What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2024-04-01 compared with 2023-03-28 · 12 added, 406 removed, 10 unchanged (98% of the section changed)

Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information and Holders of our Common Stock

Our common stock is traded on The Nasdaq Global Select Market under the symbol “HCWB”.

As of March 27, 2023, 35,886,635 shares of the Company’s common stock were issued and outstanding and were owned by approximately 3,300 holders of record.

Our common stock is traded on The Nasdaq Global Select Market under the symbol “HCWB”.

As of March 15, 2024, 37,823,394 shares of the Company’s common stock were issued and outstanding and were owned by approximately 2,300 holders of record.

The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.

4 unchanged sentences

Payment of future cash dividends, if any, will be at the discretion of the Board after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the Board deems relevant.

Use of Proceeds from Initial Public Offering of Company’s Stock

Recent Sales of Unregistered Securities;

Use of Proceeds from Registered Securities

On July 19, 2021, the SEC declared effective our registration statement on Form S-1 (File No.

333-256510), as amended, filed in connection with our IPO.

333-256510), as amended, filed in connection with our initial public offering (the “IPO”).

Our IPO closed on July 22, 2021, and we issued and sold 7,000,000 shares of common stock at a price to the public of $8.00 per share, for an aggregate amount of $56.0 million.

The net proceeds of the IPO were $49.2 million.

The managing underwriter of the offering was EF Hutton, division of Benchmark Investments, LLC.

There has been no material change in the planned use of proceeds from our IPO from that described in the final prospectus dated July 19, 2021 and filed with the SEC.

The net proceeds of our IPO were $49.2 million, after deducting underwriting discounts and commissions and other offering costs.

The managing underwriter of the IPO was EF Hutton.

None of the underwriting discounts and commissions or offering expenses were incurred or paid, directly or indirectly, to any of our directors or officers or their associates or to persons owning 10% or more of our common stock or to any of our affiliates.

We have used the proceeds of our IPO for advancing our clinical development of our lead product candidates HCW9218 and HCW9302, establishing a manufacturing capability, as described in the final prospectus dated July 19, 2021 and filed with the SEC.

There has been no material change in our use of the net proceeds from the IPO as described in our final prospectus, filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on July 21, 2022, other than the application of $7.8 million of IPO proceeds to our defense in legal matters.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Item 6 [Reserved].

Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes thereto included elsewhere in this Annual Report.

This discussion contains forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions, which are based on the beliefs of our management.

Our actual results could differ materially from those discussed in these forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors”

section of this Annual Report.

Company Overview

HCW Biologics Inc.

is a clinical-stage biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen health span by disrupting the link between chronic, low-grade inflammation and age-related diseases.

We believe age-related, chronic, low-grade inflammation, or “inflammaging,”

is a significant contributing factor to several diseases and conditions, such as cancer, cardiovascular disease, diabetes, neurodegenerative diseases, and autoimmune diseases.

The induction and retention of low-grade inflammation in an aging human body is mainly the result of the accumulation of non-proliferative but metabolically active senescent cells, which can also be caused by persistent activation of protein complexes, known as inflammasomes, in innate immune cells.

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

Our novel approach is to reduce senescent cells and eliminate the pro-inflammatory factors they secrete systemically through multiple pathways.

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

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

The key to the HCWB immunotherapeutic approach is elimination of senescent cells and the pro-inflammatory factors they secrete.

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 eliminate senescence-associated pro-inflammatory factors that function as a senomorphic.

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.

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.

HCW9302 is a preclinical compound.

We are in the process of completing IND-enabling studies and intend to prepare and submit an IND application to the FDA in 2023.

Milestones Reached in 2022 and Goals for 2023

Overview of Accomplishments Related to HCW9218

Key milestones reached as of December 31, 2022:

Completed preclinical work to establish the mechanism of action for HCW9218, granted patent that protects the underlying intellectual property on which HCW9218 is based, initiated two Phase 1/1b clinical trials and established CMC manufacturing.

Clinical Trial to Evaluate HCW9218 in Patients with Advanced Pancreatic Cancer

In October 2021, HCW Biologics was cleared by the FDA to proceed to evaluate HCW9218 in a Phase 1b/2 clinical trial in patients with advanced pancreatic cancer.

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

Patients participating in this study had advanced pancreatic cancer with progressive disease after prior chemotherapies.

No dose-limiting toxicities were reported in this trial.

A preliminary clinical data readout is expected in the first half of 2023.

If patient enrollment continues at the current pace with acceptable side effects, we expect to complete the Phase 1b portion of the study in 2023.

After initial COVID-related delays, this study made rapid progress in 2022.

As of December 31, 2022, there are four activated clinical sites recruiting and screening patients:

The Cancer Research Center at NCI, Washington University in St.

Louis (an NCI-designated Comprehensive Cancer Center), Medical University of South Carolina (an NCI-designated Comprehensive Cancer Center), and HonorHealth Research Institute.

On December 3, 2022, under a CRADA, the National Cancer Institute and HCW Biologics agreed to collaborate to perform a Phase 1b/2 clinical study to evaluate the safety and tolerability of HCW Biologics’

lead product candidate, HCW9218, in patients with advanced/metastatic pancreatic cancer.

The CRADA is entitled, “A Phase 1b/2 Study of HCW9218, a Bifunctional TGF- β

Antagonist/IL-15 Protein Complex, for Advanced Pancreatic Cancer.”

Clinical Trial to Evaluate HCW9218 in Patients with Solid Tumors

In January 2022, the Masonic Cancer Center, University of Minnesota (“UMN”) was cleared by the FDA to proceed to evaluate HCW9218 in a Phase 1 clinical trial in patients with advanced solid tumors with progressive disease after prior chemotherapies.

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

Patients participating in this study had advanced solid tumors with progressive disease after prior chemotherapies, many of whom had been treated with up to four courses of standard-of-care treatments prior to enrolling in the trial.

No dose-limiting toxicities (“DLTs”) were reported in this trial.

We expect to complete this Phase 1 study in the first half of 2023.

One of our 2023 goals is to advance this study and initiate Phase 2 clinical studies in cancer indications, such as ovarian and colorectal cancers.

If we are successful in completing the objectives of the Phase 1 study, we intend to advance at least one Phase 2 study to evaluate HCW9218 in a single cancer indication, such as ovarian cancer, subject to establishing safety and RP2D and applying to the FDA for authorization to proceed with a Phase 2 study.

However, there can be no assurance that we will successfully complete the Phase 1 study or establish safety and RP2D or the FDA will authorize us to initiate our planned clinical trials on a timely basis, or at all.

In the event we do not receive feedback on a timely basis, or we are required to change the design of our clinical protocol or address other feedback, clinical development of our products would be delayed and our costs may increase.

Overview of Accomplishments Related to HCW9302

Key milestones reached as of December 31, 2022:

Granted fundamental patent that protects the underlying intellectual property on which HCW9302 and our TOBI discovery platform are based, progressed IND-enabling activities and published a pivotal scientific paper in a high-impact, peer-reviewed journal.

Scientific Publications and Conferences

In January 2023, a pivotal scientific paper authored by our scientific research team was published in the peer-reviewed journal, Frontiers in Immunology , entitled, “A Novel Interleukin-2-Based Fusion Molecule, HCW9302, Differentially Promotes Regulatory T Cell Expansion to Treat Atherosclerosis in Mice.”

The paper highlights preclinical data from in vitro and in vivo studies demonstrating the potential of HCW9302 as a novel immunotherapeutic with the ability to suppress the progression of atherosclerosis.

The results of our research included in this publication show the potential of HCW9302 in the treatment of age-related, pro-inflammatory diseases.

We have been invited to present a poster at the American Association of Cancer Research to be held from April 14-19, 2023.

Varghese George, one of the Company's scientists, will be presenting a poster entitled, “Bifunctional immunotherapeutic HCW9218 facilitates recruitment of immune cells from tumor draining lymph nodes to promote antitumor activity and enhance checkpoint blockade efficacy in solid tumors.”

Trends and Uncertainties

Inflationary Cost Environment, Banking Crisis, Supply Chain Disruption and the Macroeconomic Environment

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

These headwinds, specifically the supply chain disruptions, have adversely impacted our ability to procure certain services and materials, which in some cases impacts the cost and timing of clinical trials and IND-enabling activities.

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

Further, rising interest rates would also increase borrowing costs to the extent that the Company takes on any additional debt.

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

However, the extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable.

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 $19.5 million in a federal money market fund (the “Fund”) with an investment objective is 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.

For discussion of risks related to potential impacts of supply chain, inflation, geopolitical and macroeconomic challenges on our operations, business results and financial condition, see “Part II, Item 1A.

Risk Factors”

in this Annual Report.

The spread of COVID-19, including the resurgence of cases related to the spread of new variants, has caused significant volatility in the U.S.

and international markets since March 2020.

The continuing direct and indirect impacts of the pandemic are significant and broad-based, including supply chain disruptions, and continue to represent business and financial risks.

As such, the Company is continually coordinating with third-party contract manufacturing organizations (“CMOs”), service providers and vendors that constitute the Company’s supply chain, with respect to risks and mitigating actions.

Future developments in these and other areas present material uncertainty and risk with respect to our clinical trials, IND-enabling activities, buildout of our new headquarters, business, financial condition, and results of operations.

For discussion of risks related to the lingering effects of the COVID-19 pandemic, see “Part II, Item 1A.

Risk Factors”

in this Annual Report.

Components of Results of Operations

We have no products approved for commercial sale and have not generated any revenue from commercial product sales of internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases.

The principal source of our revenues to date have been generated from our Wugen License and Master Services Agreement (the “MSA”) with Wugen.

See Note 1 to our audited financial statements included elsewhere in this Annual Report for these definitions and more information.

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

Consideration under our contract included a nonrefundable upfront payment, development, regulatory and commercial milestones, and royalties based on net sales of approved products.

Additionally, HCW Biologics retained manufacturing rights and has agreed to provide Wugen with clinical and research grade materials for clinical development and commercialization of licensed products under separate agreements.

We assessed which activities in the Wugen License should be considered distinct performance obligations that should be accounted for separately.

We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the Wugen License.

Performance obligations relating to the granting a license and delivery of licensed product and R&D know-how were satisfied when transferred upon the execution of the Wugen License on December 24, 2020.

The Company recognized revenue for the related consideration at a point in time.

The revenue recognized from a transaction to supply clinical and research grade materials entered into under the MSA and covered by a Statement of Work (“SOW”), represents one performance obligation that is satisfied over time.

The Company recognizes revenue generated for supply of material for clinical development using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company’s progress toward completion.

Operating Expenses

Our operating expenses are reported as research and development expenses and general and administrative expenses.

Research and Development

Our research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

Employee-related expenses, including salaries, benefits, and stock-based compensation expense;

Expenses related to manufacturing and materials, consisting primarily of expenses incurred primarily in connection with CMOs, which produce cGMP materials for clinical trials on our behalf;

Expenses associated with preclinical activities, including research and development and other IND-enabling activities;

Expenses incurred in connection with clinical trials;

Other expenses, such as facilities-related expenses, direct depreciation costs for capitalized scientific equipment, and allocation for overhead.

We expense research and development costs as they are incurred.

Costs for contract manufacturing are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors.

Payments for these activities are based on the terms of the agreement, and the pattern of payments for goods and services will change depending on the material.

Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed.

We expect research and development expenses to increase substantially for the foreseeable future as we continue the development of our product candidates.

We cannot reasonably determine the nature, timing, and costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates.

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

See “Risk Factors -- Risks Related to the Development and Clinical Testing of Our Product Candidates,”

elsewhere in this Annual Report for a discussion of some of the risks and uncertainties associated with the development and commercialization of our product candidates.

Any changes in the outcome of any of these risks and uncertainties with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates.

For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses, including salaries, related benefits, and stock-based compensation expense for employees in the executive, legal, finance and accounting, human resources, and other administrative functions.

General and administrative expenses also include third-party costs such as insurance costs, fees for professional services, such as legal, auditing and tax services, facilities administrative costs, and other expenses.

During the period ended December 31, 2022, Altor BioScience, LLC and NantCell, Inc., or Altor/NantCell, a former employer of Dr.

Wong, our Founder and Chief Executive Officer, initiated an arbitration against Dr.

Wong in California.

On December 23, 2022, a lawsuit was filed by Altor/NantCell against us in federal court alleging misappropriation of trade secrets under state and federal laws, inducement of breach of contract and breach of fiduciary duty, among other claims against us.

See “Part I, Item 3.

Legal Proceedings”

in this Annual Report for more information.

In the year ended December 31, 2022, we incurred legal expenses on our own behalf and on behalf of Dr.

Wong, in compliance with the indemnification agreement with Dr.

Wong as an officer and director of the Company.

In addition, Altor/NantCell has advancement obligations for claims brought against Dr.

Wong, thus legal expenses incurred by Dr.

Wong in connection with his arbitration will be advanced by Altor/NantCell;

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

During the year ending December 31, 2023, we expect to incur material costs and expenses in connection with defending the Company in the foregoing legal matters.

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.

Interest and Other Income, Net

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

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

On August 15, 2022, the Company entered into a short-term, market-rate lease with the former owner of the building purchased by the Company on the same date.

The lease provides the former owner (tenant) 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.

The lease may be terminated at any time by the tenant with 60 days’

written notice.

During the year ended December 31, 2022, the Company reported $90,347 in rental income, which is included within Interest and other income (loss), net in the statement of operation for the year ended December 31, 2022 included elsewhere in this Annual Report.

Results of Operations

The following table summarizes our results of operations for the years ended December 31, 2021 and 2022:

Cost of revenues

Operating expenses:

Research and development

General and administrative

Total operating expenses

Loss from operations

Interest expense

In the year ended December 31, 2021, the Company did not recognize any revenue.

As of December 31, 2021, we recognized $1.8 million of deferred revenue from the sale of clinical and research grade materials to our licensee, Wugen, included within Accrued liabilities and other current liabilities on the balance sheet included in the audited financial statements.

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

However, as of December 31, 2021, the Company did not finalize statements of work, or SOWs, for these transactions which specify the performance obligations required to be completed by the Company for supplies ordered by Wugen.

Thus, a contract did not exist as of December 31, 2021.

In the year ended December 31, 2022, the Company recognized $6.7 million of revenue, as a result of the sale of research and clinical grade materials to Wugen under the terms of the Wugen License.

These revenues included $1.8 million of revenue that was deferred at December 31, 2021.

Since 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, the Company determined all requirements for revenue recognition under Topic 606 were met for these transactions.

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

Research and Development Expenses

The following table summarizes our research and development expenses for the years ended December 31, 2021 and 2022:

Salaries, benefits and related expenses

Manufacturing and materials

Preclinical expenses

Clinical trials

Other expenses

Total research and development expenses

Research and development expenses increased by $1.1 million, or 14%, from $8.2 million for the year ended December 31, 2021 to $9.3 million for the year ended December 31, 2022.

This increase was primarily attributable to increased expenses for clinical trials, expenses associated with IND-enabling, preclinical activities, and depreciation expense.

Salaries, benefits and related expenses increased by $321,169, or 11%, from $2.8 million for the year ended December 31, 2021 to $3.1 million for the year ended December 31, 2022.

This increase was primarily attributable to a $348,008 increase in salaries and wages, which was attributable to an increase of $152,939 arising from the absence of any tax credits in 2022 as compared with 2021.

This was due to the Company exceeding the revenue threshold to qualify for tax credits.

Another cause for an increase in salaries, benefits and related expenses was the increase of $115,824 for health insurance and other benefits in the year ended December 31, 2022, compared with 2021.

For 2022, the implementation of a new performance-based bonus program also resulted in increased costs for Research and Development salaries, benefits and related expenses of $113,136 in performance bonuses, as a result of achieving goals related to patient enrollment and dose escalation for Phase 1/1b clinical trials to evaluate HCW9218 in cancer indications.

These increases were partially offset by a reimbursement from Wugen for certain expenses incurred under the terms of the Wugen License that was $500,000 in the year ended December 31, 2022, compared to $240,000 for the same period in 2021.

Manufacturing and materials expenses decreased by $61,734, or 2%, from $2.5 million for the year ended December 31, 2021 to $2.4 million for the year ended December 31, 2022.

Manufacturing and materials expenses in the year ended December 31, 2021 resulted from activities related to establishing master cell banks for several molecules, effecting a technology transfer to our contract manufacturer required for internally-developed manufacturing processes, and successfully completing multiple cGMP production runs for our molecules.

For HCW9218, we successfully completed a cGMP manufacturing run and initiated the fill/finish process and testing for product release.

For HCW9302, we initiated the master cell bank production and completed a scale-up run of cGMP-grade material.

In the year ended December 31, 2022, costs were primarily attributable to a 1000L GMP run for HCW9218 and completion of a 200L cGMP run of HCW9302, including finalizing manufacturing reports, fill and finish activities.

Expenses associated with preclinical activities increased by $171,147 or 9%, from $2.0 million for the year ended December 31, 2021 to $2.2 million for the year ended December 31, 2022.

This increase was attributable to higher costs for completing toxicology studies related to IND-enabling activities.

In year ended December 30, 2021, expenses were related primarily to the cost of toxicology studies and experimental materials for IND-enabling activities required to prepare our IND for clinical trials to evaluate HCW9218 in difficult-to-treat solid tumor cancers.

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

Expenses associated with clinical trials including professional fees related to regulatory filings, increased by $546,545 or 219%, from $249,204 for the year ended December 31, 2021 to $795,749 for the year ended December 31, 2022.

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

HCW9218, our lead drug candidate, entered clinical stage in the first half of 2022, upon the initiation of an Investigator-sponsored Phase 1 clinical trial at the Masonic Cancer Center, University of Minnesota for a dose escalation study of HCW9218 as a monotherapy in chemo-refractory/chemo-resistant solid tumors, such as breast, ovarian, prostate and colorectal cancers.

We intend to complete this study in the first half of 2023.

A Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in advanced pancreatic cancer was initiated in October 2022, when HonorHealth Research Institute dosed the first patient participating in this trial.

As of December 31, 2022, there were four clinical sites opened.

For the pancreatic cancer study, we plan to enroll up to 24 patients.

We intend to complete the Phase 1b portion of this study in 2023.

Other expenses, which include overhead allocations, increased by $187,614, or 31%, from $608,166 for the year ended December 31, 2021 to $795,780 for the year ended December 31, 2022.

An increase of $88,311 in allocated depreciation expense is attributable to the depreciation of the building acquired on August 15, 2022.

The Company applied the results of a cost segregation study to record the assets acquired, resulting in useful lives that ranged from five years to 39 years.

An increase of $63,546 in travel expense and conference fees reflects the Company's more frequent participation in major industry conferences to present preliminary

first-in-human clinical data.

Higher occupancy costs and repairs and maintenance expenses resulted in an increase of $35,637 in other expenses for the year ended December 31, 2022.

General and Administrative Expenses

The following table summarizes our general and administrative expense for the years ended December 31, 2021 and 2022:

Salaries, benefits and related expenses

Professional services

Facilities and office expenses

Other expenses

Total general and administrative expenses

General and administrative expenses increased by $3.1 million, or 60%, from $5.2 million for the year ended December 31, 2021 to $8.3 million for the year ended December 31, 2022.

The increase was primarily due to an increase of $722,000 related to compensation expense associated with equity awards to the CEO, executives and directors upon completion of the IPO, an increase of $1.1 million in corporate legal fees and an increase of $531,468 for insurance coverage.

Salaries, benefits and related expenses increased by $1.1 million, or 44%, from $2.3 million for the year ended December 31, 2021 to $3.4 million for the year ended December 31, 2022.

The increase was primarily due to an increase of $722,000 related to equity awards granted to officers and executives, and an increase of $108,649 for Board compensation under our non-employee director compensation program put in place post-IPO.

For 2022, the Company implemented a performance-based bonus program for all employees, under which officers were awarded $350,000.

Professional services increased by $1.1 million, or 88%, from $1.3 million for the year ended December 31, 2021 to $2.4 million for the year ended December 31, 2022, primarily due to a $1.1 million increase for fees for legal services, including $1.0 million for legal fees arising from our legal proceedings with Altor/NantCell and related indemnification of our Founder and Chief Executive Officer in his arbitration with Altor/NantCell, a portion of which will be advanced by Altor/NantCell in compliance with its advancement obligation to Dr.

Fees increased for professional services other than legal advisors, such as auditors and tax advisors, by $87,033 for the year ended December 31, 2022 versus the comparable period in 2021.

Other expenses increased by $731,777, or 76%, from $1.0 million for the year ended December 31, 2021 to $1.7 million for the year ended December 31, 2022.

The increase is primarily due to an increase of $531,468 in insurance costs associated with being a public company, expensing $144,870 of offering costs related to our shelf registration statement on Form S-3 and an increase of $176,480 in Delaware franchise taxes.

Interest and Other Income (Loss), Net

Interest and other income (loss), net decreased by $327,291, or 65%, from $505,366 for the year ended December 31, 2021 to $178,075 for the year ended December 31, 2022.

The decrease is primarily due to the forgiveness of the SBA Paycheck Protection Loan, including accrued interest, in 2021 that did not recur in 2022.

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2022, our principal source of liquidity was $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.

These funds were provided primarily from the $49.2 million of net proceeds from our IPO and to a lesser extent the Wugen License.

We expect our principal sources of liquidity will continue to be our cash and cash equivalents, out-licensing agreements, debt financings and any additional capital we may obtain through equity offerings.

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, secured by the

The remainder of the purchase price was funded with cash.

Amounts borrowed under the term facility have a fixed interest rate of 5.75%, with interest only payments required for the first year and 25-year amortization thereafter.

There is no prepayment penalty.

As of December 31, 2022, a balance of $6.5 million remains due for this obligation, $6.4 million of which is classified as a noncurrent liability included in Debt, net in the balance sheet included in the audited financial statements.

As of December 31, 2022, the Company was in compliance with all covenants under the loan agreement and related documents.

In August 2022, we filed a shelf registration statement on Form S-3 with the SEC (File No.

333-266991), which upon being declared effective, allowed us to offer up to $100.0 million of securities from time to time in one or more public offerings, including up to $15.5 million of shares of our common stock which we may sell, subject to certain limitations, pursuant to a sales agreement dated August 19, 2022 with Jones Trading Institutional Services LLC.

We believe that our cash and cash equivalents and short-term investments as of December 31, 2022 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.

Because of the numerous risks and uncertainties associated with the clinical development and commercialization of immunotherapeutics, we are unable to estimate the exact amount of capital requirements to pursue these activities.

Our funding requirements will depend on many factors, including, but not limited to:

timing, progress, costs, and results of our ongoing preclinical studies and clinical trials of our immunotherapeutic products;

impact of COVID-19 on the timing and progress of our IND-enabling activities, clinical trials and our ability to identify and enroll patients;

costs, timing, and outcome of regulatory review of our product candidates;

number of trials required for regulatory approval;

whether we enter into any collaboration or co-development agreements and the terms of such agreements;

whether we raise additional funding through bank loan facilities, other debt arrangements, out-licensing or joint ventures, cooperative agreements or strategic collaborations;

effect of competing technology and market developments;

cost of maintaining, expanding, and enforcing our intellectual property rights;

impact of litigation, regulatory inquiries, or investigations, as well as costs to indemnify our officers and directors against third-party claims related to our patents and other intellectual property;

cost and timing of buildout of new headquarters, including risks of cost overruns and delays, and ability to obtain additional financing, if needed;

costs and timing of future commercialization activities, including product manufacturing, marketing, sales, and distribution, for any of our product candidates for which we receive regulatory approval.

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

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

Summary of Statements of Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2021 and 2022:

Cash used in operating activities

Cash (used in) provided by investing activities

Cash provided by financing activities

Net increase in cash and cash equivalents

Operating Activities

Net cash used in operating activities was $11.0 million for the year ended December 31, 2021 and $10.4 million for the year ended December 31, 2022.

Cash used in operating activities for the year ended December 31, 2021 consisted primarily of net loss for the period of $12.9 million, a gain on extinguishment of debt of $567,311, and an increase in Prepaid expenses and other assets of $2.8 million, primarily offset by a decrease of $2.4 million in Accounts receivable, an increase of $1.9 million in Accounts payable and other liabilities, and $595,765 of noncash adjustments consisting primarily of an adjustment for depreciation and amortization expense.

Cash used in operating activities for the year ended December 31, 2022 consisted primarily of a net loss of $14.9 million, $284,695 cash used arising from an increase in accounts receivable, and $128,246 cash used by a decrease in a lease liability.

These uses were partially offset primarily by a $2.5 million cash increase arising from a decrease in prepaid expenses and other assets, a $418,208 cash increase arising from an increase in accounts payable and other liabilities, and adjustments for noncash expenses of $2.0 million, consisting of $1.1 million for stock-based compensation expense, $717,854 for depreciation and amortization expense, and $186,370 for net unrealized loss on investments.

Investing Activities

For the year ended December 31, 2021, cash used in investing activities reflects the purchase of U.S.

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

As of December 31, 2021, we held $34.9 million in U.S.

government-backed securities.

For the year ended December 31, 2022, cash provided by investing activities was $14.7 million, consisting of proceeds for maturity of short-term investments of $25.0 million, offset by $10.0 million of cash used to purchase our new headquarters.

Financing Activities

For the year ended December 31, 2021, cash provided by financing activities was $49.3 million, consisting primarily of net proceeds of $49.2 million from our IPO.

For the year ended December 31, 2022, cash provided by financing activities was $6.3 million, consisting primarily of net proceeds of issuance of debt reflecting the $6.5 million loan used to fund the purchase of the Company's new headquarters.

Contractual Obligations and Commitments

As of December 31, 2022, we had $200,015 of obligations for the 14 months remaining in the lease terms for a non-cancellable operating lease agreement related to our facilities in Miramar, Florida.

On February 25, 2022, HCW Biologics was assigned all rights, title, and interest in the primary lease which underlies the sublease.

Effective March 1, 2022, we entered into a lease extension for our current location for a period of two years, ending February 29, 2024.

The Company has commitments with a third-party manufacturing organization to supply us with clinical grade materials.

As of December 31, 2022, we are under contract for obligations of $406,000 that we expect to pay during 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.

In the normal course of business, we enter into contracts for non-clinical studies, preclinical testing, and other services and products.

These contracts generally provide for termination following a certain period after notice and therefore we believe that our non-cancellable obligations under these agreements are not material.

Cogent Loan Agreement

On August 15, 2022, we entered into a loan and security agreement with Cogent Bank to partially fund our purchase of the property that will become our new headquarters.

The agreement provides for a term loan of up to $6.5 million.

Amounts outstanding on the term loan will accrue interest at bearing interest at a rate per annum equal to 5.75%.

We are obligated to make interest-only payments on the term loan from September 2022 through August 2023 and principal and interest payments in 47 equal monthly installments, based on a 25-year maturity schedule, commencing September 15, 2023 followed by one final balloon payment of all

remaining principal, interest and fees due on the maturity date of August 15, 2027.

Our obligations under the agreement are secured by, among other things, a mortgage on our new corporate headquarters and related real property.

As of December 31, 2022, $6.5 million was outstanding under the term loan and we were in compliance with all loan covenants.

Critical Accounting Policies, Significant Judgements and Use of Estimates

The audited financial statements included elsewhere in this Annual Report are prepared in conformity with accounting principles generally accepted in the United States (“U.S.

GAAP”), which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in the periods presented.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources.

We believe the accounting estimates employed are appropriate and the resulting balances are reasonable;

however, due to the inherent uncertainties in developing estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods.

Refer to Note 1 to our audited financial statements included elsewhere in this Annual Report for our significant accounting policies related to our critical accounting estimates.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgements and estimates.

Revenue Recognition

We recognize revenue under the guidance of Topic 606.

To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, we perform the following five steps:

(i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation.

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer.

If all conditions are not met for revenue recognition, the Company recognizes deferred revenue.

The Company’s policy is to recognize deferred revenue only to the extent product release occurred after meeting specification required, product is shipped, and cash payment is received.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between fair value measurements based on market data (observable inputs), and those based on our own assumptions (unobservable inputs).

This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:

Observable inputs such as quoted prices in active markets;

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

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

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

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

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

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

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

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

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

We assess the investment each reporting period to determine if

an impairment has occurred.

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

Stock-based Compensation

As described in Note 1 and Note 10 to our audited financial statements included elsewhere in this Annual Report, we maintain a stock-based compensation plan as a long-term incentive for employees, non-employees, and directors.

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

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

We measure our stock-based awards granted to employees and directors based on the estimated fair value of the option on the date of grant (grant date fair value) and recognize compensation expense over the vesting period.

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

Forfeitures are accounted for as they occur.

We estimate grant date fair value using the Black-Scholes option-pricing model.

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

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

These assumptions include, but are not limited to:

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's 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 —Since there is no trading history for our common stock, the expected volatility was estimated based on the historical equity volatility for comparable publicly traded biotechnology companies.

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

Risk-free interest rate —The risk-free interest rate is based on the U.S.

Treasury Bond in effect at the time of grant for periods corresponding with the expected term of the exit event.

Dividend yield —The expected dividend yield is 0% because the Company has not historically paid, and does not expect, for the foreseeable future, to pay a dividend on its common stock.

Determination of the Fair Value of Our Common Stock

Until July 19, 2021 when our IPO was effective, there was no public market for our common stock historically.

Prior to this offering, our Board considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, which may be as a date later than the most recent third-party valuation date, including:

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

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

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

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

our stage of development and commercialization and our business strategy;

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

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

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

the likelihood of achieving a liquidity event, such as an IPO, or a sale of our company considering prevailing market conditions;

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

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

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

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

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

Now that we have completed our IPO, our Board determines the fair value of each share of underlying common stock based on its closing price as reported on the date of grant according to the quoted market price on the primary stock exchange on which our common stock is traded.

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

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

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

As of December 31, 2021 and 2022, we had available federal net operating loss (“NOL”) carryforwards of $26.1 million and $31.3 million, respectively.

We also had 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 carryforward indefinitely.

The federal NOLs are available to offset 80% of taxable income for state taxes for tax years starting after 2020.

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

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

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

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

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

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

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

Recent Accounting Pronouncements

See Note 1 to our audited financial statements included elsewhere in this Annual Report for more information about recent accounting pronouncements.

Emerging Growth Company and Smaller Reporting Status

As an emerging growth company, or EGC, under the JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies.

Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited financial statements in a registration statement for an initial public offering, or IPO, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements.

We may remain classified as an EGC until the end of the fiscal year until December 31, 2026, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1.235 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year.

We also would cease to be an EGC if we issue more than $1 billion of non-convertible debt over a three-year period.

We are also a “smaller reporting company,”

as defined in Rule 12b-2 under the Exchange Act.

Similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations, such as an ability to provide simplified executive compensation information and only two years of audited financial statements in an annual report on Form 10-K, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

Item 7A Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company, as defined by Rule 12b-2 under the Exchange Act and are not required to provide the information under this item.

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-K

Item 5. Market for Registrant’s Common Equity