determined that since we now have an effective MSA and SOWs for all current and historical purchases of development supply of clinical materials with Wugen, a contract exists.

We assessed all current and previous transaction to determine the timing and amount of revenue to recognize.

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 on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 29, 2022 .

Recent Accounting Pronouncements

See Note 1 to our unaudited condensed financial statements appearing elsewhere in this Quarterly Report for more information about recent accounting pronouncements.

Available information

Our corporate website address is www.hcwbiologics.com.

We use the investor relations page of our website for purposes of compliance with Regulation FD and as a routine channel for distribution of important information, including news releases, analyst presentations, financial information and corporate governance practices.

Our filings with the SEC are posted on our website and available free of charge as soon as reasonably practical after they are electronically filed with, or furnished to, the SEC.

The SEC's website, www.sec.gov , contains reports, proxy statements and other information regarding issuers that file electronically with the SEC.

The content on any website referred to in this Quarterly Report on Form 10-Q is not incorporated by reference in this Form 10-Q unless expressly noted.

Further, the Company’s references to website URLs are intended to be inactive textual references only.

See Note 1 to our unaudited condensed interim financial statements appearing elsewhere in this Quarterly Report for more information about recent accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements