HCW Biologics Inc. 10-Q

Item 1. Financial Statements. HCW Biologics Inc. Condensed Balance Sheets December 31, September 30, 2021 2022 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 11,730,677 $ 26,224,260 Short-term investments 24,983,520 — Accounts receivable, net 133,000 355,555 Prepaid expenses 2,196,557 1,921,993 Other current assets 1,436,616 205,921 Total current assets 40,480,370 28,707,729 Investments 11,522,050 11,268,500 Property and equipment, net 1,119,091 10,957,946 Other assets 393,318 419,027 Total assets $ 53,514,829 $ 51,353,202 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Current liabilities: Accounts payable $ 223,664 $ 1,410,357 Accrued liabilities and other current liabilities 2,097,925 882,775 Total current liabilities 2,321,589 2,293,132 Debt — 6,448,166 Other liabilities — 56,676 Total liabilities 2,321,589 8,797,974 Commitments and contingencies (Note 7) Stockholders’ equity: Common stock: Common, $ 0.0001 par value; 250,000,000 shares authorized and 35,768,264 shares issued at December 31, 2021; 250,000,000 shares authorized and 35,836,135 shares issued at September 30, 2022 3,577 3,584 Additional paid-in capital 81,827,006 82,670,949 Accumulated deficit ( 30,637,343 ) ( 40,119,305 ) Total stockholders’ equity 51,193,240 42,555,228 Total liabilities and stockholders’ equity $ 53,514,829 $ 51,353,202 See accompanying notes to the unaudited condensed interim financial statements. 1 HCW Biologics Inc. Condensed Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2022 2021 2022 Revenues: Revenues $ — $ 1,809,025 $ — $ 5,380,570 Cost of revenues — ( 1,447,220 ) — ( 3,062,496 ) Net revenues — 361,805 — 2,318,074 Operating expenses: Research and development 2,687,341 2,648,794 6,690,317 6,408,353 General and administrative 1,404,823 1,732,666 3,565,013 5,321,262 Total operating expenses 4,092,164 4,381,460 10,255,330 11,729,615 Loss from operations ( 4,092,164 ) ( 4,019,655 ) ( 10,255,330 ) ( 9,411,541 ) Interest and other income (loss), net ( 2,540 ) 105,461 566,268 ( 70,421 ) Net loss $ ( 4,094,704 ) $ ( 3,914,194 ) $ ( 9,689,062 ) $ ( 9,481,962 ) Net loss per share, basic and diluted $ ( 0.14 ) $ ( 0.11 ) $ ( 0.74 ) $ ( 0.26 ) Weighted average shares outstanding, basic and diluted 29,572,267 35,835,135 13,111,087 35,809,216 See accompanying notes to the unaudited condensed interim financial statements. 2 HCW Biologics Inc. Condensed Statements of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity For the Nine Months Ended September 30, 2021 and September 30, 2022 (Unaudited) Redeemable Preferred Stock Stockholders’ Deficit Series A Series B Series C Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Deficit Balance, December 31, 2020 6,316,691 $ 6,140,792 12,012,617 $ 13,680,306 5,439,112 $ 11,294,301 4,793,393 $ 480 $ — $ ( 16,718,877 ) $ ( 16,718,397 ) Issuance of Class A Common Stock upon exercise of stock options — — — — — — 88,702 8 13,377 — 13,385 Stock-based compensation — — — — — — — — 641 — 641 6% cumulative dividends on redeemable preferred stock — 95,992 — 213,971 — 167,395 — — ( 14,018 ) ( 463,340 ) ( 477,358 ) Accretion of issuance costs — — 0 — 3,929 — 10,200 — — — — — Net loss — — — — — — — — — ( 2,843,996 ) ( 2,843,996 ) Balance, March 31, 2021 6,316,691 $ 6,236,784 12,012,617 $ 13,898,206 5,439,112 $ 11,471,896 4,882,095 $ 488 $ — $ ( 20,026,213 ) $ ( 20,025,725 ) Issuance of Class A Common Stock upon exercise of stock options — — — — — — 73,487 8 9,457 — 9,465 Stock-based compensation — — — — — — — — 9,578 — 9,578 6% cumulative dividends on redeemable preferred stock — 97,058 — 216,348 — 169,256 — — ( 19,035 ) ( 463,623 ) ( 482,658 ) Accretion of issuance costs — — — 3,929 — 10,198 — — — — — Net loss — — — — — — — — — ( 2,750,362 ) ( 2,750,362 ) Balance, June 30, 2021 6,316,691 6,333,842 12,012,617 14,118,483 5,439,112 11,651,350 4,955,582 496 — ( 23,240,198 ) ( 23,239,702 ) Issuance of common stock upon initial public offering, net of issuance cost — — — — — — 7,000,000 700 49,239,247 — 49,239,947 Conversion of Series A Redeemable Preferred Stock, with forfeited cumulative dividends ( 6,316,691 ) ( 6,333,842 ) — — — — 6,316,691 632 6,353,474 ( 20,265 ) 6,333,841 Conversion of Series B Redeemable Preferred Stock, with forfeited cumulative dividends — — ( 12,012,617 ) ( 14,118,483 ) — — 12,012,613 1,201 14,170,312 ( 53,030 ) 14,118,483 Conversion of Series C Redeemable Preferred Stock, with forfeited cumulative dividends — — — — ( 5,439,112 ) ( 11,651,350 ) 5,439,112 544 11,706,544 ( 55,741 ) 11,651,347 Issuance of Common Stock upon exercise of stock options — — — — — — 4,114 — 576 — 576 Stock-based compensation — — — — — — — 1,660 — 1,660 Net loss — — — — — — — — — ( 4,094,704 ) ( 4,094,704 ) Balance, September 30, 2021 — $ — — $ — — $ — 35,728,112 $ 3,573 $ 81,471,813 $ ( 27,463,938 ) $ 54,011,448 See accompanying notes to the unaudited condensed interim financial statements. 3 HCW Biologics Inc. Condensed Statements of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity For the Nine Months Ended September 30, 2021 and September 30, 2022 (Unaudited) Redeemable Preferred Stock Stockholders’ Equity Series A Series B Series C Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Equity Balance, December 31, 2021 — $ — — $ — — $ — 35,768,264 $ 3,577 $ 81,827,006 $ ( 30,637,343 ) $ 51,193,240 Issuance of Class A Common Stock upon exercise of stock options — — — — — — 11,225 1 2,272 — 2,273 Stock-based compensation — — — — — — — — 260,348 — 260,348 Net loss — — — — — — — — — ( 2,057,207 ) ( 2,057,207 ) Balance, March 31, 2022 — $ — — $ — — $ — 35,779,489 $ 3,578 $ 82,089,626 $ ( 32,694,550 ) $ 49,398,654 Issuance of Class A Common Stock upon exercise of stock options — — — — — — 44,434 4 5,996 — 6,000 Stock-based compensation — — — — — — — — 271,335 — 271,335 Net loss — — — — — — — — — ( 3,510,561 ) ( 3,510,561 ) Balance, June 30, 2022 — — — — — — 35,823,923 3,582 82,366,957 ( 36,205,111 ) 46,165,428 Issuance of Class A Common Stock upon exercise of stock options — — — — — — 12,212 2 1,672 — 1,674 Stock-based compensation — — — — — — — — 302,320 — 302,320 Net loss — — — — — — — — — ( 3,914,194 ) ( 3,914,194 ) Balance, September 30, 2022 — $ — — $ — — $ — 35,836,135 $ 3,584 $ 82,670,949 $ ( 40,119,305 ) $ 42,555,228 See accompanying notes to the unaudited condensed interim financial statements. 4 HCW Biologics Inc. Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2021 2022 Cash flows from operating activities: Net loss $ ( 9,689,062 ) $ ( 9,481,962 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 436,135 456,696 Stock-based compensation 11,878 834,003 Gain on extinguishment of debt ( 567,311 ) — Unrealized loss on investments, net — 253,550 Reduction in the carrying amount of right-of-use asset — 1,463 Changes in operating assets and liabilities: Accounts receivable 2,430,000 ( 222,555 ) Prepaid expenses and other assets ( 2,181,492 ) 1,854,155 Accounts payable and other liabilities 1,960,729 ( 202,979 ) Operating lease liability — ( 89,110 ) Net cash used in operating activities ( 7,599,123 ) ( 6,596,739 ) Cash flows from investing activities: Purchases of property and equipment ( 27,411 ) ( 10,206,441 ) Proceeds for sale or maturities of short-term investments — 24,983,520 Purchases of short-term investments ( 24,989,700 ) — Purchases of long-term investments ( 9,977,900 ) — Net cash (used in) provided by investing activities ( 34,995,011 ) 14,777,079 Cash flows from financing activities: Proceeds from initial public offering 56,000,000 — Issuance costs of initial public offering ( 6,760,053 ) — Proceeds from issuance of common stock 23,426 9,947 Proceeds from issuance of debt, net — 6,448,166 Offering costs — ( 144,870 ) Net cash provided by financing activities 49,263,373 6,313,243 Net changes in cash and cash equivalents 6,669,239 14,493,583 Cash and cash equivalents at the beginning of the period 8,455,834 11,730,677 Cash and cash equivalents at the end of the period $ 15,125,073 26,224,260 Noncash operating, investing and financing activities: Cumulative dividends earned and accrued in the reporting period $ 100,776 $ — Forfeiture of cumulative dividends, upon conversion of all preferred stock $ 2,822,081 $ — PPP loan forgiveness $ 567,311 $ — Operating lease liabilities arising from obtaining right-of-use assets $ — $ 231,196 See accompanying notes to the unaudited condensed interim financial statements. 5 HCW Biologics Inc. Notes to Condensed Financial Statements (Unaudited) 1. Organization and Summary of Significant Accounting Policies Organization HCW Biologics Inc. (the “Company”) is a clinical-stage biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen health span by disrupting the link between chronic, low-grade inflammation and age-related diseases. The Company believes age-related low-grade chronic inflammation, or “inflammaging,” is a significant contributing factor to several chronic diseases and conditions, such as cancer, cardiovascular disease, diabetes, neurodegenerative diseases, and autoimmune diseases. The Company is located in Miramar, Florida and was incorporated in the state of Delaware in April 2018. Liquidity As of September 30, 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 its exclusive worldwide license with Wugen, Inc. (“Wugen”), pursuant to which Wugen licensed limited rights to develop, manufacture, and commercialize cell therapy treatments for cancer based on two of our internally-developed multi-cytokine fusion protein molecules, and its manufacturing and supply arrangement with Wugen. In the three months and nine months ended September 30, 2022, the Company recognized revenues of $ 1.8 million and $ 5.4 million, respectively, generated from the supply of clinical and research grade material to Wugen. On August 15, 2022, the Company entered into a loan and security agreement for a $ 6.5 million, five-year loan to provide financing for the purchase of a building which will become the Company's new headquarters. The remainder of the purchase price was paid in cash. See Note 3 Debt. On August 26, 2022, the Company's $ 100.0 million shelf registration statement on Form S-3, including a prospectus for the issuance and sale of up to $ 15.5 million of shares of the Company’s common stock through an at-the-market equity program, was declared effective by the Securities and Exchange Commission (“SEC”). As of September 30, 2022 , the Company had cash and cash equivalents of $ 26.2 million and long-term investments of $ 9.7 million held in U.S. government-backed securities. Since inception to September 30, 2022 , the Company incurred cumulative net losses of $ 37.3 million. Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise additional capital to fully implement its business plan. The Company intends to raise capital which may include the issuance of additional equity financing and/or third-party collaboration funding. However, if such financing is not available at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of some of its products. 6 Summary of Significant Accounting Policies Basis of Presentation Unaudited Interim Financial Information The accompanying unaudited condensed interim financial statements as of September 30, 2022 and for the three months and nine months ended September 30, 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”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed interim financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Company’s financial position and the results of its operations and cash flows. The results for the three and nine months ended September 30, 2021 and 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. GAAP for complete financial statements. Because all of the disclosures required by U.S. GAAP for complete financial statements are not included herein, these unaudited condensed interim financial statements and the notes accompanying them should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2021 which appear in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2021 with the SEC on March 29, 2022 and in other filings with the SEC. Revenue Recognition The Company accounts for revenues in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”). To determine revenue recognition for arrangements that fall within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services transferred to the customer. At contract inception, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. To date, the Company's revenues have been generated exclusively from the Wugen License, which consists of 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 the supply of clinical and research grade materials under which the Company also recognized revenues. License Grants: For out-licensing arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement. Milestone and Contingent Payments: At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event. When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. The Company’s licensees will generally pay milestones payments subsequent to achievement of the triggering event. 7 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”) with Wugen for the supply of materials for clinical development of licensed products. The terms set forth in the MSA were not sufficient to meet all the requirements for the Company to determine that a contract existed for a transaction. In order for a contract to exist, additional terms for each transaction require the Company to enter into a statement-of-work (“SOW”) for each purchase. Each of these transactions 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. On March 14, 2022, the Company entered into SOWs with Wugen for each of the then-current and historical purchases of clinical and research grade materials under the MSA. As a result, the Company determined that all requirements were met to qualify as contracts under Topic 606 for the related transactions covered by these SOWs. For the three months and nine months ended September 30, 2022 , the Company recognized revenue related to sale of development supply materials to Wugen of $ 1.8 million and $ 5.4 million, respectively. 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 has not been met. The Company had deferred revenue of $ 1.8 million and nil as of December 31, 2021 and September 30, 2022 , respectively. All deferred revenue balances are current liabilities and reported within Accrued liabilities and other current liabilities in the accompanying condensed balance sheets. Investments The Company holds a minority interest in Wugen which is accounted for using the measurement alternative whereby the investment is recorded at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee. No impairment has been recognized. As of December 31, 2021 and September 30, 2022, the Company included $ 1.6 million for the investment in Wugen included in Investments in the accompanying condensed balance sheets. The Company invested net proceeds of its IPO in bills and notes issued by the U.S. Treasury which are classified as trading securities. As of December 31, 2021, the company held $ 25.0 million in U.S. Treasury bills included in Short-term investments and $ 9.9 million in U.S Treasury notes included in Investments in the accompanying condensed balance sheet. As of September 30, 2022, the Company held $ 9.7 million in U.S. Treasury notes in cluded 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 right of use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company has a lease agreement with lease and non-lease components, which are accounted for separately. 8 Net Loss Per Share Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share of common stock includes the effect, if any, from the potential exercise of stock options and unvested shares of restricted stock, which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive. Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (“Topic 842”), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The Company adopted Topic 842 as of January 1, 2022. 2. Accrued Liabilities and Other Current Liabilities 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. As of September 30, 2022, the Company had a balance of $ 882,775 in Accrued liabilities and other current liabilities, consisting primarily of $ 70,000 related to salary and benefits, $ 174,520 related to short-term lease liability, $ 230,400 related to clinical trials expenses, $ 166,000 legal fees and $ 240,000 related primarily to other accrued liabilities. 3. Debt On August 15, 2022, the Company entered into a loan and security agreement, or the 2022 Loan Agreement, with Cogent Bank, or Cogent, pursuant to which it received $ 6.5 million in gross proceeds to purchase a building that will become the Company's new headquarters. The loan is secured by a first lien on the building. As of September 30, 2022, the Company had $ 6.5 million in gross principal outstanding in a loan under the 2022 Loan Agreement. The outstanding loan will mature on August 15, 2027 , or the Maturity Date, and bears interest at a fixed per annum rate equal to 5.75 %. An interest-only period is one year followed by 48 months of equal payments of principal and interest beginning on September 15, 2023 based on a 25-year amortization rate. Upon the Maturity Date, a final payment of unamortized principal will be due to Cogent. The Company has the option to prepay the outstanding balance of the loan prior to the Maturity Date without penalty. As of September 30, 2022, the loan is presented net of debt issuance costs in Debt on the accompanying condensed balance sheet. 4. 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, 2021 2022 2021 2022 Numerator: Net loss $ ( 4,094,704 ) $ ( 3,914,194 ) $ ( 9,689,062 ) $ ( 9,481,962 ) Denominator: Weighted-average common shares outstanding 29,572,267 35,835,135 13,111,087 35,809,216 Net loss per share, basic and diluted $ ( 0.14 ) $ ( 0.11 ) $ ( 0.74 ) $ ( 0.26 ) 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, 2021 2022 Common stock options 1,710,817 1,907,991 Potentially diluted securities 1,710,817 1,907,991 9 At December 31, 2021, and September 30, 2022, the Company has 10,000,000 shares of preferred stock authorized and no shares issued. 10 5. Fair Value of Financial Instruments The carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, U.S. government-backed securities with maturity dates up to one year, accounts payable and accrued liabilities, approximate fair value due to their short-term maturities. Money market funds included in cash and cash equivalents and U.S. government-backed securities are measured at fair value based on quoted prices in active markets, which are considered Level 1 inputs. No transfers between levels occurred during the periods presented. The following table presents the Company’s assets which were measured at fair value at December 31, 2021 and September 30, 2022: At December 31, 2021: Level 1 Level 2 Level 3 Total Assets: Money market funds $ 9,506,499 $ — $ — $ 9,506,499 Treasury bills 24,983,520 — — 24,983,520 Treasury notes 9,922,300 — — 9,922,300 Total $ 44,412,319 $ — $ — $ 44,412,319 At September 30, 2022: Level 1 Level 2 Level 3 Total Assets: Money market funds $ 24,787,557 $ — $ — $ 24,787,557 Treasury notes 9,668,750 — — 9,668,750 Total $ 34,456,307 $ — $ — $ 34,456,307 6. Income Taxes The Company computes its quarterly income tax expense/(benefit) by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The Compa ny did no t have a provision for income taxes (current or deferred tax expense) as of December 31, 2021 and September 30, 2022. T he Company will continue to maintain a 100 % valuation allowance on total deferred tax assets. The Company believes it is more likely than not that the related deferred tax asset will not be realized. As a result, the Company’s effective tax rate will remain at 0.00 % because no items either estimated or discrete items would impact the tax provision. 7 . Commitments and Contingencies Operating Leases The Company has operating leases for approximately 12,250 square feet of space located in Miramar, Florida. The leases have a two-year term which commenced on March 1, 2022 and will terminate on February 29, 2024 . Upon the commencement of the leases, the Company used its incremental borrowing rate of 6.0 % to determine the amounts to recognize for a ROU asset and a lease liability. There are no obligations under finance leases. The components of the lease expense for the three months and nine months ended September 30, 2022 were as follows: For the Three Months Ended September 30, 2022 For the Nine Months Ended September 30, 2022 Operating lease cost $ 42,413 $ 84,825 11 Supplemental cash flow information related to lease for the nine months ended September 30, 2022 was as follows: For the Nine Months Ended September 30, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows $ 111,429 Right-of-use assets obtained in exchange for lease obligations: Operating lease $ 89,110 As of September 30, 2022, the supplemental balance sheet information related to leases was as follows: As of September 30, 2022 Operating lease right-of-use assets $ 229,733 Other current liabilities $ 174,520 Operating lease liabilities, net of current portion 56,676 Total operating lease liabilities $ 231,196 As of September 30, 2022, the remaining lease payments were as follows: 2022 (remaining 3 months) $ 41,786 2023 171,322 2024 28,693 Total future minimum lease payments $ 241,801 For the three months ended September 30, 2021 and 2022, rent expense recognized by the Company was $ 36,300 and $ 43,700 respectively, of which $ 19,200 and $ 22,200 , respectively, is included in research and development in the accompanying condensed statements of operations. Certain comparative figures have been reclassified to conform to the current year presentation under Topic 842 for rent expense. For the nine months ended September 30, 2021 and 2022, rent expense recognized by the Company was $ 104,100 and $ 130,300 , respectively, of which $ 52,600 and $ 57,800 , respectively, is included in research and development in the accompanying condensed statements of operations. Certain comparative figures have been reclassified to conform to the current year presentation under Topic 842 for rent expense . 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 mi llion. At September 30, 2022 , future payment obligations under such agreements were $ 2.0 million. Legal In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend the indemnified parties for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require it to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by law. The Company also has directors’ and officers’ insurance. 12 Other The length of time and full extent to which the COVID-19 pandemic directly or indirectly impacts the Company's business, results of operations and financial condition, including but not limited to the supply chain, manufacturing, clinical trials, research and development costs and employee-related costs, depends on future developments that are highly uncertain, subject to change and are difficult to predict. Additionally, the ongoing geopolitical tensions related to Chinese aggression toward Taiwan, the conflict in Ukraine, and the related sanctions and other penalties imposed, in addition to other financial pressures from inflation and higher interest rates, are creating substantial uncertainty in the global economy. The Company has encountered some delays in the commencement of clinical trials as a result of clinical sites experiencing COVID-related delays due to staffing shortages and supply chain issues. In addition, the Company has encountered some delays in the completion of IND-enabling studies required by the U.S. Federal Drug Administration to support Investigational New Drug Applications (“IND” ) due to government-mandated measures taken as a result of COVID outbreaks. The Company expects to be impacted by inflation, especially for materials required for the buildout of the Company's new headquarters and employee-related costs. These headwinds may have an adverse impact on the Company's ability to conduct clinical trials as well as IND-enabling activities, causing delays in our clinical development timeline. The Company uses a number of strategies to effectively navigate these issues, but the extent and duration of such events and conditions, and resulting disruptions to the Company's operations, are highly unpredictable. 8. Subsequent Events Subsequent events have been evaluated through the date the financial statements were available to be issued. 13 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our unaudited condensed interim financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (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 (the “SEC”) 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,” “HCW Biologics,” “we,” “us” and “our” refer to HCW Biologics Inc. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success, 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. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A -“Risk Factors,” in this Quarterly Report on Form 10-Q and in other filings we make with the SEC from time to time. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. These forward-looking statements speak only as of the date hereof. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. Overview HCW Biologics Inc. (“HCW Biologics,” “HCW,” the “Company,” or “we”) is a clinical-stage biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen health span by disrupting the link between chronic, low-grade inflammation and age-related diseases. We believe age-related, chronic, low-grade inflammation, or “inflammaging,” is a significant contributing factor to several diseases and conditions, such as cancer, cardiovascular disease, diabetes, neurodegenerative diseases, and autoimmune diseases. The induction and retention of low-grade inflammation in an aging human body is mainly the result of the accumulation of non-proliferative but metabolically active senescent cells, which can also be caused by persistent activation of protein complexes, known as inflammasomes, in innate immune cells. These two elements share common mechanisms in promoting secretion of pro-inflammatory proteins and in many cases interact to drive senescence, and thus, inflammaging. Our novel approach is to eliminate senescent cells and the pro-inflammatory factors they secrete systemically through multiple pathways. 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. 14 HCW9218 reached 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. The first patient was dosed in a multi-center Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in patients with chemo-refractory/chemo-resistant advanced pancreatic cancer in October 2022. In both of these studies in solid tumor cancers, we will be gathering additional data to obtain insights for future phases of clinical trials, such as the level of immune system reaction and serum TGF- β neutralization to and by HCW9218 as well as any incidence of mucosal bleeding caused by the HCW9218 TGF-β trap. In addition, the Masonic Cancer Center will present preliminary human data from the solid tumor trial in a poster presentation at the Society for Immunotherapy of Cancer (“SITC”) conference to be held from November 8 through November 12, 2022 in Boston, Massachusetts. We are targeting a readout of preliminary human data from the pancreatic study in the first half of 2023. We expect that the human data from these two clinical trials in cancer will guide future development of HCW9218 for other age-related pathologies. 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 another lead drug candidate which is designed to activate and expand regulatory T (“T reg ”) cells to reduce senescence by suppressing 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 expand and activate T reg cells and reduce inflammation-related diseases, supporting the potential of HCW9302 to treat a wide variety of autoimmune and proinflammatory diseases, such as atherosclerosis. IND-enabling activities are currently in progress, but due to COVID-related delays, the completion date for toxicology studies required by the Federal Drug Administration (“FDA”) for an Investigational New Drug Application (“IND”) is expected to extend to the first half of 2023. If we are successful in completing IND-enabling activities and have no further delays in the expected schedule, we continue to plan to file an IND to obtain approval from the FDA for a Phase 1b/2 clinical trial to evaluate HCW9302 in an autoimmune disorder in the first half of 2023. Recent Developments • On August 15, 2022, the Company purchased a building located in Miramar, Florida for approximately $10.0 million, as our new headquarters. The Company received a $6.5 million five-year loan to finance the purchase of the new property. The loan bears a fixed interest of 5.75% per annum with interest only payment due in the first year. • The multi-center, Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in patients with chemo-refractory/chemo-resistant advanced pancreatic cancer has initiated. HonorHealth Research Institute dosed its first patient on October 17, 2022, and a second patient on October 31, 2022. We are in the process of activating other clinical sites at NCI-designated Comprehensive Cancer Centers. • As of September 30, 2022, there were no reports of dose-limited toxicity in the Phase 1 clinical trial to evaluate HCW9218 in patients with chemo-refractory/chemo-resistant solid tumors with disease progression after prior treatment with standard of care therapies, being conducted at the Masonic Cancer Center. Patients have been enrolled and dosed for two levels of dose escalation in this trial. • On August 26, 2022, the Company's $100.0 million shelf registration statement on Form S-3, including a prospectus for the issuance and sale of up to $15.5 million of shares of the Company's common stock through an at-the-market program, was declared effective by the SEC. • The 37th Annual Meeting of the Society for Immunotherapy of Cancer accepted an abstract submitted by the Masonic Cancer Center, University of Minnesota, entitled: A phase 1 study of HCW9218, a bifunctional TGF-β Antagonist/IL-15 protein complex, in advanced solid tumors. Preliminary clinical results from the Phase 1 clinical study to evaluate HCW9218 in chemo-refractory/chemo-resistant solid tumors will be presented in a poster at the SITC 2022 conference by Dr. Melissa Geller, Principal Investigator. Trends and Uncertainties COVID-19 The spread of COVID-19, including the resurgence of cases related to the spread of new 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 how long it will impact our operations and if it will have a material impact over time. 15 The extent to which the COVID-19 or outbreaks of its variants may affect our IND-enabling activities, 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, IND-enabling activities, buildout of our new headquarters, business, financial condition, and results of operations. Inflationary Cost Environment, Supply Chain Disruption and the Macroeconomic Environment Our operations have been affected by many headwinds, including inflationary pressures, rising interest rates, ongoing global supply chain disruptions resulting from increased geopolitical tensions such as the war between Russia and Ukraine, Chinese aggression towards Taiwan, financial market volatility and currency movements. These headwinds, specifically the supply chain disruptions, have adversely impacted our ability to procure certain services and materials, which in some cases impacts the cost and timing of clinical trials and IND-enabling activities. In addition, the Company may be impacted by inflation when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Further, rising interest rates would also increase borrowing costs to the extent that the Company takes on any additional debt. The Company uses a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines. However, the extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable. For discussion of risks related to potential impacts of supply chain, inflation, geopolitical and macroeconomic challenges on our operations, business results and financial condition, see “Part II, Item 1A. Risk Factors.” Components of our Results of Operation Revenues We have no products approved for commercial sale and have not generated any revenue from commercial product sales of internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases. The principal source of our revenues to date have been generated from our Wugen License and MSA with Wugen. See Note 1 to our condensed interim financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for these definitions and more information. We derive revenue from a license agreement granting rights to Wugen to further develop and commercialize products based on two of our 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 revenue recognized from a transaction to supply clinical and research grade materials entered into under the MSA and covered by a SOW, represents one performance obligation that is satisfied over time. The Company recognizes revenue generated for supply of material for clinical development using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company's progress toward completion. Operating Expenses Our operating expenses are reported as research and development expenses and general and administrative expenses. Research and Development Our research and development expenses consist primarily of costs incurred for the development of our product candidates, which include: • Employee-related expenses, including salaries, benefits, and stock-based compensation expense. 16 • Expenses related to manufacturing and materials, consisting primarily of expenses incurred primarily in connection with third-party contract manufacturing organizations (“CMO”), which produce cGMP materials for clinical trials on our behalf. • Expenses associated with preclinical activities, including research and development and other IND-enabling activities. • Expenses incurred in connection with clinical trials. • Other expenses, such as facilities-related expenses, direct depreciation costs for capitalized scientific equipment, and allocation for overhead. We expense research and development costs as they are incurred. Costs for contract manufacturing are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the agreement, and the pattern of payments for goods and services will change depending on the material. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed. We expect research and development expenses to increase substantially for the foreseeable future as we continue the development of our product candidates. We cannot reasonably determine the nature, timing, and costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. Product candidates in later stages of development generally have higher development costs than those in earlier stages. See “Risk Factors -- Risks Related to the Development and Clinical Testing of Our Product Candidates,” elsewhere in this Quarterly Report on Form 10-Q for a discussion of some of the risks and uncertainties associated with the development and commercialization of our product candidates. Any changes in the outcome of any of these risks and uncertainties with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. General and Administrative Expenses General and administrative expenses consist primarily of employee-related expenses, including salaries, related benefits, and stock-based compensation expense for employees in the executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include third-party costs such as insurance costs, fees for professional services, such as legal, auditing and tax services, facilities administrative costs, and other expenses. During the period ended September 30, 2022, allegations were made by a former employer of Dr. Hing C. Wong, our Founder and Chief Executive Officer, against Dr. Wong and the Company related to certain of our core intellectual property assets. Although no claims have been filed, we began incurring legal expenses on our own behalf as well as on behalf of Dr. Wong, as required under the Company’s indemnification agreement with our officers and directors. We expect that our general and administrative expenses will continue to be higher in the foreseeable future due to expenses relating to our operations as a public company, including increased costs for the recruitment and retention of personnel and payment to outside consultants, advisors and accountants, as well as increased costs to comply with government regulations, corporate governance, internal control, insurance and similar requirements applicable to public companies. In addition, we also expect we may have increased legal expenses in connection with any matters or claims arising from the allegations of Dr. Wong's former employer. 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. government-backed securities, other income related to non-operating activities, and other non-operating expenses. On August 15, 2022, the Company entered into a short-term, market-rate lease with the former owner of the building purchased by the Company on the same date. The lease provides the tenant with the right to occupy offices that comprise approximately 15,000 square feet for a period of one year, ending August 14, 2023. The lease may be terminated at any time by the tenant with 60 days written notice. During the three months ended September 30, 2022, the Company reported $30,894 in miscellaneous income, which is included within Interest and other income (loss), net in the condensed statements of operation for the three and nine months ended September 30, 2022 included elsewhere in this Quarterly Report on Form 10-Q. 17 Results of Operations Three Months Ended September 30, Nine Months Ended September 30, 2021 2022 2021 2022 Revenues: Revenues $ — $ 1,809,025 $ — $ 5,380,570 Cost of revenues — (1,447,220 ) — (3,062,496 ) Net revenues — 361,805 — 2,318,074 Operating expenses: Research and development 2,687,341 2,648,794 6,690,317 6,408,353 General and administrative 1,404,823 1,732,666 3,565,013 5,321,262 Total operating expenses 4,092,164 4,381,460 10,255,330 11,729,615 Loss from operations (4,092,164 ) (4,019,655 ) (10,255,330 ) (9,411,541 ) Interest and other income (loss), net (2,540 ) 105,461 566,268 (70,421 ) Net loss $ (4,094,704 ) $ (3,914,194 ) $ (9,689,062 ) $ (9,481,962 ) Comparison of the Three Months ended September 30, 2021 and September 30, 2022 Revenues On June 18, 2021, the Company entered into a MSA with Wugen for the supply of materials for clinical development of licensed products. The terms set forth in the MSA were not sufficient to meet all the requirements for the Company to determine that a contract exists. In order for a contract to exist, additional terms are needed that must be set forth in a SOW. Until March 14, 2022, the Company has not entered into any SOWs for transactions to supply Wugen with clinical and research grade materials, and all amounts received for such transactions were recorded as deferred revenue. On March 14, 2022, the Company entered into SOWs with Wugen for each of the then-current and historical purchases of clinical and research grade materials under the MSA. As a result, the Company determined that all requirements were met for these transactions to qualify as contracts under Topic 606. As of September 30, 2021, the Company did not recognize any revenue for supply of clinical and research grade materials, since we did not have a contract in place. For the three months ended September 30, 2022, the Company recognized $1.8 million of revenues in the condensed statement of operations that appears elsewhere in this Quarterly Report on Form 10-Q. For any transactions to supply materials for clinical development for which a SOW has not been finalized, revenue is not recognized because one or more of the criteria for revenue recognition has not been met, in which case, the Company records deferred revenue. There were $1.1 million and nil of short-term deferred revenues as of September 30, 2021 and September 30, 2022, respectively. Research and Development Expenses The following table summarizes our research and development expenses for the three months ended September 30, 2021 and September 30, 2022: Three Months Ended September 30, 2021 2022 $ Change % Change Salaries, benefits and related expenses $ 675,155 $ 693,774 $ 18,619 3 % Manufacturing and materials 1,034,080 751,945 (282,135 ) (27 )% Preclinical expenses 769,179 729,172 (40,007 ) (5 )% Clinical trials 69,556 292,276 222,720 320 % Other expenses 139,371 181,627 42,256 30 % Total research and development expenses $ 2,687,341 $ 2,648,794 $ (38,547 ) (1 )% Research and development expenses decreased by $38,547, or 1%, from $2.7 million for the three months ended September 30, 2021 to $2.6 million for the three months ended September 30, 2022. This decrease was primarily due to a decline in manufacturing expenses of $282,135 and an increase in clinical trial expenses of $222,720. 18 Salaries, benefits, and related expenses increased by $18,619, or 3%, from $675,155 for the three months ended September 30, 2021 to $693,744 for the three months ended September 30, 2022. This increase was primarily attributable to a $78,314 increase in salaries and wages and a $13,262 increase in compensation expenses related to stock-based compensation, offset by a reimbursement from Wugen for certain expenses incurred under the terms of the Wugen License that was $74,667 greater for the three months ended September 30, 2022 versus the comparable period in 2021. Manufacturing and materials expense decreased by $282,135, or 27%, from $1.0 million for the three months ended September 30, 2021 to $751,945 for the three months ended September 30, 2022. In the three months ended September 30, 2021, manufacturing activities focused on our lead molecules, HCW9218 and HCW9302. For HCW9218, we finalized a 200L GMP run as well as initiated the fill/finish process and final testing for product release for clinical trials. For HCW9302, we initiated master cell bank production and completed a scale-up run of GMP materials. In the three months ended September 30, 2022, costs were primarily from the initiation of a 1000L GMP run for HCW9218. Looking ahead for the remainder of 2022, costs are expected to be primarily associated with several procedures required to finalize production of HCW9302, including GMP process closeout through finalization of reports, fill/finish activities, as well as drug substance and drug product release testing. In addition, we expect to complete the 1000L GMP manufacturing run and fill/finish activities for HCW9218 that was initiated in the second quarter of 2022. Expenses associated with preclinical activities decreased by $40,007, or 5%, from $769,179 for the three months ended September 30, 2021 to $729,172 for the three months ended September 30, 2022. In the three months ended September 30, 2021, expenses were related primarily to the cost 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 September 30, 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 by $222,720, or 320%, from $69,556 for the three months ended September 30, 2021 to $292,276 for the three months ended September 30, 2022. We anticipate expenses related to clinical activities will increase substantially in the future, as there will be multiple clinical trials in progress for the foreseeable future. HCW9218, our lead drug candidate, entered clinical stage in the first half of 2022, upon the initiation of an Investigator-sponsored Phase 1 clinical trial at the Masonic Cancer Center, University of Minnesota for a dose escalation study of HCW9218 as a monotherapy in chemo-refractory/chemo-resistant solid tumors, such as breast, ovarian, prostate and colorectal cancers. The trial is designed 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. For a Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in patients with chemo-refractory/chemo-resistant advanced pancreatic cancer, three clinical sites were opened as of September 30, 2022. The first patient was dosed by HonorHealth on October 17, 2022. We plan to enroll up to 24 patients from several clinical sites at NCI-designated Comprehensive Cancer Centers. The primary objectives of this study are to determine safety, maximum tolerable dose, and the recommended Phase 2 dose. Besides safety and dosing data, during the course of these clinical studies, we are gathering additional data to obtain further insights for future phases of clinical trials, such as immune system reaction and serum TGF- β neutralization to and by HCW9218 and incidence of mucosal bleeding caused by the HCW9218 TGF-β trap. Other expenses, which include overhead allocations increased by $42,256, or 30%, from $139,371 for the three months ended September 30, 2021 to $181,627 for the three months ended September 30, 2022. The increase in other expenses was primarily attributable to an increase of $14,294 in facility-related expenses for warranties, $7,451 in travel and travel-related activities to attend scientific conferences, and an increase of $15,709 in depreciation expense. General and Administrative Expenses The following table summarizes our general and administrative expenses for the three months ended September 30, 2021 and September 30, 2022: Three Months Ended September 30, 2021 2022 $ Change % Change Salaries, benefits and related expenses $ 523,818 $ 779,713 $ 255,895 49 % Professional services 331,706 352,166 20,460 6 % Facilities and office expenses 83,623 85,661 2,038 2 % Depreciation 44,820 31,939 (12,881 ) (29 )% Rent expense 24,893 31,217 6,324 25 % Other expenses 395,963 451,970 56,007 14 % Total general and administrative expenses $ 1,404,823 $ 1,732,666 $ 327,843 23 % 19 General and administrative expenses increased by $327,843, or 23%, from $1.4 million for the three months ended September 30, 2021 to $1.7 million for the three months ended September 30, 2022. This increase was primarily due to an increase of $255,895 in salaries, benefits and related expenses, resulting primarily from an increase of $287,398 in compensation expense for stock-based compensation associated with an equity award to the CEO upon completion of the IPO, expensing $144,870 of offering costs incurred in connection with our shelf registration statement on Form S-3, and an increase of $20,000 for the Company's Board of Directors (“Board”) compensation under our non-employee director compensation program put in place post-IPO. These increases were partially offset by a decrease of $75,000 in performance bonuses and a decrease of $10,326 for employee benefits in the three months ended September 30, 2022 versus the comparable period in 2021. Professional services expense increased by $20,460, or 6%, from $331,706 for the three months ended September 30, 2021 to $352,166 for the three months ended September 30, 2022. The increase is primarily attributable to an increase of $75,236 for legal services related to patents, offset by a decrease of $46,800 in fees paid to advisors for investor relations and communications and a decrease of $13,177 in fees paid to other professional services. Depreciation expense decreased by $12,881 primarily due to a decrease of $26,494 in amortization for leasehold improvements and an increase of $15,709 in depreciation expense. The Company accelerated amortization of leasehold improvements when the underlying lease expired in February 2022. Depreciation expenses increased as a result of the purchase of a new building for the Company's headquarters in August 2022. Other expenses increased by $56,007, or 14%, from $395,963 for the three months ended September 30, 2021 to $451,970 for the three months ended September 30, 2022. The increase is primarily due to expensing offering costs of $144,870 incurred in connection with our shelf registration statement on Form S-3 and an increase of $16,200 primarily resulting from an increase in Delaware franchise tax, offset by a net decrease of $117,800 in insurance costs. Comparison of the Nine Months ended September 30, 2021 and September 30, 2022 Revenues There was no revenue for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the Company recognized $5.4 million of revenues in the unaudited statements of operations included elsewhere in this Quarterly Report on Form 10-Q. All revenues were generated under the MSA with Wugen. Revenue was recognized for all transactions made under the MSA for which the Company entered SOWs, since we determined that all requirements were met for the related transactions to qualify as a contract under Topic 606. For those transactions for which revenues were not recognized because one or more of the criteria for revenue recognition had not been met under Topic 606, the Company recorded deferred revenue. There were $1.1 million and nil of short-term deferred revenues as of September 30, 2021 and September 30, 2022, respectively. Research and Development Expenses The following table summarizes our research and development expenses for the nine months ended September 30, 2021 and September 30, 2022: Nine Months Ended September 30, 2021 2022 $ Change % Change Salaries, benefits and related expenses $ 2,147,907 $ 2,268,755 $ 120,848 6 % Manufacturing and materials 2,109,534 1,273,902 (835,632 ) (40 )% Preclinical expenses 1,764,117 1,841,809 77,692 4 % Clinical trials 227,108 486,992 259,884 114 % Other expenses 441,651 536,895 95,244 22 % Total research and development expenses $ 6,690,317 $ 6,408,353 $ (281,964 ) (4 )% Research and development expenses decreased by $281,964, or 4%, from $6.7 million for the nine months ended September 30, 2021 to $6.4 million for the nine months ended September 30, 2022. The decrease of $835,632 in manufacturing and materials expenses were partially offset by increases in all other expenses. 20 Salaries, benefits, and related expenses increased by $120,848, or 6%, from $2.1 million for the nine months ended September 30, 2021 to $2.3 million for the nine months ended September 30, 2022. This increase was primarily attributable to a $275,209 increase in salaries and wages, performance bonuses, and benefits and an increase of $34,819 in compensation expense related to stock-based compensation. These increases were partially offset by a reimbursement from Wugen for certain expenses incurred under the terms of the Wugen License that was $185,333 greater for the nine months ended September 30, 2022 versus the comparable period in 2021. Manufacturing and materials expense decreased by $835,632, or 40%, from $2.1 million for the nine months ended September 30, 2021 to $1.3 million for the nine months ended September 30, 2022. Manufacturing and materials expenses in the nine months ended September 30, 2021 resulted from activities related to establishing master cell banks for several molecules, effecting a technology transfer to our contract manufacturer required for internally-developed manufacturing processes, and successfully completing multiple cGMP production runs for our molecules. For HCW9218, we successfully completed cGMP manufacturing runs in multiple quantities and initiated the fill/finish process and testing for product release. For HCW9302, we had initiated master cell bank production and completed a scale-up run of cGMP-grade material. In the nine months ended September 30, 2022, costs were primarily from a 1000L GMP run for HCW9218 as well as HCW9302 technology transfer and development process closeout through finalization of reports and the project initiation. Expenses associated with preclinical activities increased by $77,692, 4%, from $1.8 million for the nine months ended September 30, 2021 to $1.8 million for the nine months ended September 30, 2022. In the nine months ended September 30, 2021, expenses were related primarily to the cost 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 nine months ended September 30, 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 by $259,884, or 114%, from $227,108 for the nine months ended September 30, 2021 to $486,992 for the nine months ended September 30, 2022. We anticipate expenses related to clinical activities will increase substantially in the future. HCW9218, our lead drug candidate, entered clinical stage in the first half of 2022, upon the initiation of an Investigator-sponsored Phase 1 clinical trial at the Masonic Cancer Center, University of Minnesota for a dose escalation study of HCW9218 as a monotherapy in chemo-refractory/chemo-resistant solid tumors, such as breast, ovarian, prostate and colorectal cancers. As of September 30, 2022, there were three clinical sites opened for the Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in chemo-refractory/chemo-resistant advanced pancreatic cancer. The first patient was dosed on at HonorHealth Research Institute on October 17, 2022. For the pancreatic cancer study, we plan to enroll up to 24 patients from several clinical sites. Other expenses, which include overhead allocations, increased by $95,244, or 22%, from $441,651 for the nine months ended September 30, 2021 to $536,895 for the nine months ended September 30, 2022. The increase in other expenses is primarily attributable to an increase of $22,640 in facility-related expenses for warranties, an increase of $42,467 in travel and travel-related activities to attend scientific conferences and an increase of $19,512 in depreciation expense. General and Administrative Expenses The following table summarizes our general and administrative expenses for the nine months ended September 30, 2021 and September 30, 2022: Nine Months Ended September 30, 2021 2022 $ Change % Change Salaries, benefits and related expenses $ 1,634,048 $ 2,237,841 $ 603,793 37 % Professional services 1,000,206 1,098,530 98,324 10 % Facilities and office expenses 211,038 299,595 88,557 42 % Depreciation 172,545 84,484 (88,061 ) (51 )% Rent expense 74,711 96,493 21,782 29 % Other expenses 472,465 1,504,319 1,031,854 218 % Total general and administrative expenses $ 3,565,013 $ 5,321,262 $ 1,756,249 49 % General and administrative expenses increased by $1.7 million, or 49%, from $3.6 million for the nine months ended September 30, 2021 to $5.3 million for the nine months ended September 30, 2022. The increase was primarily due to an increase of $787,307 related to stock-based compensation expense associated with an equity award to the CEO upon completion of the IPO and an increase of $755,092 related to an increase in insurance coverage appropriate for a public company. 21 Salaries, benefit and related expenses increased by $603,793, or 37%, from $1.6 million for the nine months ended September 30, 2021 to $2.2 million for the three months ended September 30, 2022. The increase was primarily due to an increase of $99,657 in salaries, benefits and related expenses, an increase of $787,307 related to stock-based compensation expense associated with an equity award to the CEO upon completion of the IPO, and an increase of $103,214 for Board compensation under our non-employee director compensation program put in place post-IPO offset by a $370,750 reduction in performance bonuses. Professional services increased by $98,324, or 10%, from $1.0 million for the nine months ended September 30, 2021 to $1.1 million for the nine months ended September 30, 2022, primarily due to a $174,339 increase for corporate legal services, a $103,905 increase in expenses for other professional services, such as auditing and tax advisers, and a $47,813 increase in other consulting services, such as architectural services related to the Company's new headquarters building. These increases were partially offset by a decrease of $226,277 in fees for legal services related to patent filings. Other expenses increased by $1.0 million, or 218%, from $472,465 for the nine months ended September 30, 2021 to $1.5 million for the nine months ended September 30, 2022. The increase is primarily due to an increase of $755,092 in insurance costs associated with being a public company, expensing $144,870 of offering costs related to our shelf registration statement on Form S-3 and an increase of $109,047 in Delaware franchise taxes. Liquidity and Capital Resource Sources of Liquidity As of September 30, 2022, we had cash and cash equivalents held in a money market account of $26.2 million and long-term investments in U.S. government-backed securities of $9.7 million. On August 15, 2022, we purchased a 36,000 square foot building located in Miramar, Florida for approximately $10.1 million, including transaction costs. A portion of the acquisition cost was funded with a $6.5 million five-year term facility, secured by the building. The remainder of the purchase price was funded with cash. Amounts borrowed under the term facility have a fixed interest rate of 5.75%, with interest only payments required for the first year and 25-year amortization thereafter. With our remaining IPO proceeds, we estimate we have adequate capital to fund operations and the buildout of our new facility to 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. Our funding requirements will depend on many factors, including, but not limited to: • timing, progress, costs, and results of our ongoing preclinical studies and clinical trials of our immunotherapeutic products; • impact of COVID-19 on the timing and progress of our IND-enabling activities, clinical trials and our ability to identify and enroll patients; • costs, timing, and outcome of regulatory review of our product candidates; • number of trials required for regulatory approval; • whether we enter into any collaboration or co-development agreements and the terms of such agreements; • whether we raise additional funding through bank loan facilities; • effect of competing technology and market developments; • cost of maintaining, expanding, and enforcing our intellectual property rights; • impact of litigation, regulatory inquiries, or investigations, as well as costs to indemnify our officers and directors against third-party claims related to our patents and other intellectual property; • cost and timing of buildout of new headquarters, including risks of cost overruns and delays, and ability to obtain additional bank financing under existing term facility, if needed; and • costs and timing of future commercialization activities, including product manufacturing, marketing, sales, and distribution, for any of our product candidates for which we receive regulatory approval. A change in the outcome of any of these or other factors with respect to the clinical development and commercialization of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures. 22 Comparison of the Cash Flows for the Nine Months Ended September 30, 2021 and September 30, 2022 The following table summarizes our cash flows for the nine months ended September 30, 2021 and September 30, 2022: Nine Months Ended September 30, 2021 2022 Cash used in operating activities $ (7,599,123 ) $ (6,596,739 ) Cash (used in) provided by investing activities (34,995,011 ) 14,777,079 Cash provided by financing activities 49,263,373 6,313,243 Net increase in cash and cash equivalents $ 6,669,239 $ 14,493,583 Operating Activities Net cash used in operating activities was $7.6 million for the nine months ended September 30, 2021 and $6.6 million for the nine months ended September 30, 2022, respectively. 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 $436,135 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. Cash used in operating activities for the nine months ended September 30, 2022 consisted primarily of a net loss of $9.5 million, $222,555 cash decrease arising from an increase accounts receivable, and $202,979 cash decrease arising from a decrease in accounts payable and other currently liabilities. These uses were partially offset by a $1.9 million cash increase arising from a decrease in prepaid expenses and other assets and noncash adjustments of $834,003 for stock-based compensation expense and $456,696 for depreciation and amortization expense. Investing Activities 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. During the nine months ended September 30, 2022, cash provided by investing activities consisted of $25.0 million of cash provided when short-term investments reached maturity, offset by $10.2 million of cash used to purchase property, plant and equipment. Financing Activities During the nine months ended September 30, 2021 cash provided by financing activities primarily resulted from our IPO, offset by offering costs. Net proceeds were approximately $49.2 million, after deducting underwriting discounts and commissions and estimated offering expenses paid by us. During the nine months ended September 30, 2022, cash provided by financing activities resulted from obtaining purchase financing to acquire our new headquarters building. Critical Accounting Policies, Significant Judgements and Use of Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed interim financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgements and estimates. 23 Revenue Recognition We recognize revenue under the guidance of Topic 606. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer. See Note 1 to our condensed interim financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information. Other than the above, there have been no material changes to our critical accounting policies and estimates from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies, Significant Judgements and Use of Estimates” in our Annual Report 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 interim financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information about recent accounting pronouncements.