What changed in this filing

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Item 1. Financial Statements

2023-11-14 compared with 2023-08-11 · 288 added, 209 removed, 441 unchanged (53% of the section changed)

2 unchanged sentences

Condensed Balance Sheets

September 30,

Current assets:

21 unchanged sentences

250,000,000 shares

authorized and 35,926,721 shares issued at June 30, 2023

authorized and 35,927,321 shares issued at September 30, 2023

Additional paid-in capital

6 unchanged sentences

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenues

11 unchanged sentences

Condensed Statements of Changes in Stockholders’

For the Six Months Ended June 30, 2022 and June 30, 2023

For the Nine Months Ended September 30, 2022 and September 30, 2023

Stockholders’

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Balance, June 30, 2022

Issuance of Common Stock upon exercise of stock options

Stock-based compensation

Balance, September 30, 2022

Stockholders’

7 unchanged sentences

Balance, June 30, 2023

Issuance of Common Stock upon exercise of stock options

Stock-based compensation

Balance, September 30, 2023

See accompanying notes to the unaudited condensed interim financial statements.

1 unchanged sentence

Condensed Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

3 unchanged sentences

Unrealized loss (gain) on investments, net

Realized (gain) on investments

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

9 unchanged sentences

Proceeds for sale or maturities of short-term investments

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Cash flows from financing activities:

Proceeds from issuance of common stock

Proceeds from issuance of debt, net

Offering costs

Debt repayment

Net cash provided by financing activities

Net changes in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

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Capital expenditures accrued, but not yet paid

Purchases of property and equipment included in accounts payable and other liabilities

See accompanying notes to the unaudited condensed interim financial statements.

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HCW Biologics Inc.

(the “Company”) is a biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen healthspan by disrupting the link between chronic, low-grade inflammation and age-related diseases.

(the “Company”) is a clinical stage biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen healthspan by disrupting the link between chronic, low-grade inflammation and age-related diseases.

The Company believes age-related low-grade chronic inflammation, or “inflammaging,”

1 unchanged sentence

The Company is located in Miramar, Florida and was incorporated in the state of Delaware in April 2018.

As of June 30, 2023, 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.

As of September 30, 2023, 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 solely from the Wugen License and manufacturing and supply arrangement with Wugen.

In the three and six months ended June 30, 2023, the Company recognized revenues from manufacturing and supply of materials for Wugen o f $ 622,807 and $ 664,690 , res pectively.

As of June 30, 2023, the Company had cash and cash equivalents of $ 7.4 m illion, a deposit for interest reserve of $ 5.3 million, and short-term investments o f $ 10.0 m illion held in U.S.

government-backed securities.

Since inception to June 30, 2023, the Company incurred cumulative net loss es of $ 52.2 million.

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

In the three and nine months ended September 30, 2023, the Company recognized revenues from manufacturing and supply of materials for Wugen of $ 853,102 and $ 1.5 million, respectivel y.

As of September 30, 2023, the Company had cash and cash equivalents of $ 11.2 million and a deposit for interest reserve of $ 5.3 million.

Since inception to September 30, 2023 , the Company incurred cumulative net losses of $ 57.1 million.

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

The Company intends to focus its efforts to raise capital from non-dilutive funding sources.

This includes out-licensing rights to technology or regional markets, third-party collaboration funding, cooperative agreements for clinical trials, or other business development transactions.

In addition, when or if market conditions are more favorable, the Company may raise capital through additional debt or equity financings.

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.

In November 2023, the Company expects to begin to draw down on its $ 26.3 million Development Line of Credit Agreement, the proceeds of which will be primarily used for the buildout of the Company's headquarters, including upgraded research laboratories and a new manufacturing facility.

Commitments and Contingencies - Project Financing herein.

The Company intends to raise capital through additional debt or equity financings.

In addition, the Company intends to continue its efforts to enter into business development transactions.

Business development efforts are focused on out-licensing rights to non-core assets or regional markets, third-party collaboration funding, cooperative agreements for clinical trials, and other transactions.

However, if the Company is not able to obtain financing at adequate levels, it 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

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Unaudited Interim Financial Information

The accompanying unaudited condensed interim financial statements as of June 30, 2023 and for the three and six months ended June 30, 2022 and 2023 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

The accompanying unaudited condensed interim financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2022 and 2023 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”).

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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 six months ended June 30, 2023 are not necessarily indicative of the results expected for the full fiscal year or any subsequent interim period.

The results for the three and nine months ended September 30, 2023 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, 2022 has been derived from the audited financial statements at that date but does not include all disclosures required by U.S.

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Deposit for Interest Reserve

The Company agreed to establish an interest reserve account for the purpose of paying interest on outstanding debt under the Development Line of Credit Agreement which is further described in Note 8.

The Company has established an interest reserve account for the purpose of paying interest on outstanding debt under the Development Line of Credit Agreement which is further described in Note 8.

Commitments and Contingencies - Project Financing herein.

As of June 30, 2023, there was a balance of $ 5.3 million included in Deposit for interest reserve in noncurrent assets on the accompanying condensed balance sheet.

As of September 30, 2023 , there was a balance of $ 5.3 million included in Deposit for interest reserve in noncurrent assets on the accompanying condensed balance sheet.

Revenue Recognition

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

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

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

The manufacturing of the clinical and research materials supplied by the Company each represents a single performance obligation that is satisfied over time.

Under the MSA, the Company enters into statements-of-work (“SOWs”) for transactions for the purchase of clinical and research grade materials which meet all requirements necessary to qualify as a contract under Topic 606.

sale of clinical and research material supplied by the Company each represents a single performance obligation that is satisfied over time.

The Company recognizes revenue using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company's progress toward completion.

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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.

The Company recognized revenue related to sale of development supply materials to its licensee, Wugen, of $ 454,000 and $ 3,571,545 , respectively, for the three and six months ended June 30, 2022;

and $ 622,807 and $ 664,690 , resp ectively, for three and six month s ended June 30, 2023.

The Company recognized revenue related to sale of development supply materials to its licensee, Wugen, of $ 1.8 million and $ 5.4 million, respectively, for the three and nine months ended September 30, 2022 ;

and $ 853,102 and $ 1.5 million, resp ectively, for three and nine months ended September 30, 2023 .

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 on the minority interest in Wugen as of June 30, 2023.

As of December 31, 2022 and June 30, 2023, the Company included $ 1.6 million for the investment in Wugen in Investments in the accompanying condensed balance sheets.

The Company invests in bills and notes issued by the U.S.

No impairment has been recognized on the minority interest in Wugen as of September 30, 2023.

As of December 31, 2022 and September 30, 2023 , the Company included $ 1.6 million for the investment in Wugen in Investments in the accompanying condensed balance sheets.

From time to time, the Company invests in bills and notes issued by the U.S.

Treasury which are classified as trading securities.

The Company reported a fair value of $ 9.7 million and $ 10.0 million for the fair value of investments in U.S.

Treasury bills as of December 31, 2022 and June 30, 2023, respectively, included in Short-term investments in the accompanying condensed balance sheets.

The Company reported a fair value of $ 9.7 million and nil for the fair value of investments in U.S.

Treasury bills as of December 31, 2022 and September 30, 2023, respectively, included in Short-term investments in the accompanying condensed balance sheets.

Operating Leases

11 unchanged sentences

As of December 31, 2022 , the Company had a balance of $ 1.7 million included in Accrued liabilities and other current liabilities in the accompanying condensed balance sheet, consisting primarily of $ 416,000 for legal expenses, $ 277,500 for clinical expenses, $ 524,000 for bonus expenses, $ 134,000 for salary and benefits, and $ 178,000 for a lease liability.

As of June 30, 2023, the Company had a balance of $ 2.4 million in Accrued liabilities and other current liabilities in the accompanying condensed balance sheet, consisting primarily of the following:

$ 994,000 for legal expenses related to legal proceedings which are further described in Note 8.

As of September 30, 2023 , the Company had a balance of $ 2.3 million in Accrued liabilities and other current liabilities in the accompanying condensed balance sheet, consisting primarily of the following:

$ 208,000 for retainage related to renovation of the Company's headquarters;

$ 892,000 related to legal matters further described in Note 8.

Commitments and Contingencies - Legal herein;

$ 246,000 for clinical expenses;

$ 365,000 performance-related bonus payable;

$ 365,000 related to performance-based bonuses;

$ 81,000 for salary and benefits;

$ 79,000 for legal expenses related to the execution of the Company's patent prosecution strategy and other legal expenses incurred in the ordinary course of business;

$ 71,000 for a lease liability;

and $ 97,101 for the current portion of long-term debt.

$ 117,680 for the current portion of long-term debt;

and $ 40,000 for legal fees related to patent prosecution as well as other legal expenses incurred in the ordinary course of business.

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 Cogent loan is secured by a first priority lien on the building.

As of June 30, 2023, the Company had $ 6.5 million in gross principal outstanding in a loan under the 2022 Loan Agreement.

The 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.

Under the terms of the 2022 Loan Agreement, the 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 “Cogent Maturity Date”), and bears interest at a fixed per annum rate equal to 5.75 %.

Upon the Cogent Maturity Date, a final payment of unamortized principal will be due.

The Company is in compliance with all covenants as of June 30, 2023.

At the Cogent Maturity Date, a final payment of unamortized principal will be due.

The Company has the option to prepay the outstanding balance of the loan prior to the Cogent Maturity Date without penalty.

As of December 31, 2022, the Cogent loan consisted of a long-term portion of $ 6.5 million which is included in Debt, net on the accompanying condensed balance sheet.

As of June 30, 2023, it consisted of a curre nt portion of $ 97,101 which is included in Accrued liabilities and other current liabilities and a noncurrent portion of $ 6.4 million which is included in De bt, net in the accompanying condensed balance sheet .

The Company is in compliance with all covenants under the 2022 Loan Agreement as of September 30, 2023.

As of December 31, 2022, the 2022 Loan Agreement consisted of $ 6.5 million which is included in Debt, net on the accompanying condensed balance sheet.

As of September 30, 2023, it consisted of a curre nt portion of $ 117,680 which is included in Accrued liabilities and other current liabilities and a noncurrent portion of $ 6.3 million which is included in De bt, net in the accompanying condensed balance sheet.

Preferred Stock

At December 31, 2022 and June 30, 2023, the Company has 10,000,000 shares of preferred stock authorized and no shares issued.

At December 31, 2022 and September 30, 2023 , the Company had 10,000,000 shares of preferred stock authorized and no shares issued.

Net Loss Per Share

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Weighted-average common shares outstanding

1 unchanged sentence

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,

Common stock options

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No transfers between levels occurred during the periods presented.

The following table presents the Company’s assets which were measured at fair value at December 31, 2022 and June 30, 2023:

The following table presents the Company’s assets which were measured at fair value at December 31, 2022 and September 30, 2023:

At December 31, 2022:

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Treasury notes

At June 30, 2023:

At September 30, 2023:

Money market funds

Treasury notes

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

The Company did no t have a provision for income taxes (current or deferred tax expense) as of December 31, 2022 and June 30, 2023 .

The Company did no t have a provision for income taxes (current or deferred tax expense) as of December 31, 2022 and September 30, 2023 .

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

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There are no obligations under finance leases.

The components of the lease expense for the three and six months ended June 30, 2023 were as follows:

The components of the lease expense for the three and nine months ended September 30, 2023 were as follows:

For the Three Months

Ended June 30, 2023

For the Six Months Ended June 30, 2023

Ended September 30, 2023

For the Nine Months Ended September 30, 2023

Operating lease cost

Supplemental cash flow information related to lease for the six months ended June 30, 2023 was as follows:

For the Six Months Ended June 30, 2023

Supplemental cash flow information related to lease for the nine months ended September 30, 2023 was as follows:

For the Nine Months Ended September 30, 2023

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

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Operating lease

As of June 30, 2023, the supplemental balance sheet information related to leases was as follows:

As of June 30, 2023

As of September 30, 2023, the supplemental balance sheet information related to leases was as follows:

As of September 30, 2023

Operating lease right-of-use assets

Operating lease liabilities, current

As of June 30, 2023, the remaining lease payments were as follows:

As of September 30, 2023, the remaining lease payments were as follows:

Total future minimum lease payments

For the three months ended June 30, 2022 and 2023, rent expense recognized by the Company was $ 49,996 and $ 40,875 , respectively, of which $ 25,149 and $ 22,212 , respectively, is included in research and development in the accompanying condensed statements of operations.

For the six months ended June 30, 2022 and 2023, rent expense recognized by the Company was $ 77,139 and $ 84,825 , respectively, of which $ 32,834 and $ 44,424 , respectively, is included in research and development in the accompanying condensed statements of operations.

For the three months ended September 30, 2022 and 2023, rent expense recognized by the Company was $ 43,700 and $ 42,400 , respectively, of which $ 22,200 and $ 22,200 , respectively, is included in research and development in the accompanying condensed statements of operations.

For the nine months ended September 30, 2022 and 2023, rent expense recognized by the Company was $ 130,300 and $ 127,200 , respectively, of which $ 57,800 and $ 66,600 , respectively, is included in research and development in the accompanying condensed statements of operations.

Contractual Commitments

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

At December 31, 2022 and June 30, 2023, future payment obligations under such agreements were $ 406,000 and $ 2.2 million, respectively.

In addition, as of December 31, 2022, the Company committed to purchase upstream processing and fluid management equipment for $ 1.6 million, and it advanced $ 495,000 for this purchase as of June 30, 2023.

At December 31, 2022 and September 30, 2023 , future payment obligations under such agreements were $ 406,000 and $ 1.8 million, respectively.

Project Financing

On April 21, 2023, the Company entered into a secured Development Line of Credit Agreement (the "2023 Loan Agreement") with Prime Capital Ventures, LLC ("Prime"), pursuant to which Prime will advance loans to the Company in a principal amount not to exceed $ 26.3 million with a scheduled maturity of April 20, 2028 (the "Prime Maturity Date").

On April 21, 2023, the Company entered into a secured Development Line of Credit Agreement (such agreement as amended from time to time, the "2023 Loan Agreement") with Prime Capital Ventures, LLC ("Prime"), pursuant to which Prime will advance loans to the Company in a principal amount not to exceed $ 26.3 million with a scheduled maturity of April 20, 2028 (the "Prime Maturity Date").

The Company has the option to prepay the balance of the loan prior to the Prime Maturity date without penalty.

The note issued pursuant to the 2023 Loan Agreement bears interest at a fixed rate equal to 7.00 % per annum, due monthly in arears on the first day of each month.

The primary purpose of the loan is to provide the funding required to complete the buildout of the Company's new headquarters, including improved research laboratories and a vivarium to support the Company's pre-clinical research efforts, and a manufacturing facility to produce GMP material to support the Company's clinical development as well as produce material to support the clinical development of its licensee, Wugen.

Under the 2023 Loan Agreement, the Company was required to fund an interest reserve bank account controlled by Prime in the amount of $ 5.3 million to fund the interest payments due on outstanding principal amounts under the 2023 Loan Agreement.

The note issued pursuant to the 2023 Loan Agreement bears interest at a fixed rate equal to 7.00 % per annum, due monthly in arrears on the first day of each month.

The primary purpose of the loan is to provide the funding required to complete the buildout of the Company's new headquarters, including improved research laboratories and a vivarium to support the Company's preclinical research efforts, and a manufacturing facility to produce GMP material to support the Company's clinical development as well as produce material to support the clinical development of its licensee, Wugen.

Under the 2023 Loan Agreement, the Company was required to fund an interest reserve bank account controlled by Prime in the amount of $ 5.3 million to fund the interest payments due thereunder.

The balance of the reserve account is presented in Deposit for interest reserve in noncurrent assets on the accompanying condensed balance sheet.

As of June 30, 2023, the Company had no outstanding borrowings under the 2023 Loan Agreement.

The initial advance is contingent upon the Company's receipt of all necessary permits and approvals to begin construction.

As of September 30, 2023 , the Company had no outstanding borrowings under the 2023 Loan Agreement.

On August 10, 2023, the Company obtained construction permits required to begin the buildout of its new headquarters.

This satisfies the final condition precedent to accessing the $26.3 million line of credit.

This satisfied the final condition precedent to accessing the $ 26.3 million line of credit.

The Company will incur $ 1.8 million in debt issuance costs in connection to the Prime loan, which will be earned and payable upon the first draw down.

In November 2023, the Company expects to begin to draw down funds available under the 2023 Loan Agreement.

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.

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Inflationary Cost Environment, Geopolitical Risks and Other Macroeconomic Factors

The 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.

Further, there have been lingering, long-term effects of COVID-19 that continue to directly or indirectly impact the Company’s business, results of operations and financial condition, particularly related to staffing at clinical sites.

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.

The Company uses a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines.

The operations have been affected by many headwinds, including inflationary pressures, rising interest rates, ongoing global supply chain disruptions resulting from increased geopolitical tensions such as the war in the Middle East, the conflict between Russia and Ukraine, Chinese aggression towards Taiwan, financial market volatility and currency movements.

The Company has been impacted by inflation, and may continue to be so, when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs.

Management employs a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines.

Future developments in these and other areas present material uncertainty and risk with respect to the Company's clinical trials, IND-enabling activities, buildout of the new headquarters, as well as the Company's financial condition and results of operations.

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This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success of our clinical trials, plans and objectives of management for future operations, adequacy of our cash resources and working capital, future economic conditions or performance, lingering impact of COVID-19 pandemic on our research and development activities and business operations, and future results of anticipated products, are forward-looking statements.

All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success of our clinical trials, plans and objectives of management for future operations, adequacy of our cash resources and working capital, future economic conditions or performance, and future results of anticipated products, are forward-looking statements.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

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Our lead product candidates address the two primary processes that promote chronic inflammation.

Subcutaneous administration of our clinical-stage, lead drug candidate, HCW9218, activates NK cells, innate lymphoid group-1, and CD8 + T cells, and neutralizes TGF-β.

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

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

This lead product candidate is currently being evaluated in two Phase 1/1b clinical trials for chemo-refractory/chemo-resistant solid tumor cancers.

Subcutaneous administration of our preclinical-stage, lead drug candidate, HCW9302, is designed to activate and expand T reg cells to reduce senescence by suppressing the activity of inflammasome-bearing cells and the inflammatory factors which they secrete.

HCW9218 is our clinical stage lead product candidate which is administered by subcutaneous injection.

This bi-functional immunotherapeutic has demonstrated the ability to reduce senescent cells as well as function as a senomorphic that eliminates senescence-associated pro-inflammatory factors.

We have made progress in developing a deep understanding of the anti-cancer mechanism of action of HCW9218, especially in relation to how it complements immune checkpoint inhibitors and chemotherapies.

In preclinical testing in different cold tumor models and data from correlative studies conducted in conjunction with our clinical trials, HCW9218 has demonstrated that it has a unique mechanism of action that we believe is the key to turning a ‘cold’

tumor into a ‘hot’

tumor, indicating the potential of the anti-cancer utility of HCW9218 in combination with standard-of-care anti-cancer therapies.

The graphic below depicts the potential of HCW9218 in widely-used, FDA-approved anti-cancer therapies.

HCW9218 Platform to Boost Anti-Cancer Utility of Standard-of-Care Cancer Therapies

The Company plans to focus its clinical development for future Phase 2 clinical trials in two of the areas of utility depicted in the graphic above:

HCW9218 + chemotherapy.

Chemotherapy is the current standard of care for treating most forms of cancer.

Tumor cells can undergo senescence and secrete pro-inflammatory factors, or SASP factors, in response to chemotherapy, a process referred to as therapy-induced senescence (“TIS”).

SASP factors promote TIS cancer cells to re-enter the growth cycle with stem-like characteristics which can result in disease relapse and metastasis.

HCW9218 is designed to treat the impact of accumulated senescent cells and the SASP factors which they secrete by eliminating senescent cells (i.e., senescent cell reducing effect) and reducing SASP factors (i.e., senomorphic effect).

One of the key SASP factors is TGF-β, well known for its immunosuppressive role in cancer progression.

HCW9218 is designed with a TGF-β

trap for TGF-β

neutralization.

HCW9218 + immune checkpoint inhibitors.

HCW9218 addresses a key challenge for immune checkpoint inhibitors:

Exhausted T cells.

Preclinical studies have shown that HCW9218 stimulates and expands progenitor exhausted stem-like and transitory CD8+ T cells in the tumor draining lymph nodes followed by trafficking of these cells into the tumors.

This opens a pathway for enhancing the anti-tumor activity of immune checkpoint inhibitors.

HCW9218 also substantially lowers the TGF-β

activity in the tumor microenvironment to lessen immunosuppression which the Company believes will also enhance the effectiveness of immune checkpoint inhibitors.

Outside of the Company's main focus are two other standard-of-care cancer treatments shown above, antibody- and cell-based therapies.

Our preclinical studies have demonstrated HCW9218 may have the potential to boost the effectiveness of these two anti-cancer therapies.

HCW9218 activates natural killer (“NK”) cells to increase their antibody-dependent cytotoxicity against cancer cells.

As a result, combination therapy of HCW9218 and a tumor-specific antibody was more efficacious than either therapy alone in a mouse melanoma model.

HCW9218 treatment also can activate and induce adoptively transferred tumor-specific CD8 + T cells to traffic into tumors and carry out their effector functions in reducing tumor growth.

Our business development activities include a search for partners who are focused on these areas for out-license arrangements and collaborations.

HCW9302 is our preclinical lead product candidate administered by subcutaneous injection.

This immunotherapeutic is designed to reduce senescence by suppressing the activity of inflammasome-bearing cells and the inflammatory factors they secrete through activation and expansion of regulatory T cells (“T reg ”) cells.

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 pro-inflammatory diseases, such as atherosclerosis.

We are in the process of completing IND-enabling studies and intend to prepare and submit an Investigational New Drug (“IND”) application to the FDA in 2023.

We are in the process of completing IND-enabling studies and intend to prepare and submit an Investigational New Drug (“IND”) application to the FDA for permission to conduct a clinical trial in an autoimmune indication in the fourth quarter of 2023.

Recent Developments

In a Phase 1 clinical trial to evaluate HCW9218 in the treatment of chemo-refractory/chemo-resistant solid tumors, sponsored by the Masonic Cancer Center, University of Minnesota (the "UMN study"), the first patient was dosed in the expansion phase of the trial.

There has been no dose-limiting toxicity to date.

The Company expects this trial to be completed in the second half of 2023 and intends to disclose human clinical data from this trial and the mechanism of action underlying HCW9218 anti-cancer activities at a major industry conference prior to the end of the year.

In a Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in the treatment of chemo-refractory/chemo-resistant pancreatic cancer, the trial has completed two dose escalations and has begun a third, with no dose-limiting toxicity to date.

The Company expects this trial to be completed late in 2023 or early 2024, with a human clinical data readout in the first half of 2024.

On April 21, 2023, we entered into a secured Development Line of Credit Agreement with Prime Capital Ventures, LLC, as lender, pursuant to which the Company may borrow up to $26.3 million with a scheduled maturity date of April 20, 2028.

In connection with this loan, the Company established a $5.3 million deposit for interest reserve.

Among the other uses of proceeds, we plan to refinance our existing long-term debt with some of the proceeds from this loan.

Some of the proceeds of the loan will be used to recoup $3.2 million in funds advanced from the Company's operating capital while awaiting permits.

On August 10, 2023, we obtained construction permits required to begin the buildout of our new headquarters.

This satisfies the final condition precedent to accessing the $26.3 million line of credit.

On June 13, 2023, HCW Biologics was granted U.S.

11,672,826 by the United States Patent and Trademark Office which contains methods of use claims directed to administering the Company’s clinical-stage bifunctional immunotherapeutic, HCW9218, to treat cancer, including colorectal cancer, breast cancer, ovarian cancer, hepatocellular carcinoma, gastric cancer, urothelial carcinoma, and melanoma.

In November 2023, a human data readout from the Phase 1 clinical trial and correlative studies to evaluate HCW9218 in solid tumors were presented at the 38th Annual Meeting of the Society for Immunotherapy of Cancer (“SITC”) by the Principal Investigator, Dr.

Geller, Professor and Division Director of Gynecologic Oncology in the Department of Obstetrics, Gynecology and Women's Health at the University of Minnesota.

This clinical readout was based on 15 patients who were enrolled in the study as of October 16, 2023, all of whom were patients whose disease had previously progressed after multiple lines of standard-of-care therapy.

The trial is now in its final expanded dose level, and we expect it to be completed in the fourth quarter of 2023.

There has been one dose-limiting toxicity experience in this study, but it did not trigger stopping rules.

Highlights of data presented at SITC include:

o HCW9218 was administered subcutaneously once every three weeks for up to six cycles at dose levels 0.25 mg/kg (DL1), 0.5 mg/kg (DL2), 0.8 mg/kg (DL3) or 1.2 mg/kg (DL4).

The median number of cycles was three.

o 87% (13/15) had >4 lines of prior therapy.

Tumor types included:

Ovarian (n=6), Colorectal (n=4), Rectal (n=3), and Liver (n=2).

o 53% (8/15) patients treated with HCW9218 were evaluated in a post-treatment assessment, including biopsies and scanning.

Tumor types included:

Ovarian (n=3), Colorectal (n=3), Rectal (n= 1) and Liver (n=1).

o 50% (4/8) patients evaluated in post-treatment assessments exhibited stable disease following HCW9218 treatment.

Patients showed stable disease lasting over 6 months.

Clinical benefit was observed from DL2, DL3 and DL4.

o 66% (2/3) patients with ovarian cancer who underwent post-treatment assessments showed stable disease.

o HCW9218 significantly reduced blood levels of TGF-β

in cancer patients in a dose-dependent manner, without causing treatment-emergent skin lesions and bleeding events previously reported with TGF-β

antagonists in clinic.

o HCW9218 strongly promotes proliferation and activation of NK and T cells in patients’

blood after dosing without causing cytokine release syndrome.

No liver enzyme elevation was observed.

HCW9218 also showed a substantial increase in blood NK cell counts three weeks after a single dosing.

o HCW9218 treatment presents a promising approach to enhancing the antitumor activity of immune checkpoint inhibitors in patients with solid tumors based on the ability of HCW9218 to activate, expand and induce tumor trafficking of progenitor exhausted stem-like and transitory CD8 + T cells.

o Repeated HCW9218 administration up to the highest planned dose level was well tolerated by patients with chemotherapy-refractory advanced solid tumors, which has provided support for the Recommended Phase 2 Dose (“RP2D”) level for future Phase 2 studies of HCW9218.

In a Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in the treatment of chemo-refractory/chemo-resistant pancreatic cancer, the trial has completed three dose escalation cohorts and has begun the fourth, with no dose-limiting toxicity to date.

We expect this trial to be completed late in late 2023 or early 2024, with a human clinical data readout anticipated in the first half of 2024.

In November 2023, we expect to begin to draw down funds available under the 2023 Loan Agreement.

We expect to draw on the loan over the next ten months, up to the maximum loan amount of $26.3 million.

The proceeds of this loan will be used primarily for the renovation of our new headquarters, including upgraded research laboratories and a new manufacturing facility, and the repayment of borrowings under the 2022 Loan Agreement incurred as acquisition financing for the purchase of the property.

A portion of the proceeds of the loan will be used to recoup the $4.4 million advanced from our operating capital for the building project prior to accessing funds available under the 2023 Loan Agreement.

In August 2023, the Company was granted two patents:

11,730,762 by the United States Patent and Trademark Office which contains claims for a method to promote the activation and proliferation of NK cells or T cells.

The patented method is based on contacting the NK cells or T cells in a liquid culture medium with one of our proprietary molecules, all which are constructed with a tissue factor domain and created using our TOBI TM discovery platform, and an antibody construct that binds to the molecule’s tissue factor domain.

The method covered by this patent encompasses three of our proprietary immunotherapeutic molecules.

11,738,052 by the United States Patent and Trademark Office which contains claims for a method of promoting the activation and proliferation of NK cells, known as our "prime and expand" method.

The patented method is based on contacting NK cells in a liquid culture medium with an antibody construct and two of our proprietary immunotherapeutic molecules, both of which were created using the Company's TOBI TM discovery platform.

Trends and Uncertainties

Inflationary Cost Environment, Geopolitical Risks and Other Macroeconomic Factors

The Company may be impacted by inflation, especially when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs.

Further, there continue to be some lingering, long-term effects of COVID-19 that directly or indirectly impacts the Company’s business, results of operations and financial condition, particularly related to staffing at clinical sites.

The Company uses a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines.

The Company's operations have been affected by many headwinds, including inflationary pressures, rising interest rates, ongoing global supply chain disruptions resulting from increased geopolitical tensions such as the war in the Middle East, the conflict between Russia and Ukraine, Chinese aggression towards Taiwan, financial market volatility and currency movements.

The Company has been impacted by inflation, and may continue to be so, especially when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs.

Management employs a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines.

Future developments in these and other areas, such as the Company's ongoing legal proceedings, present material uncertainty and risk with respect to the Company's clinical trials, IND-enabling activities, buildout of the new headquarters, as well as the Company's financial condition and results of operations.

50 unchanged sentences

however, under certain circumstances, the Company may be required to advance his legal fees.

The Company incurred legal expenses on its own behalf in the period ended June 30, 2023, and we expect to continue to incur material costs and expenses in connection with defending the Company in the foregoing legal matters for the remainder of the year.

We expect general and administrative expenses incurred in the normal course of business for other purposes, such as costs for recruitment and retention of personnel, service fees for consultants, advisors and accountants, as well as costs to comply with government regulations, corporate governance, internal control over financial reporting, insurance and other requirements for a public company, are expected to continue to increase for the foreseeable future as we scale our operations.

The Company incurred legal expenses on its own behalf in the period ended September 30, 2023, and we expect to continue to incur material costs and expenses in connection with defending the Company in the foregoing legal matters through the end of 2023 and into 2024.

We expect general and administrative expenses incurred in the normal course of business for other purposes, such as costs for recruitment and retention of personnel, service fees for consultants, advisors and accountants, as well as costs to comply with government regulations, corporate governance, internal control over financial reporting, insurance and other requirements for a public company, to continue to increase for the foreseeable future as we scale our operations.

Interest Expense and Other (Expense) Income, Net

Interest expense reflects the interest paid for loans.

Other (expense) income, net consists of interest earned on our cash, cash equivalents, unrealized gains and losses related to our investments in U.S.

Other (expense) income, net consists of interest earned on our cash, cash equivalents, unrealized and realized gains and losses related to our investments in U.S.

government-backed securities, income related to non-operating activities, and miscellaneous non-operating expenses.

Income related to non-operating activities includes rent earned under a short-term, market rate lease, which the Company entered into with the former owner of the building purchased by the Company on August 15, 2022.

The lease provides the former owner with the right to occupy offices that comprise approximately 15,000 square feet of the building for a period of one year, ending August 14, 2023.

During the three and six months ended June 30, 2023, the Company reported rental income of $59,453 and $118,907, respectively, which is included within Other (expense) income, net in the interim statement of operations for the three and six months ended June 30, 2023, included elsewhere in this Quarterly Report.

The lease provided the former owner with the right to occupy offices that comprise approximately 15,000 square feet of the building for a period of one year, ending August 14, 2023, which the Company agreed to extend to September 30, 2023.

During the three and nine months ended September 30, 2023, the Company reported rental income of $60,003 and $178,910, respectively, which is included within Other (expense) income, net in the interim condensed statement of operations.

Results of Operations

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenues

6 unchanged sentences

Other (expense) income, net

Comparison of the Three Months ended June 30, 2022 and June 30, 2023

The Company recognized $454,000 and $662,807 of revenues for the three months ended June 30, 2022 and 2023, respectively.

Comparison of the Three Months ended September 30, 2022 and September 30, 2023

The Company recognized $1.8 million and $853,102 of revenues for the three months ended September 30, 2022 and 2023, respectively.

All revenues were generated under the development supply agreement with our licensee, Wugen.

Revenue was recognized for all transactions made under the MSA for which the Company entered a SOW, since a contract existed for these transactions and all of the other conditions for revenue recognition were met under Topic 606.

Revenue was recognized for all transactions made under SOWs pursuant to our existing MSA, since a contract existed for these transactions and all of the other conditions for revenue recognition were met under Topic 606.

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

There were $314,625 of short-term deferred revenues as of June 30, 2022 and no deferred revenues as of June 30, 2023.

There were no deferred revenues as of September 30, 2022 or September 30, 2023.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2022 and June 30, 2023:

The following table summarizes our research and development expenses for the three months ended September 30, 2022 and September 30, 2023:

Three Months Ended

September 30,

Salaries, benefits and related expenses

4 unchanged sentences

Total research and development expenses

Research and development expenses decreased by $353,216, or 18%, from $2.0 million for the three months ended June 30, 2022 to $1.6 million for the three months ended June 30, 2023.

This decrease was primarily due to a decline in expenses for manufacturing and preclinical activities, offset by an increase in expenses for clinical trials.

Salaries, benefits, and related expenses decreased by $43,840, or 5%, from $802,033 for the three months ended June 30, 2022 to $758,193 for the three months ended June 30, 2023.

This decrease was primarily attributable to a decrease of $53,109 in salaries, including the impact of the reimbursement for certain expenses provided for under the Wugen license, partially offset by a $8,913 increase in expenses related to employee benefits.

Manufacturing and materials expense decreased by $203,942, or 67%, from $304,329 for the three months ended June 30, 2022 to $100,387 for the three months ended June 30, 2023.

In the three months ended June 30, 2022, costs were primarily attributable to a 1000L GMP manufacturing run for HCW9218.

By June 30, 2023, the Company anticipated that adequate supply of clinical development material for the Company's two lead molecules, HCW9218 and HCW9302, had been put in place for clinical development activities planned for the next 24 months.

In the three months ended June 30, 2023, costs were primarily for ancillary activities such as shipping, insurance and storage.

Expenses associated with preclinical activities decreased by $275,825, or 46%, from $599,520 for the three months ended June 30, 2021 to $323,695 for the three months ended June 30, 2022.

In the three months ended June 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.

In the three months ended June 30, 2023, costs were incurred primarily for additional studies required for submission of an IND to request permission to conduct a clinical study to evaluate HCW9302 in an autoimmune indication.

Expenses associated with clinical activities increased by $113,997, or 136%, from $83,939 for the three months ended June 30, 2022 to $197,936 for the three months ended June 30, 2023.

In the three months ended June 30, 2022, the Company incurred clinical trial expenses as a result of the UMN study.

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

The primary objectives are to determine safety, maximum tolerated dose, and the recommended Phase 2 dose.

In the three months ended June 30, 2023, there were two ongoing clinical studies.

In the UMN study, the first patient was dosed in the expansion phase of the trial.

The Company expects the UMN study to be complete in the second half of 2023.

Once completed, it is our intention to disclose human clinical data from this trial at a major industry conference by the end of the year, which we expect will include results from additional studies based on biopsies and other studies and data on the mechanism of action of HCW9218 in anti-cancer activities.

During this period, clinical trial expenses also include expenses incurred in connection with a Company-sponsored, multi-center Phase 1b/2 clinical trial to evaluate HCW9218 in advanced pancreatic cancer.

There are currently five clinical sites participating in this trial, including the National Cancer Institute's Center for Cancer Research, Medical University of South Carolina (an NCI-designated Comprehensive Cancer Center), Washington University in St.

Louis (an NCI-designated Comprehensive Cancer Center), Cleveland Clinic in Cleveland, Ohio (an NCI-designated Comprehensive Cancer Center), and HonorHealth Research Institute.

We expect to complete Phase 1b portion of the pancreatic cancer study in late 2023 or early 2024, followed by a human data readout of clinical data in the first half of 2024.

There has been no dose-limiting toxicity in either study to date.

Other expenses, which include overhead allocations, increased by $56,394, or 31%, from $180,061 for the three months ended June 30, 2022 to $236,455 for the three months ended June 30, 2023.

The increase in other expenses is due primarily to an increase of $43,633 in the allocation for depreciation arising from the acquisition of a property in the third quarter of 2022, an increase of $11,919 in the allocation of rent and occupancy expense, and an increase of $12,324 for office-related equipment and repairs, offset by a decrease of $13,549 in travel-related expenses.

NM - Not meaningful

Research and development expenses decreased by $981,352, or 37%, from $2.6 million for the three months ended September 30, 2022 to $1.7 million for the three months ended September 30, 2023.

This decrease was primarily due to a decline in expenses for manufacturing and preclinical activities, and allocation for depreciation expense, partially offset by an increase in clinical trials expenses.

Manufacturing and materials expense decreased by $545,795, or 73%, from $751,945 for the three months ended September 30, 2022 to $206,150 for the three months ended September 30, 2023.

In the three months ended September 30, 2022, expenses were primarily attributable to the initiation of a 1000L GMP manufacturing run for HCW9218.

As of September 30, 2023, the Company anticipated that adequate supply of clinical development material for the Company's two lead molecules, HCW9218 and HCW9302, had been put in place for clinical development activities planned for the next 20-24 months.

In the three months ended September 30, 2023, costs were incurred primarily for master cell bank characterization for HCW9101H, a high-producing cell line of a key component of the manufacturing process for the Company's proprietary molecules including those licensed to Wugen, as well as ancillary activities such as shipping, insurance and storage.

Expenses associated with preclinical activities decreased by $422,828, or 58%, from $729,172 for the three months ended September 30, 2022 to $306,344 for the three months ended September 30, 2023.

In the three months ended September 30, 2022, expenses were attributable 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.

In the three months ended September 30, 2023, costs were incurred primarily for additional studies required for submission of the HCW9302 IND.

Expenses associated with clinical activities increased by $51,545, or 18%, from $292,276 for the three months ended September 30, 2022 to $343,821 for the three months ended September 30, 2023.

The increase was primarily due to a $122,838 increase in patient fees and clinical trial fees, partially offset by a $84,152 decrease in clinical site start-up costs.

In the three months ended September 30, 2022, the Company had one ongoing Phase 1 clinical trial to evaluate HCW9218 in solid tumors, sponsored by the University of Minnesota (“UMN”), which initiated in May 2022.

In the three months ended September 30, 2023, there were two ongoing clinical studies:

The UMN study and a Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in chemo-resistant/chemo-refractory pancreatic cancer, which initiated in October 2022.

In the three months ended September 30, 2023, the UMN trial completed dose escalation and began enrollment in the cohort expansion at the highest planned dose level.

A human data readout was presented at the 2024 SITC conference, showing clinical safety and tumor response endpoints and results of correlative studies for 15 patients with heavily pretreated advanced solid tumors.

These results supported the anti-cancer utility of HCW9218 and provided the rationale for future Phase 2 clinical trials using HCW9218 in combination with standard-of-care cancer treatments.

There has been one dose limiting toxicity event among the patients participating in the study, which did not disrupt this patient's continued participation in the study.

The Company expects the UMN study to be complete in the fourth quarter of 2023.

Clinical expenses for the three months ended September 30, 2023 also include expenses related to a Company-sponsored, multi-center Phase 1b/2 clinical trial to evaluate HCW9218 in advanced pancreatic cancer.

Patient recruitment continues to progress at the five clinical sites, led by the National Cancer Institute.

The trial completed three dose escalation cohorts and has begun a fourth, with no dose-limiting toxicity to date.

We expect to complete the Phase 1b portion of the pancreatic cancer study in late 2023 or early 2024, followed by a human data readout of clinical data expected in the first half of 2024.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended June 30, 2022 and June 30, 2023:

The following table summarizes our general and administrative expenses for the three months ended September 30, 2022 and September 30, 2023:

Three Months Ended

September 30,

Salaries, benefits and related expenses

4 unchanged sentences

Total general and administrative expenses

General and administrative expenses increased by $1.3 million, or 76%, from $1.7 million for the three months ended June 30, 2022 to $3.0 million for the three months ended June 30, 2023.

The increase was primarily due to an increase in professional fees, which includes legal fees associated with the proceedings brought against the Company by Altor/NantCell, partially offset by a decrease in other expenses, mainly insurance premiums.

Professional services increased by $1.3 million, or 467%, from $287,199 for the three months ended June 30, 2022 to $1.6 million for the three months ended June 30, 2023.

Professional services include corporate legal services, expenses related to legal actions brought by Altor/NantCell, and other professional services, such as auditing and tax advisory fees.

For the three months ended June 30, 2023, the Company incurred $1.2 million for legal fees in connection with the Altor/NantCell matter, $154,806 for legal fees in connection to the execution of the prosecution of our patent strategy, and $47,009 in fees associated with other professional services such as audit fees and tax advisory services.

Depreciation allocation to general and administrative expenses increased by $47,857, or 283%, from $16,940 for the three months ended June 30, 2022 to $64,797 for the three months ended June 30, 2023.

The increase in the depreciation allocation to general and administrative expenses reflects the Company's acquisition of a property to buildout for its new headquarters and manufacturing facility in the third quarter of 2022.

Other expenses decreased by $184,325, or 36%, from $511,462 for the three months ended June 30, 2022 to $327,137 for the three months ended June 30, 2023.

The decrease consists primarily of a $232,283 decrease in insurance premiums, partially offset by a $43,633 increase in the depreciation allocation and a $49,219 increase in taxes.

Comparison of the Six Months ended June 30, 2022 and June 30, 2023

The Company recognized $3.6 million and $644,690 of revenues for the six months ended June 30, 2022 and 2023, respectively.

NM - Not meaningful

General and administrative expenses increased by $1.9 million, or 107%, from $1.7 million for the three months ended September 30, 2022 to $3.6 million for the three months ended September 30, 2023.

The increase was primarily due to an increase in professional fees, which includes legal fees associated with the Altor/NantCell matter.

Salaries, benefits and related expenses did not have a meaningful net change.

The components of the change consisted of a $55,547 increase in salaries and wages, a $21,606 increase in employee benefits, partially offset by a $80,580 decrease in expenses arising from stock-based compensation.

Professional services increased by $1.9 million, or 548%, from $352,166 for the three months ended September 30, 2022 to $2.3 million for the three months ended September 30, 2023.

Professional services include corporate legal services, expenses related to the Altor/NantCell matter, legal fees associated with patent prosecution, and other professional services, such as auditing and tax advisory fees.

The $1.9 million increase consists of a $2.0 million increase in legal fees associated with the Altor/NantCell matter and a $18,196 increase in fees associated with other professional services, such as audit fees and tax advisory services, partially offset by a $58,479 decrease in legal fees associated with patent prosecution.

Facilities and office expenses increased by $90,033, or 105%, from $85,661 for the three months ended September 30, 2022 to $175,694 for the three months ended September 30, 2023.

The increase was primarily due to a $77,598 increase in IT-related expenses and a $10,291 increase in facility-related expenses.

Depreciation allocation to general and administrative expenses increased by $31,144, or 98%, from $31,939 for the three months ended September 30, 2022 to $63,083 for the three months ended September 30, 2023.

The increase in the depreciation allocation to general and administrative expenses is related to the Company's acquisition of a property for its new headquarters in the third quarter of 2022.

Other expenses decreased by $200,954, or 44%, from $451,970 for the three months ended September 30, 2022 to $251,016 for the three months ended September 30, 2023.

The decrease consists primarily of a $151,576 decrease in costs for filing fees, as the shelf registration filing in August 2022 did not recur during the three months ended September 30, 2023, and a $85,510 decrease in insurance premiums, partially offset by a $33,572 increase in taxes.

Comparison of the Nine Months ended September 30, 2022 and September 30, 2023

The Company recognized $5.4 million and $1.5 million of revenues for the nine months ended September 30, 2022 and 2023, respectively.

All revenues were generated under the development supply agreement with Wugen.

The decline in revenue is attributed to a change in Wugen's clinical development plan, a delay in the ramp up of its manufacturing process, as well as transactions for which not all of the elements for revenue recognition were met.

The revenue recognized in the six months ended June 30, 2022 reflects recognition of revenues that had previously been classified as deferred revenue.

Revenue may be recognized for all transactions made under the MSA for which the Company entered SOWs, since both of these elements must be in place for a contract to exist and to fulfill all of the other conditions for revenue recognition under Topic 606.

The revenue recognized in the nine months ended September 30, 2022 reflects recognition of revenues that had previously been classified as deferred revenue.

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 records deferred revenue.

There were $314,625 of short-term deferred revenues as of June 30, 2022 and no deferred revenues as of June 30, 2023.

There were no deferred revenues as of September 30, 2022 and September 30, 2023.

Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2022 and June 30, 2023:

Six Months Ended

The following table summarizes our research and development expenses for the nine months ended September 30, 2022 and September 30, 2023:

Nine Months Ended

September 30,

Salaries, benefits and related expenses

4 unchanged sentences

Total research and development expenses

Research and development expenses increased by $112,921, or 3%, from $3.8 million for the six months ended June 30, 2022 to $3.9 million for the six months ended June 30, 2023.

This increase was primarily due to an increase in clinical trial expenses and the allocation of depreciation, offset by a decrease in salaries and benefits, manufacturing and preclinical expenses.

Salaries, benefits, and related expenses decreased by $72,323, or 5%, from $1.6 million for the six months ended June 30, 2022 to $1.5 million for the six months ended June 30, 2023.

This decrease was primarily attributable to a decrease of $108,849 in salaries and performance-based bonus compensation, including the impact of the reimbursement of expenses provided for under the Wugen license, partially offset by a $19,059 increase in payroll taxes and a $14,460 increase in employee benefits expenses.

Manufacturing and materials expense decreased by $136,664, or 26%, from $521,957 for the six months ended June 30, 2022 to $385,293 for the six months ended June 30, 2023.

In the six months ended June 30, 2022, costs were primarily attributable to HCW9302 technology transfer and development process closeout through finalization of reports and the project initiation and production costs for a 1000L GMP manufacturing run for HCW9218.

In the six months ended June 30, 2023, costs were incurred primarily for production activities associated with a 200L cGMP manufacturing run of HCW9302 and ancillary activities such as shipping, insurance and storage.

Expenses associated with preclinical activities decreased by $51,256, or 5%, from $1.1 million for the six months ended June 30, 2022 to $1.1 million for the six months ended June 30, 2023.

In the six months ended June 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.

In the six months ended June 30, 2023, costs were incurred to complete the toxicology study and for additional studies required for submission of an IND to request permission to conduct a clinical study to evaluate HCW9302 in an autoimmune indication.

Expenses associated with clinical activities increased by $249,579, or 128%, from $194,716 for the six months ended June 30, 2022 to $444,295 for the six months ended June 30, 2023.

In the six months ended June 30, 2022, there was one ongoing clinical trial at the University of Minnesota.

In the six months ended June 30, 2023, in addition to the UMN study, the Company incurred costs related to an ongoing Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in chemo-refractory/chemo-resistant pancreatic cancer which initiated in October 2022.

Other expenses, which include overhead allocations, increased by $123,585, or 35%, from $355,267 for the six months ended June 30, 2022 to $478,852 for the six months ended June 30, 2023.

The increase in other expenses is due primarily to an increase of $99,406 in the allocation for depreciation, reflecting the Company's acquisition of a property to buildout for its new headquarters and manufacturing facility in the third quarter of 2022.

In addition, there was a $13,090 increase in the allocation for rent and occupancy expenses, offset by a $8,125 decrease in travel-related expenses.

Research and development expenses decreased by $868,434, or 14%, from $6.4 million for the nine months ended September 30, 2022 to $5.5 million for the nine months ended September 30, 2023.

This decrease was primarily due to a decrease in manufacturing and preclinical expenses, partially offset by an increase in clinical trials expenses.

Salaries, benefits, and related expenses decreased by $73,490, or 3%, from $2.3 million for the nine months ended September 30, 2022 to $2.2 million for the nine months ended September 30, 2023.

This decrease was primarily attributable to an allocation of labor costs for manufacturing of clinical materials for Wugen and the impact of the reimbursement of expenses provided for under the Wugen License.

Manufacturing and materials expense decreased by $650,117, or 51%, from $1.3 million for the nine months ended September 30, 2022 to $623,785 for the nine months ended September 30, 2023.

In the nine months ended September 30, 2022, costs were primarily attributable to HCW9302 technology transfer and development process closeout through finalization of reports and the project initiation and production costs for a 1000L GMP manufacturing run for HCW9218.

In the nine months ended September 30, 2023, costs were incurred primarily for production activities associated with the master cell bank characterization for HCW9101H;

a 200L cGMP manufacturing run of HCW9302;

and ancillary activities such as shipping, insurance and storage.

Expenses associated with preclinical activities decreased by $474,084, or 26%, from $1.8 million for the nine months ended September 30, 2022 to $1.4 million for the nine months ended September 30, 2023.

In the nine months ended September 30, 2022, expenses were related primarily to the cost of toxicology studies and experimental materials used for IND-enabling activities required to prepare our IND for clinical trials to evaluate HCW9302 in an autoimmune indication.

In the nine months ended September 30, 2023, costs were incurred to complete the toxicology study and for additional studies required for submission of the HCW9302 IND.

Expenses associated with clinical activities increased by $301,124, or 62%, from $486,992 for the nine months ended September 30, 2022 to $788,116 for the nine months ended September 30, 2023.

In the nine months ended September 30, 2022, the UMN study was the only ongoing clinical trial.

In the nine months ended September 30, 2023, in addition to the UMN study, there was an ongoing Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in chemo-refractory/chemo-resistant pancreatic cancer.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the six months ended June 30, 2022 and June 30, 2023:

Six Months Ended

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2022 and September 30, 2023:

Nine Months Ended

September 30,

Salaries, benefits and related expenses

3 unchanged sentences

Total general and administrative expenses

General and administrative expenses increased by $2.5 million, or 71%, from $3.6 million for the six months ended June 30, 2022 to $6.1 million for the six months ended June 30, 2023.

The increase was primarily due to a $2.6 million increase in professional fees, consisting of a $2.3 million increase in legal fees associated with the proceedings brought against the Company by Altor/NantCell, $514,560 in legal fees arising from the execution of the prosecution of our patent strategy, and $280,016 for other professional services such as audit fees and tax advisory fees.

Depreciation allocation to general and administrative expenses increased by $81,465, or 155%, from $52,545 for the six months ended June 30, 2022 to $134,010 for the six months ended June 30, 2023.

Other expenses decreased by $368,884, or 35%, from $1.1 million for the six months ended June 30, 2022 to $683,467 for the six months ended June 30, 2023.

The decrease consists primarily of a $446,724 decrease in the insurance premiums offset by a $81,552 increase in taxes.

General and administrative expenses increased by $4.4 million, or 83%, from $5.3 million for the nine months ended September 30, 2022 to $9.7 million for the nine months ended September 30, 2023.

The increase was primarily due to a $4.5 million increase in professional fees, consisting of a $4.3 million increase in legal fees associated with the Altor/NantCell matter, a $224,201 increase in legal fees associated with patent prosecution, and a $92,921 increase for other professional services such as audit fees and tax advisory fees.

Salaries, benefits and related expenses increased by $170,781, or 8%, from $2.2 million for the nine months ended September 30, 2022 to $2.4 million for the nine months ended September 30, 2023.

The increase is primarily attributable to a $188,224 increase in salaries and wages, a $40,887 increase in expenses for health insurance premium for employee benefits, and a $20,165 increase in payroll tax expense, partially offset by a $94,041 decrease in stock-based compensation expense.

Professional services increased by $4.5 million, or 411%, from $1.1 million for the nine months ended September 30, 2022 to $5.6 million for the nine months ended September 30, 2023.

The $4.5 million increase consists of a $4.3 million increase in legal fees associated with the Altor/NantCell matter, a $224,201 increase for legal fees associated with patent prosecution, and a $92,921 increase in fees associated with other professional services such as audit fees and tax advisory services, partially offset by a $117,492 decrease in fees for consulting and advisory services.

Facilities and office expenses increased by $139,778, or 47%, from $299,595 for the nine months ended September 30, 2022 to $439,373 for the nine months ended September 30, 2023.

This increase was primarily due to a $84,353 increase in IT-related expenses and a $45,222 increase in facilities expenses.

Depreciation allocation to general and administrative expenses increased by $103,970, or 123%, from $84,484 for the nine months ended September 30, 2022 to $188,454 for the nine months ended September 30, 2023.

The increase in the depreciation allocation to general and administrative expenses reflects the Company's acquisition of a property for its new headquarters in the third quarter of 2022.

Other expenses decreased by $561,197, or 37%, from $1.5 million for the nine months ended September 30, 2022 to $943,122 for the nine months ended September 30, 2023.

The decrease is primarily due to a $527,306 decrease in the insurance premiums and a $133,639 decrease in costs for filing, as the shelf registration filing in August 2022 did not recur during the nine months ended September 30, 2023, partially offset by a $115,124 increase in taxes.

Liquidity and Capital Resources

Sources of Liquidity

As of June 30, 2023, our principal source of liquidity was $7.4 million in cash and cash equivalents, a $5.3 million deposit for interest reserve, and $10.0 million held in U.S.

government-backed securities presented in Short-term investments.

Our principal source of liquidity has been $49.2 million in net proceeds from our initial public offering, a $6.5 million bank loan, and a $26.3 million loan for project financing.

For future capital needs, the Company intends to focus our efforts on non-dilutive funding sources.

This includes out-licensing rights to technology or regional markets, third-party collaboration funding, cooperative agreements for clinical trials, or other business development transactions.

If market conditions become more favorable, the Company may raise capital through additional debt or equity financings.

As of September 30, 2023, our principal source of liquidity was $11.2 million in cash and cash equivalents and a $5.3 million deposit for interest reserve.

Since inception, our principal sources of liquidity have been $49.2 million in net proceeds from our initial public offering, a $6.5 million bank loan for the acquisition of a property the Company will use as its new headquarters;

and a $26.3 million loan to finance to renovate our new headquarters.

The Company intends to raise capital through additional debt or equity financings.

In addition, we intend to continue our efforts to enter into business development transactions.

However, if we are not able to obtain financing at adequate levels, we will need to reevaluate its operating plan and may be required to delay the development of some of its products.

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 loan obtained from the Cogent Bank (“Cogent Loan”) and is secured by the building.

As of June 30, 2023, the Company owed $6.5 million on the Cogent Loan and was in compliance with all covenants under the 2022 Loan agreement and related documents.

On April 21, 2023, the Company entered into the 2023 Loan Agreement with Prime Capital Ventures, LLC (“Prime”), pursuant to which Prime shall advance loans to the Company in a principal amount not to exceed $26.3 million with a scheduled maturity of April 20, 2028 (the “Prime Maturity Date”).

A portion of the acquisition cost was funded with a $6.5 million five-year loan obtained from Cogent Bank (the “2022 Loan Agreement”) and is secured by the building.

As of September 30, 2023, the Company owed $6.5 million on the 2022 Loan Agreement and was in compliance with all covenants thereunder.

On April 21, 2023, the Company entered into the 2023 Loan Agreement with Prime Capital Ventures, LLC (“Prime”), pursuant to which Prime will advance loans to the Company in a principal amount not to exceed $26.3 million pursuant to a loan agreement (the “2023 Loan Agreement”) with a scheduled maturity of April 20, 2028 (the “Prime Maturity Date”).

In November 2023, the Company expects to begin to draw down funds under the 2023 Loan Agreement.

We expect to draw on the loan over the next ten months, up to the maximum loan amount of $26.3 million.

Some of the proceeds of the loan will be used to recoup $4.4 million in funds advanced from the Company's operating capital for the building project prior to drawing funds available under the 2023 Loan Agreement.

The Company has the option to terminate the 2023 Loan Agreement prior to the Prime Maturity Date.

The note issued pursuant to the 2023 Loan Agreement bears interest at a fixed per annum rate equal to 7.00%, due monthly in arears on the first day of each month.

The primary use for borrowings under the 2023 Loan Agreement is to obtain the funding required to complete the buildout of the Company's new headquarters, including improved research laboratories, a vivarium, and manufacturing facilities.

The note issued pursuant to the 2023 Loan Agreement bears interest of 7.00% per annum, due monthly in arrears on the first day of each month.

Under the 2023 Loan Agreement, the Company was required to fund a reserve bank account controlled by Prime in the amount of $5.3 million, with the purpose to fund the interest due on outstanding amounts under the 2023 Loan Agreement.

The balance of the reserve account is presented in Deposit for interest reserve in noncurrent assets on the accompanying condensed balance sheet.

As of June 30, 2023, the Company had no borrowings under the 2023 Loan Agreement.

The initial advance under the terms of the 2023 Loan Agreement is contingent upon the Company's receipt of all necessary permits and approvals to begin construction.

On August 10, 2023, we obtained construction permits required to begin the buildout of our new headquarters.

This satisfies the final condition precedent to accessing the $26.3 million line of credit.

The Company incurred $1.8 million in debt issuance costs in connection to with the loan, which will be earned and payable upon the first draw down.

Some of the proceeds of the loan will be used to recoup $3.2 million in funds advanced from the Company's operating capital while awaiting permits.

We intend to repay the Cogent Loan with part of the proceeds from borrowings under the 2023 Loan Agreement.

We will not incur any prepayment penalties as a result of prepayment.

We believe that our cash and cash equivalents and short-term investments as of June 30, 2023 will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months.

As of September 30, 2023, the Company had no borrowings under the 2023 Loan Agreement.

The Company incurred $1.3 million in debt issuance costs in connection with a lender's fee, which is payable in equal installments from the first four draws from the 2023 Loan Agreement.

We intend to repay the 2022 Loan Agreement in six equal installments from the first six draws of the 2023 Loan Agreement.

We will not incur any prepayment penalties as a result of prepayment of the 2022 Loan Agreement.

We believe that our cash and cash equivalents and short-term investments as of September 30, 2023 will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months.

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

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Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures.

Comparison of the Cash Flows for the Six Months Ended June 30, 2022 and June 30, 2023

The following table summarizes our cash flows for the six months ended June 30, 2022 and June 30, 2023:

Six Months Ended

Comparison of the Cash Flows for the Nine Months Ended September 30, 2022 and September 30, 2023

The following table summarizes our cash flows for the nine months ended September 30, 2022 and September 30, 2023:

Nine Months Ended

September 30,

Cash used in operating activities

Cash provided by (used in) investing activities

Cash provided by investing activities

Cash provided by financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Operating Activities

Cash used in operating activities for the six months ended June 30, 2022 consisted primarily of a net loss of $5.6 million, as well as $1.5 million of cash used in operations, resulting from a $1.3 million decrease in accounts payable and other liabilities and a $213,934 increase in accounts receivable.

Cash provided by operations consisted primarily of $1.9 million arising from a decrease in prepaid expenses and other assets and adjustments for noncash charges, including $292,363 for depreciation and amortization and $531,683 for compensation expense related to stock-based compensation.

Cash used in operating activities for the six months ended June 30, 2023 consisted primarily of a net loss of $9.4 million, as well as a deposit $5.3 million used to establish an interest reserve for future interest payments, as required under the terms of the 2023 Loan Agreement.

In addition, an increase in accounts receivable used $289,516 of cash and an increase in accounts payable and other liabilities provided $1.2 million of cash.

There was $881,951 of cash provided by net non-cash adjustments, consisting of $583,180 of cash provided by an adjustment for depreciation and amortization, $522,629 of cash provided by an adjustment for stock-based compensation, partially offset by a $223,440 use of cash for an adjustment for unrealized gains on investments.

Cash used in operating activities for the nine months ended September 30, 2022 consisted primarily of a net loss of $9.5 million, a $222,555 cash decrease arising from an increase accounts receivable, and a $202,979 cash decrease arising from a decrease in accounts payable and other current liabilities.

These uses were partially offset by $1.9 million of cash provided by a decrease in prepaid expenses and other assets and noncash adjustments, consisting of $834,003 for stock-based compensation expense and $456,696 for depreciation and amortization expense.

Cash used in operating activities for the nine months ended September 30, 2023 consisted primarily of a net loss of $14.3 million, as well as a deposit $5.3 million used to establish an interest reserve for future interest payments, as required under the terms of the 2023 Loan Agreement.

In addition, other uses of cash include a $292,383 increase in accounts receivable and a $251,008 increase in prepaid expenses and other current assets, partially offset by cash provided by a $392,802 net increase in accounts payable and other current liabilities.

Further offset to the use of cash resulted from net noncash adjustments of $1.1 million, consisting primarily of $860,634 of cash provided by an adjustment for depreciation and amortization, $742,477 of cash provided by an adjustment for stock-based compensation, reduced by $248,445 of cash used for an adjustment for unrealized gains on investments.

Investing Activities

Cash provided by investing activities for the six months ended June 30, 2022, consisted of $8.0 million of cash provided when short-term investments reached maturity, offset by $36,461 of cash used to purchase equipment.

Cash used by investing activities for the six months ended June 30, 2023, consisted of $1.9 million arising from the purchase of property and equipment.

Cash provided by investing activities for the nine months ended September 30, 2022 consisted of $25.0 million of cash provided when short-term investments reached maturity, partially offset by $10.2 million of cash used to purchase property, plant and equipment.

Cash used by investing activities for the nine months ended September 30, 2023, consisted of $10.0 million of cash provided when short-term investments reached maturity, partially offset by $2.5 million of cash used to purchase equipment.

Financing Activities

During the six months ended June 30, 2022 and 2023, cash provided by financing activities is due to issuance of common stock upon exercise of vested employee stock options.

Cash provided by financing activities for the nine months ended September 30, 2022 resulted primarily from obtaining the Cogent Loan, in the amount of $6.5 million, to provide purchase financing to acquire our new headquarters building.

Cash provided by financing activities for the nine months ended September 30, 2023 resulted from issuance of common stock upon exercise of vested employee stock options, partially offset by a principal repayment, as required under the 2022 Loan Agreement.

Critical Accounting Policies, Significant Judgements and Use of Estimates

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

What changed 10-Q

Item 1. Financial Statements