HCW Biologics Inc. 10-K

Item 8 Financial Statements and Supplementary Data. HCW Biologics Inc. Index to Financial Statements Years ended December 31, 2021 and 2022 Audited Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 80 Balance Sheets 81 Statements of Operations 82 Statement of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity 83 Statements of Cash Flows 84 79 RE PORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders HCW Biologics Inc. Opinion on the financial statements We have audited the accompanying balance sheets of HCW Biologics Inc. (the “Company”) as of December 31, 2022 and 2021, and the related statements of operations, changes in redeemable preferred stock and stockholders’ (deficit) equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2019. Miami, FL March 28, 2023 80 HCW Biologics Inc. Bal ance Sheets December 31, December 31, 2021 2022 ASSETS Current assets: Cash and cash equivalents $ 11,730,677 $ 22,326,356 Short-term investments 24,983,520 9,735,930 Accounts receivable, net 133,000 417,695 Prepaid expenses 2,196,557 1,394,923 Other current assets 1,436,617 196,015 Total current assets 40,480,371 34,070,919 Investments 11,522,050 1,599,751 Property, plant and equipment, net 1,119,090 10,804,610 Other assets 393,318 333,875 Total assets $ 53,514,829 $ 46,809,155 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Current liabilities: Accounts payable $ 223,664 $ 1,226,156 Accrued liabilities and other current liabilities 2,097,925 1,730,325 Total current liabilities 2,321,589 2,956,481 Debt, net — 6,409,893 Other liabilities — 14,275 Total liabilities 2,321,589 9,380,649 Commitments and contingencies (Note 15) 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 35,876,440 shares issued at December 31, 2022 3,577 3,588 Additional paid-in capital 81,827,006 82,962,964 Accumulated deficit ( 30,637,343 ) ( 45,538,046 ) Total stockholders’ equity 51,193,240 37,428,506 Total liabilities and stockholders’ equity $ 53,514,829 $ 46,809,155 The accompanying notes are an integral part of these financial statements. 81 HCW Biologics Inc. State ments of Operations Years ended December 31, 2021 2022 Revenues: Revenues $ — $ 6,722,090 Cost of revenues — ( 4,135,712 ) Net revenues — 2,586,378 Operating expenses: Research and development 8,173,624 9,338,365 General and administrative 5,194,210 8,326,791 Total operating expenses 13,367,834 17,665,156 Loss from operations ( 13,367,834 ) ( 15,078,778 ) Interest expense — ( 126,660 ) Other income 505,366 304,735 Net loss $ ( 12,862,468 ) $ ( 14,900,703 ) Net loss per share, basic and diluted $ ( 0.69 ) $ ( 0.42 ) Weighted average shares outstanding, basic and diluted 18,770,935 35,822,249 The accompanying notes are an integral part of these financial statements. 82 HCW Biologics Inc. Statem ents of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity Redeemable Preferred Stock Stockholders’ (Deficit) 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 (Deficit) Equity Balance, December 31, 2020 6,316,691 $ 6,140,792 12,012,617 $ 13,680,306 5,439,112 $ 11,294,301 4,793,393 $ 480 $ — $ ( 16,718,877 ) $ ( 16,718,397 ) Issuance of Class A Common Stock upon exercise of stock options — — — — — — 206,455 20 29,517 — 29,537 6% cumulative dividends on redeemable preferred stock — 193,050 — 430,319 — 336,651 — — ( 33,053 ) ( 926,966 ) ( 960,019 ) Accretion of issuance costs — — — 7,858 — 20,398 — — — — — Issuance of common stock upon initial public offering, net of issuance cost — — — — — — 7,000,000 700 49,239,247 — 49,239,947 Conversion of Series A Redeemable Preferred Stock, with forfeited cumulative dividends ( 6,316,691 ) ( 6,333,842 ) — — — — 6,316,691 632 6,353,474 ( 20,265 ) 6,333,841 Conversion of Series B Redeemable Preferred Stock, with forfeited cumulative dividends — — ( 12,012,617 ) ( 14,118,483 ) — — 12,012,613 1,201 14,170,312 ( 53,030 ) 14,118,483 Conversion of Series C Redeemable Preferred Stock, with forfeited cumulative dividends — — — — ( 5,439,112 ) ( 11,651,350 ) 5,439,112 544 11,706,534 ( 55,737 ) 11,651,341 Stock-based compensation — — — — — — — 360,975 — 360,975 Net loss — — — — — — — — — ( 12,862,468 ) ( 12,862,468 ) Balance, December 31, 2021 — $ — — $ — — $ — 35,768,264 $ 3,577 $ 81,827,006 $ ( 30,637,343 ) $ 51,193,240 Issuance of Common Stock upon exercise of stock options — — — — — — 108,176 11 15,767 — 15,778 Stock-based compensation — — — — — — — — 1,120,191 — 1,120,191 Net loss — — — — — — — — — ( 14,900,703 ) ( 14,900,703 ) Balance, December 31, 2022 — $ — — $ — — $ — 35,876,440 $ 3,588 $ 82,962,964 $ ( 45,538,046 ) $ 37,428,506 The accompanying notes are an integral part of these financial statements. 83 HCW Biologics Inc. State ments of Cash Flows Years Ended December 31, 2021 2022 Cash flows from operating activities: Net loss $ ( 12,862,468 ) $ ( 14,900,703 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 543,598 717,854 Stock-based compensation 360,975 1,120,191 Gain on extinguishment of debt ( 567,311 ) — Unrealized loss on investments, net 65,832 186,370 Reduction in the carrying amount of right-of-use asset 28,256 2,089 Changes in operating assets and liabilities: — Accounts receivable 2,367,000 ( 284,695 ) Prepaid expenses and other assets ( 2,799,415 ) 2,482,822 Accounts payable and other liabilities 1,887,816 418,208 Operating lease liability — ( 128,246 ) Net cash used in operating activities ( 10,975,717 ) ( 10,386,110 ) Cash flows from investing activities: Purchases of property and equipment ( 47,263 ) ( 10,275,128 ) Proceeds for sale or maturities of short-term investments — 24,983,520 Purchases of short-term investments ( 24,987,277 ) — Purchases of long-term investments ( 9,984,375 ) — Net cash (used in) provided by investing activities ( 35,018,915 ) 14,708,392 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 29,528 15,778 Proceeds from issuance of debt, net — 6,448,166 Offering costs — ( 190,547 ) Net cash provided by financing activities 49,269,475 6,273,397 Net changes in cash and cash equivalents 3,274,843 10,595,679 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 $ 11,730,677 $ 22,326,356 Supplemental disclosure of cash flow information: Cash paid for interest $ — $ 126,660 Noncash operating, investing and financing activities: 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 $ — $ 192,686 The accompanying notes are an integral part of these financial statements. 84 HCW Biologics Inc. Notes to the Financial Statements December 31, 2021 and 2022 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 December 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 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 year December 31, 2022, the Company recognized revenues o f $ 6.7 million, generated from the supply of clinical and research grade material to Wugen. There were no revenues recognized in the comparable period in the prior year. On August 15, 2022, the Company purchased a building as its new headquarters for $ 10.1 million and entered into a loan and security agreement, which provided a $ 6.5 million five-year loan used to finance the purchase of a building. The remainder of the purchase price was paid in cash. See Note 6 Debt, Net. 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 (“the SEC”). As of December 31, 2022 , the Company had $ 22.3 million in cash and cash equivalents, including money market investments, and $ 9.7 million held in U.S. government-backed securities presented in Short-term investments. Since inception to December 31, 2022 , the Company incurred cumulative net losses of $ 42.8 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 from non-dilutive funding sources such as bank financing, out-licensing rights to technology or markets, cooperative agreements for clinical trials, or other business development transactions, 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. Summary of Significant Accounting Policies Basis of Presentation The accompanying audited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). 85 Segment Reporting The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, reviews financial information on an aggregate basis for allocating capital and evaluating performance. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Management must apply significant judgment in this process. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from estimates. Cash and Cash Equivalents Cash and cash equivalents consist of demand deposits at financial institutions, money market funds, and highly liquid investments with original maturities of three months or less. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“Topic 820”), establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between fair value measurements based on market data (observable inputs) and those based on the Company’s own assumptions (unobservable inputs). This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1: Observable inputs such as quoted prices in active markets; Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions. Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, as disclosed in Note 3, takes into account the market for the Company’s financial assets and liabilities, the associated credit risk, and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Concentration of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash, cash equivalents, accounts receivable, and investments. The Company’s cash and cash equivalents are deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. For the year ended December 31, 2022, the Company recognized revenues of $ 6.7 million. A ll of the Company's revenues were derived from the supply of clinical grade material to Wugen under the supply agreement between Wugen and the Company, as contemplated in the Wugen License. Since December 24, 2020, the Company holds a 5.8 % equity interest in shares of Wugen common stock, which were received as consideration for the Wugen License. The Company has not been able to realize any benefit from the sale of these shares, as they are not currently traded on any public market and thus have limited marketability. The Company is highly dependent on a third-party manufacturer to supply drug products for its research and development activities of its programs, including clinical and non-clinical studies. These programs could be adversely affected by a significant interruption in the supply of such drug products. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. 86 Property, Plant and Equipment, Net Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 39 years. Land is not subjected to the recording of depreciation expense because it has an infinite life. Leasehold improvements are amortized on a straight-line method over the shorter of the useful life of the leasehold improvement or the term of the lease. Construction-in-progress represents property and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable to the construction. Construction-in-progress is not depreciated. Upon completion and ready for intended use, construction-in-progress is reclassified to the appropriate category within property, plant and equipment. Upon retirement or sale of the assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet in the period in which the retirement or sale occurred, and the resulting gain or loss is recognized in the statements of operations. Repairs and maintenance are expensed as incurred. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets, as follows: Estimated Useful Lives Building 39 years Property 5 - 15 years Laboratory equipment 5 years Office equipment 3 years Furniture and fixtures 7 years Leasehold improvements The lesser of the lease term or life of the asset Impairment of Long-Lived Assets Long-lived assets are reviewed for indications of possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the future undiscounted cash flows attributable to these assets. An impairment loss is recognized to the extent an asset group is not recoverable, and the carrying amount exceeds the projected discounted future cash flows arising from these assets. Impairment losses, if any, are recognized in earnings. There were no impairment losses for any of the periods presented. Redeemable Preferred Stock The Company applied the relevant accounting standards to distinguish liabilities from equity when we assessed the classification and measurement of preferred stock. Preferred Stock subject to mandatory redemptions was considered a liability and measured at fair value. Conditionally redeemable preferred stock issued by the Company was considered mezzanine or temporary equity and presented outside of the equity section of the balance sheet. 87 Collaborative Arrangements When the Company enters into collaboration arrangements, it assesses whether the arrangements fall within the scope of FASB issued ASC 808, Collaborative Arrangements, based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. If the payments from the collaboration partner to the Company represent consideration from a customer, such as license fees and contract research and development activities, the Company accounts for those payments within the scope of FASB issued ASC 606, Revenue from Contracts with Customers (“Topic 606”). However, if the Company concludes that the payments are not from a customer, for certain activities and associated payments, such as for certain collaborative research, development, manufacturing, and commercial activities, these payments are presented as a reduction of research and development expense or general and administrative expense, based on where the Company presents the underlying expense. Revenue Recognition The Company 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. 88 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. For each in process SOW, amounts are billed in the same quarter the costs are incurred. Any such revisions are recorded on a cumulative catch-up basis, noting no material revisions during the year ended December 31, 2022. 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 year ended December 31, 2022, the Company recognized revenues related to sale of development supply materials to Wugen of $ 6.7 million. Accounts Receivable, Net Accounts receivable is presented net of allowances for doubtful accounts. The method for valuing doubtful accounts is based upon historical experience coupled with a review of the current status of existing receivables. The term between invoicing and payment due dates is not significant. There was no allowance for doubtful accounts as of December 31, 2021 or December 31, 2022. Deferred Revenue Deferred revenue represents amounts billed, or in certain cases, yet to be billed to the Company’s customer for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance period of the underlying performance obligations. As of December 31, 2021, current deferred revenue includes amounts of $ 1.8 million allocated to the development supply agreement performance obligation under the Wugen License that is included within Accrued liabilities and other current liabilities. In the year ended December 31, 2022, all the criteria for revenue recognition were met and the Company recognized all of this $ 1.8 million in revenue. There was not a deferred revenue balance as of December 31, 2022. Investments The Company holds a minority interest in Wugen. The underlying shares of common stock are not traded on any public market and thus have limited marketability. The Company does not have significant influence over the operating and financial policies of Wugen. As a result, the Company has accounted for this investment using the measurement alternative whereby the investment is recorded at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee. No impairment was recognized during the years ended December 31, 2021 and 2022. 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 balance sheet included in the audited financial statements. As of December 31, 2022, the Company held $ 9.7 million in U.S. Treasury bills included in Short-term investments in the balance sheet included in the audited financial statements. 89 Operating Leases The Company determines if an arrangement is a lease at inception. Operating leases right of use (“ROU”) assets are included in Other assets, and operating liabilities are included in Accrued liabilities and other current liabilities, and Other liabilities on the balance sheets included in the audited financial statements. 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. Research and Development Expenses Research and development costs are expensed as incurred and include salaries, benefits, and other operating costs such as outside services, supplies and allocated overhead expenses. The Company may perform research and development for its own proprietary drug candidates and technology development or for certain third parties under collaborative arrangements. For its proprietary drug candidates and its own internal technology development programs, the Company invests its own funds without reimbursement from a third party. Where the Company performs research and development activities under a clinical joint development collaboration, it records the partner’s share of collaboration expenses as a reduction to research and development expense when reimbursement amounts are due under the agreement. The Company records an accrued expense for the estimated costs of its contract manufacturing activities performed by third parties. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows to vendors. Payments under the contracts include upfront payments and milestone payments, which depend on factors such as the achievement of the completion of certain stages of the manufacturing process. For purposes of recognizing expense, the Company assesses whether the production process is sufficiently defined to be considered the delivery of a good, as evidenced by predictive or contractually required yields in the production process, or the delivery of a service, where processes and yields are developing and less certain. If the Company considers the process to be the delivery of a good, the Company recognizes the expense when the drug product is delivered, or otherwise bears risk of loss. If the Company considers the process to be the delivery of a service, the expense is recognized based on its best estimates of the contract manufacturer’s progress towards completion of the stages in the contracts. The Company recognizes and amortizes upfront payments and accrues for liabilities based on the specific terms of each arrangement. Arrangements may provide upfront payments for certain stages of the arrangement and milestone payments for the completion of certain stages, and, accordingly, may result in advance payments for services that have not been completed or goods not delivered and liabilities for stages where the contract manufacturer is entitled to a milestone payment. Advance payments for goods or services that will be used or rendered for future research and development activities are capitalized as prepaid expenses and recognized as expense as the related goods are delivered or the related services are performed. The Company bases its estimates on the best information available at the time. However, additional information may become available to the Company which may allow it to make a more accurate estimate in future periods. In this event, the Company may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain. Such increases or decreases in cost are generally considered to be changes in estimates and will be reflected in research and development expenses in the period identified. Patent Costs Costs related to filing and pursuing patent applications are recorded as general and administrative expenses in the statement of operations and expensed as incurred, since recoverability of such expenditures is uncertain. Stock-based Compensation The Company measures its stock-based awards granted to employees and directors based on the estimated fair value of the option on the date of grant (grant date fair value) and recognizes compensation expense over the vesting period. Compensation expense is recorded as either research and development or general and administrative expenses in the statement of operations based on the function to which the related services are provided. Forfeitures are accounted for as they occur. The Company has granted options with service-based and performance-based vesting conditions. The Company uses the Black-Scholes option pricing model for the respective grant to determine the grant date fair value. The Black-Scholes option pricing model requires the input of highly subjective assumptions. These variables include, but are not limited to, its stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. 90 Management will continue to assess the assumptions and methodologies used to calculate the estimated grant date fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and materially impact the Company’s grant date fair value determination. For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria are probable of being met. Deferred Offering Costs Debt issuance costs are presented in the balance sheet as a direct deduction from the carrying amount of the related debt and are amortized, using the effective interest method, as interest expense over the contractual life of the related debt. The Company defers offering costs consisting of legal, accounting and other fees and costs directly attributable to offering costs. For offerings expected to occur within 90 days, the deferred offering costs will be offset against the proceeds received upon the completion of the offering. Deferred offering costs will be recorded under Other noncurrent assets on the balance sheet. In the event an offering is terminated or the timing for completing the offering is uncertain, all of the deferred offering costs will be expensed within the Company’s statement of operations in the period in which the determination is made. In the year ended December 31, 2021, the Company incurred $ 6.8 million of deferred offering costs in connection with its $ 56.0 million IPO which was declared effective by the SEC on July 19, 2021. In the year ended December 31, 2022, the Company expensed $ 190,547 of deferred offering costs in connection with its $ 100.0 million shelf registration statement on Form S-3, including a prospectus for the issuance and sale of up to $ 15.5 million shares of the Company's common stock through an at-the-market program, which was declared effective by the SEC on August 26, 2022. Income Taxes The Company accounts for income taxes using an asset and liability approach in accordance with applicable guidance prescribed by FASB issued ASC 740, Income Taxes (“Topic 740”). Topic 740 requires that the deferred tax consequences of temporary differences between the amounts recorded in the financial statements and the amounts included in the federal and state income tax returns to be recognized in the balance sheet. The Company makes judgments regarding the realizability of its deferred tax assets. The balance sheet carrying value of its deferred tax assets is based on whether the Company believes it is more likely than not that the Company will generate sufficient future taxable income to realize these deferred tax assets after consideration of all available evidence. The Company regularly reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Generally, cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed. The Company’s tax positions may be subject to income tax audits. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its tax provision. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. The provision for income taxes includes the effects of any accruals that the Company believes are appropriate, as well as the related net interest and penalties. Tax Credit Receivable The Company may be eligible for research and development credits for its research and development activities, in accordance with Internal Revenue Code (“I.R.C.”) § 41(c). The credits are generally available to offset income tax liabilities. The Company has applied approximately $ 250,000 of research and development credits to offset its federal payroll tax expenses for the year ended December 31, 2021, due to its small business status. As of December 31, 2021 and 2022 , the current portion of outstanding payroll tax receivables is included in Other current assets in the balance sheet, and the noncurrent portion is included in Other noncurrent assets. 91 Net Loss Per Share Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted average number of common shares plus the potential dilutive effects of potential dilutive securities outstanding during the period. Potential dilutive securities are excluded from diluted earnings or loss per share if the effect of such inclusion is anti-dilutive. The Company’s potentially dilutive securities, which include convertible redeemable preferred stock and outstanding stock options under the 2019 Equity Incentive Plan (“2019 Plan”) and the 2021 Equity Incentive Plan (“2021 Plan”), have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position. Recently Issued Accounting Pronouncements In 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. 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. See Note 15. “Commitments and Contingencies - Operating Leases.” 2. Property, Plant and Equipment, Net Property, plant and equipment, net consists of the following: At December 31, 2021 2022 Land $ — $ 2,150,038 Building — 6,105,570 Property — 1,767,231 Laboratory equipment 1,949,318 2,115,153 Office equipment 175,245 209,405 Furniture and fixtures 292,165 292,045 Leasehold improvements 349,976 349,976 Construction in progress — 52,414 $ 2,766,704 $ 13,041,832 Less: Accumulated depreciation and amortization ( 1,647,614 ) ( 2,237,222 ) Property, plant and equipment, net $ 1,119,090 $ 10,804,610 Construction in progress, and it represents direct costs of construction incurred for the Company’s new research lab and manufacturing facilities. Depreciation and amortization expense for the year ended December 31, 2021 was $ 543,598 of which $ 353,388 is included in research and development expenses. Depreciation and amortization expense for the year ended December 31, 2022 was $ 589,608 , of which $ 441,698 is included in research and development expenses. 92 3. Fair Value of Financial Instruments The carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, U.S. government backed securities with maturity dates up to one year, accounts payable and accrued liabilities, are measured at 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 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 December 31, 2022: Level 1 Level 2 Level 3 Total Assets: Money market funds $ 19,458,020 $ — $ — $ 19,458,020 Treasury notes 9,735,930 — — 9,735,930 Total $ 29,193,950 $ — $ — $ 29,193,950 4. Investments In December 2020, the Company entered into the Wugen License for limited rights to develop, manufacture and commercialize cellular therapy products based on two of the Company’s fusion protein molecules. As part of the consideration received for the Wugen License, the Company received shares of Wugen common stock, which were recognized at $ 1.6 million, the fair value of the securities as of December 24, 2020, the effective date for the Wugen License. Initial recognition was at fair value based on level 3 inputs, since there was no public market on which to trade these shares at the time they were received. The fair value was determined based primarily on the pricing and terms of a third-party financing completed by Wugen in 2020. So long as there continues to be no public market for these securities, the Company will classify this asset as a cost method investment, recorded at cost less impairment adjusted for observable market changes. As of December 31, 2021, Investments had a balance of $ 11.5 million in the balance sheet included in the audited financial statements, consisting of $ 1.6 million for the investment in Wugen, which the Company continues to carry at cost, since no public market exists for these securities, and no impairment adjusted was necessary, and $ 9.9 million in U.S. Treasury notes . These securities are classified as trading securities. As of December 31, 2022, Investments had a balance of $ 1.6 million, reflecting the investment in Wugen, whic h the Company continues to carry at cost since no public market exists for these securities and no impairment adjustments have been necessary since the acquisition date. 5. 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. The amount of loan and interest forgiven is recognized as a gain upon debt extinguishment and is reported within Other income, net in the statement of operations included in the audited financial statements for the year ended December 31, 2021. As of December 31, 2022, the Company had a bala nce of $ 1.7 million included in Accrued liabilities and other current liabilities in the balance sheet included in the audited financial statements, consisting of $ 416,000 for legal expenses, $ 277,500 for clinical expenses, $ 524,000 in bonus expenses, $ 134,000 in salary expenses, and $ 178,000 in lease liability. 93 6. Debt, Net On August 15, 2022, the Company entered into a loan and security agreement (the “2022 Loan Agreement”) with Cogent Bank (“Cogent”), pursuant to which it received $ 6.5 million in gross proceeds to purchase a building that will become the Company's new headquarters. The loan is secured by a first priority lien on the building. The Company is in compliance with all covenants as of December 31, 2022. As of December 31, 2022, the Company had $ 6.5 million in gross principal outstanding in a loan under the 2022 Loan Agreement. 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. The unamortized balance is due on August 15, 2027 (the “Maturity Date”), and bears interest at a fixed per annum rate equal to 5.75 %. Upon the Maturity Date, a final payment of unamortized principal will be due. The Company has the op tion to prepay the outstanding balance of the loan prior to the Maturity Date without penalty. As of December 31, 2022, the current portion of $ 38,273 is included in Accrued liabilities and other current liabilities, and the noncurrent portion of $ 6.4 million is included in Debt, net in the balance sheet included in the audited financial statements. The Company classifies the total undiscounted contractual payments that are due in the next 12 months as current. The loan was initially measured on a present value basis. An amortization schedule is used to determine how much of each payment is applied to interest and principal each period. The payment is first applied to interest, and the remainder reduces the principal balance. The table below shows the amount of maturities for each of the five years following the date of the latest balance sheet: Maturities per Year 2023 $ 38,273 2024 119,398 2025 127,623 2026 135,266 2027 6,079,440 Total Debt $ 6,500,000 7. License Agreement On December 24, 2020, the Company entered into the Wugen License transferring rights to Wugen to develop, manufacture, and commercialize certain cellular therapy products based on two of the Company’s fusion protein molecules. The term of the agreement will expire on a product-by-product and country-by-country basis, upon the later of (i) ten years from the first commercial sale of the product or (ii) the expiration of the last-to-expire valid patent claim of such product. The Company concluded that Wugen is a customer and the Wugen License is a functional license under the provisions of Topic 606. For the year ended December 31, 2021, the Company entered into a master services agreement with Wugen related to the development supply agreement to provide cGMP and non-cGMP grade licensed material based on industry-standard terms. However, as of December 31, 2021, the Company and Wugen did not finalize any statements of work under the master services agreement, thus no contract exists. In addition to upfront fees and revenues from other transactions that took place upon entering the Wugen License, the Wugen License includes milestone payments and royalties. The Company uses judgment to determine whether milestones or other variable consideration should be included in the transaction price. For revenue-based royalties, including milestone payments based on the level of sales, the Company will include royalties in the transaction price at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalties are allocated has been satisfied (or partially satisfied). As part of management’s evaluation of the transaction price, the Company considers numerous factors, including whether the achievement of the milestones is outside of its control, contingent upon the efforts of others or subject to scientific risks of success. If the Company concludes it is probable that a significant revenue reversal would not occur, the associated milestone payment is included in the transaction price. Milestone payments that are not within its control, such as regulatory approvals, are generally not considered probable until those milestones are achieved. The Company reevaluates the transaction price, including estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur. As of December 31, 2022, the estimated revenue expected to be recognized in the future related to performance obligations that are partially unsatisfied as of December 31, 2022 is approximately $ 1.8 million. The Company expects to recognize this amount within the next 12 months . 94 8. Redeemable Preferred Stock Upon the IPO on July 19, 2021, all of the Company’s outstanding preferred stock converted to common stock. Cumulative dividends of $ 2.8 million accrued as of the conversion date were forfeited and such forfeiture was recognized through Additional paid-in capital in the statements of changes in redeemable preferred stock and stockholders' (deficit) equity included in the audited financial statements. No dividends were declared from inception to the date of the conversion. At December 31, 2021 and December 31, 2022, the Company had 10,000,000 shares of preferred stock authorized and no shares issued. 9. Net Loss Per Share The following table summarizes the computation of the basic and diluted net loss per share: Years Ended December 31, 2021 2022 Numerator: Net loss $ ( 12,862,468 ) $ ( 14,900,703 ) Denominator: Weighted-average common shares outstanding 18,770,935 35,822,249 Net loss per share, basic and diluted $ ( 0.69 ) $ ( 0.42 ) 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 December 31, 2021 2022 Common stock options 1,770,739 1,867,458 Potentially diluted securities 1,770,739 1,867,458 95 10. Stock-based Compensation On June 21, 2021, the 2021 Plan was adopted by the Company’s board of directors and approved by the Company’s stockholders. As of the adoption date, the 2019 Plan was terminated. No terms were changed for grants previously awarded under the 2019 Plan, and the Company concluded a modification did not occur. Under the 2019 Plan, the Company primarily granted employees incentive stock options, which had a maximum term of ten years from the date of the grant. Generally, the incentive stock options granted under the 2019 Plan have a four-year , service-based vesting period. All of the options granted under the 2019 Plan had an exercise price equal to the fair value of a share of common stock on the date of the grant, according to Company policy. The 2021 Plan permits the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, and stock bonus awards. The 2021 Plan initially reserved 3,444,343 shares of Common Stock, including the transfer of remaining shares reserved under the 2019 Plan. In addition, the number of shares reserved for issuance under the 2021 Plan will increase automatically on the first day of each fiscal year beginning with the 2022 fiscal year. Under the 2021 Plan, the term of each stock option must be stated in the stock award agreement. In the case of an incentive stock option, the term will be ten years from the date of grant, or such shorter term as may be provided in the stock award agreement. Moreover, in the case of an incentive stock option granted to a participant who owns stock representing more than 10 % of the total combined voting power of all classes of our stock or the stock of any of our affiliates, the term of the incentive stock option will be five years from the date of grant or such shorter term as may be provided in the stock award agreement. Under the 2021 Plan, the Company continues to have a policy to grant options with an exercise price equal to the fair value of a share of common stock, as determined by the closing price on NASDAQ on the grant date. The following summarizes the Company’s stock option activity for the years ended December 31, 2021 and 2022: Shares Weighted Weighted Average Issuable Average Remaining Aggregate under Exercise Contract Intrinsic Options Price Term Value Outstanding at December 31, 2020 742,047 0.16 9.1 years $ 39,078 Granted 1,249,287 4.16 Exercised ( 206,455 ) 0.13 Forfeited or cancelled ( 14,140 ) 0.19 Outstanding at December 31, 2021 1,770,739 2.96 9.0 years $ 1,124,215 Exercisable at December 31, 2021 41,084 0.17 7.9 years $ 87,522 Outstanding at December 31, 2021 1,770,739 2.96 9.0 years $ 1,124,215 Granted 237,364 2.33 Exercised ( 108,176 ) 0.15 Forfeited or cancelled ( 31,441 ) 0.41 Expired ( 1,028 ) 0.21 Outstanding at December 31, 2022 1,867,458 3.11 8.5 years $ 671,878 Exercisable at December 31, 2022 473,686 3.06 8.3 years $ 198,258 The aggregate intrinsic value is calculated based on the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options as of the rep orting date. The intrinsic value of stock options exercised during the years ended December 31, 2021 and 2022 was $ 447,115 and $ 231,301 , respectively. The weighted-average fair value of options granted during the years ended December 31, 2021 and 2022 was $ 2.95 and $ 1.71 per share, respectively. For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria are probable of being met. In determining the grant date fair value of the stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and its determination generally requires significant judgment. 96 Fair Value of Common Stock —Prior to our initial public offering, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuation of our common stock as well as our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent third-party valuation to the date of the grant. Since the completion of our initial public offering on July 19, 2021, the fair value of each share of common stock underlying stock option grants is based the quoted market price on the primary stock exchange on which our common stock is traded on the day the stock award or option is granted. Expected term —The expected term of stock options is determined using the “simplified” method, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data. Expected volatility —We have limited information on the income volatility of our stock as shares of our common stock were not actively traded on any public markets prior to July 19, 2021. The expected volatility was derived from the historical stock volatilities of comparable peer public companies within our industry. Risk-free interest rate —The risk-free interest rate is based on the U.S. Treasury Bond in effect at the time of grant for periods corresponding with the expected term. Dividend yield —The expected dividend yield is 0 % because the Company has not historically paid, and does not expect, for the foreseeable future, to pay a dividend on its common stock. For the years ended December 31, 2021 and 2022, the fair value of employee and director stock option awards was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions: Years Ended December 31, 2021 2022 Expected term (years) 6.24 5.73 Expected volatility 83.18 % 88.05 % Risk-free interest rate 1.02 % 3.29 % Dividend yield — — Fair value underlying common stock $ 2.95 $ 1.71 For the year ended December 31, 2021, for options with service-based vesting conditions, the Company recognized $ 25,239 of employee stock-based compensation expense in research and development expenses and $ 335,736 of employee stock-based compensation in general and administrative expenses in the statem ent of operations included in the audited financial statements. For the year ended December 31, 2022, for options with service-based vesting conditions, the Company recognized $ 62,473 of employee stock-based compensation expense in research and development expenses and $ 1,057,718 of employee stock-based compensation in general and administrative expenses in the statement of operations included in the audited financial statements. As of December 31, 2022 , the Company had an aggregate of $ 2.7 million of unrecognized employee stock-based compensation cost for options with service-based vesting, which is expected to be recognized over a weighted average vesting period of 2.51 years. As of December 31, 2021 and 2022 , there was no unrecognized employee stock-based compens ation cost for options with performance-based vesting conditions, as no performance-based options were unvested. For the years ended December 31, 2021 and 2022 , the Company did no t recognize any employee stock-based compensation cost for options with performance-based vesting for which vesting had occurred. 11. Employee Benefit Plan The Company offers a defined contribution savings plan (the “Benefit Plan”) under Section 401 of the Internal Revenue Code for all eligible employees. The Benefit Plan allows for discretionary contributions which are limited to the maximum allowable for federal tax purposes. The total expense related to the discretionary payments made by the Company to the Benefit Plan for the years ended December 31, 2021 and 2022 was $ 173,400 and $ 171,215 , respectively. 97 12. Collaborative Arrangements In March 2020, the Company entered into two collaborative arrangements relating to IND-enabling activities which continued in 2022. Pursuant to these agreements, the Company supplied materials for the studies and reimbursed the collaboration partner costs in connection with the projects. In turn, the partner will provide written reports and a body of scientific data for the results of the projects. 13. Income Taxes The Company did no t have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2021 and 2022. The following table summarizes the differences between the statutory federal income tax rate and the Company's effective income tax rate (percent data): Rate Reconciliation 2021 2022 Net Loss Before Taxes $ ( 12,862,468 ) $ ( 14,900,703 ) Benefit at statutory rate ( 2,701,118 ) 21.00 % ( 3,129,148 ) 21.00 % State tax benefit net of federal benefit ( 590,728 ) 4.59 % ( 655,142 ) 4.40 % Permanent book/tax differences ( 85,678 ) 0.67 % 64,106 ( 0.43 %) Other adjustments 2,093 ( 0.02 %) 8,545 ( 0.06 %) R&D credit carryforward ( 85,000 ) 0.66 % ( 512,967 ) 3.44 % Change in valuation allowance 3,460,431 ( 26.90 %) 4,224,606 ( 28.35 %) Income tax expense/(benefit) $ — 0.00 % $ — 0.00 % The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2022 are presented below: 2021 2022 Deferred tax assets: Federal net operating loss carryforward $ 5,479,664 $ 6,569,874 State net operating loss carryforward 1,164,970 1,411,041 Capitalized section 174 R&D expenses — 2,121,015 Accrued expenses 12,356 151,255 Capitalized legal fees for patents — 177,405 Stock-based compensation 84,612 341,038 Charitable Contributions — 65 Deferred rent 307 — R&D credit 218,015 720,165 Unrealized gain/loss 16,708 59,314 Deferred revenue 397,464 — ROA asset — 530 Depreciable assets 35 47,037 Net deferred tax assets 7,374,131 11,598,739 Less: valuation allowance ( 7,374,131 ) ( 11,598,739 ) Net deferred tax asset (after valuation allowance) $ — $ — A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2022 , after consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $ 11.6 million is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized. During the year ended December 31, 2022 , the valuation allowance increased by $ 4.2 million. As of December 31, 2021 and 2022 , the Company had available federal NOL carryforwards of $ 26.1 million and $ 31.3 million, respectively. The Company also has available state NOLs carryforwards of approximately $ 26.8 million and $ 32.5 million, as of December 31, 2021 and 2022 , respectively. The federal and state NOLs will carry forward indefinitely. The Federal NOLs are available to offset 80 % of taxable income. In addition, the Company had federal research and development credits carryforwards of 98 $ 218,015 and $ 720,165 , as of December 31, 2021 and 2022 , respectively, to reduce future federal income taxes, if any. These carryforwards expire from 2038 through 2042 and are subject to review and possible adjustment. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the Code), substantial changes in the Company’s ownership may limit the amount of net operating loss and research and development credit carryforwards that could be used annually in the future to offset taxable income. A formal Section 382 study has not been completed to determine if an ownership change has occurred and if its net operating losses are subject to an annual limitation. Such annual limitations could affect the utilization of NOL and tax credit carryforwards in the future. Effective for tax years beginning after December 31, 2021, Section 174 requires that research and experimental expenses (“R&E”) be capitalized and amortized. The amortization period is five years for domestic expenses and 15 years for foreign expenses. Since the Company has a significant amount of expenses that fall under the definition of R&E expenses, the change can materially affect the Company's tax provision. During the year ended December 31, 2022, the Company analyzed its expenses and determined that expenses of $ 9.2 million fell within the definition of Section 174. Accordingly, these expenditures were capitalized and amortized for tax purposes. As of December 31, 2022, the Company had $ 864,179 of amortization expense related to Section 174 capitalized R&E costs . The Company’s tax returns remain subject to examination by tax authorities beginning with the tax year ended December 31, 2019. However, due to NOLs and credits carried forward from prior tax years, substantially all tax years may also be subject to examination. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon review by the taxing authorities based on the technical merits. The Company recognizes interest accrued and penalties for unrecognized tax benefits in its tax provision. As of December 31, 2021, and 2022, the Company had no t recognized any expense related to uncertain tax position in its statement of operations. 14. Related Party Transactions The Company's Founder and Chief Executive Officer, Hing C. Wong, PhD., held all Class B Common Stock and Series A Preferred Stock issued by the Company. In addition, Dr. Wong purchased shares of Series B Preferred Stock and Series C Preferred Stock on the same terms and conditions for third-party investors. All shares of Preferred Shares held by Dr. Wong earned cumulative dividends. During the year ended December 31, 2021, all shares purchased by Dr. Wong prior to the IPO were converted to common stock, and the Company was relieved of its obligation to pay cumulative dividends on Preferred Shares that were accrued and unpaid as of the conversion date. Dr. Wong purchased additional shares of the Company's common stock in the IPO and in the open market post IPO, in compliance with SEC regulations and the Company's insider trading policies. 99 15. 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 year ended December 31, 2022 were as follows: For the Year Ended December 31, 2022 Operating lease cost $ 141,376 Supplemental cash flow information related to lease for the twelve months ended December 31, 2022 was as follows: For the Years Ended December 31, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows $ 153,215 Right-of-use assets obtained in exchange for lease obligations: Operating lease $ 128,247 As of December 31, 2022, the supplemental balance sheet information related to leases was as follows: As of December 31, 2022 Operating lease right-of-use assets $ 190,597 Other current liabilities $ 178,411 Operating lease liabilities, net of current portion 14,275 Total operating lease liabilities $ 192,686 As of December 31, 2022, the remaining lease payments were as follows: 2023 $ 171,322 2024 28,693 Total future minimum lease payments $ 200,015 For the years ended December 31, 2021 and 2022 , rent expense recognized by the Company was $ 208,300 and $ 187,600 , respectively, of which $ 108,000 and $ 86,000 , respectively, is included in research and development in the statements of operations included in the audited financial statements. Certain comparative figures have been reclassified to conform to the current year presentation under Topic 842 for rent expense. 100 Contractual Commitments The Company entered into several agreements with a third-party global contract development and manufacturer of biologics for the manufacture of the Company’s proprietary molecules for use in clinical trials. At December 31, 2021, future payment obligations under such agreements were $ 2.5 million of which approximately $ 181,600 was paid in January 2022. Future payment obligations of $ 406,000 under such agreements will be paid by the year ending December 31, 2023. On December 30, 2022, the Company committed to purchase upstream processing and fluid management equipment for $ 1.6 million. Legal Matters From time to time, the Company is a party to or otherwise involved in legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. In addition, the Company enters into agreements that may include indemnification provisions, pursuant to which the Company agrees to indemnify, hold harmless and defend the indemnified parties for losses suffered or incurred by the indemnified party. When the Company believes that the outcome of such a matter will result in a liability that is probable to be incurred and result in a potential loss, or range of loss, that can be reasonably estimated, the Company will accrue a liability and make the appropriate disclosure in the footnotes to the financial statements. On December 23, 2022, Altor BioScience, LLC and NantCell, Inc. initiated an arbitration against Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, in California alleging breach of contract and fiduciary duty, among other claims. On that same date, Altor/NantCell filed a lawsuit against the Company in federal court alleging misappropriation of trade secrets, inducement of breach of contract and breach of fiduciary duty, among other claims against the Company. On January 31, 2023, the Company filed a motion to compel arbitration, a motion for the stay of the litigation, and a motion to dismiss the complaint (“motion to compel”), which are currently pending before the Court. On March 10, 2023, the Company filed a motion to temporarily stay discovery pending the Company’s motion to compel, which the Court granted on March 13, 2023. Although adverse decisions (or settlements) may occur in the lawsuit described above, it is not possible to reasonably estimate the possible loss or range of loss, if any, associated therewith at this time. As such, no accrual for these matters has been recorded within the financial statements. 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 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 encountered some delays in the completion of 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. On March 12, 2023, the U.S. government took extraordinary steps to stop a potential banking crisis after the historic failure of Silicon Valley Bank, assuring all depositors at the failed institution that they could access all their money quickly, even as another major bank was shut down. The Company had no exposure to a failed bank. The Company averts risks associated with such a crisis by holding minimum cash balances required for uninterrupted operations, federal funds money market fund, and U.S. government-backed securities. As of December 31, 2022, the Company held $ 20.0 million in a federal money market fund (the “Fund”) with an investment objective to seek to provide current income while maintaining liquidity and a stable share price of $ 1 . The Fund invests at least 99.5 % of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized solely by U.S. government securities or cash (collectively, government securities). As such it is considered one of the most conservative investment options offered. 16. Subsequent Events Subsequent events have been evaluated through the date the financial statements were issued. 101 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . None.