HCW Biologics Inc. 10-K/A

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 proinflammatory proteins and in many cases interact to drive senescence, and thus, inflammaging. Our novel approach is to reduce senescent cells and eliminate the proinflammatory 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 proinflammatory 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 proinflammatory factors they secrete. Our lead product candidates address the two primary processes that promote chronic inflammation, as explained below: HCW9218. 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 proinflammatory factors that function as a senomorphic. HCW9218 is the basis for our cancer program. HCW9302. 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. HCW9302 is the basis for our autoimmune program. Business Highlights Financing The Company completed the following transactions with the purpose of raising funds required to launch Phase 2 clinical studies to evaluate HCW9218 in ovarian and pancreatic cancer, continue research on expanded indications beyond cancer for HCW9218, and begin the clinical development of HCW9302: • On February 20, 2024, we sold an aggregate of 1,785,718 shares of our common stock to certain of our officers and directors, at a purchase price of $1.40 per share, for an aggregate purchase price of $2.5 million. • As of March 31, 2024, the Company issued $2.0 million of senior secured notes. Investors included officers and a member of the Board of Directors, as well as other investors. On January 10, 2024, we exercised our right to terminate the credit agreement (the “Credit Agreement”), dated April 21, 2023 (“Closing Date”), between the Company and Prime Capital Ventures, LLC (the “Lender”). We had no borrowings under the Credit Agreement. On March 6, 2024, the Lender defaulted on its obligation to refund $5.3 million that we funded on the Closing Date to establish an interest reserve account. Actions have been taken that would benefit the creditors who have terminated their credit agreements and similarly sought to recover funds paid for an interest reserve, including receivership and legal remedies. Given the limited success that these efforts have had to date for the recovery of funds for creditors, the Company recognized a reserve for a credit loss for the full amount of $5.3 million as of December 31, 2023, which is a noncash adjustment in the accompanying statements of cash flow, and an operating cost presented in the accompanying statements of operations. However, we intend to pursue all available remedies to recover these funds, including legal actions, receivership and insurance. 74 As of December 31, 2023, we held $3.6 million of cash and cash equivalents and there was substantial doubt about our ability to continue as a going concern for at least 12 months from the issuance date of the financial statements included elsewhere in this Annual Report. Since that time, we have raised $4.5 million of financing, consisting of funds received from a private placement and issuance of senior secured notes. We continue with other fundraising efforts that we are targeting to complete in the next three months. Under the guidance of Topic 205-40 for going concern assessment, we evaluated whether we mitigated substantial doubt over our ability to remain a going concern after considering the additional capital raised as of March 31, 2024. We concluded that the additional financings are not sufficient to overcome substantial doubt in our ability to continue as a going concern as of December 31, 2023. The Company continues to pursue its financing plan, and in the meantime has taken steps to reduce costs. We expect our principal sources of liquidity will continue to be our cash and cash equivalents, various non-dilutive financings such as debt and out-licensing agreements for non-core assets, as well as equity financings. Our plans include other financings which we are targeting to complete in the next three months. However, if we are not successful in raising additional capital, substantial doubt over whether the Company will be able to continue to operate as a going concern will remain and we may have to curtail or cease operations. Clinical Development • The Phase 1 clinical trial to evaluate HCW9218 in solid tumors and the Phase 1b clinical trial to evaluate HCW9218 in pancreatic cancer were completed in February 2024. In the Phase 1 study, over 70% of patients with ovarian cancer (5/7) showed evidence of stable disease. In the Phase 1b study, 13% (2/15) of patients who participated in the study showed evidence of stable disease. The studies met the primary objective to determine a RP2D. • In February 2024, we entered into an agreement with UPMC to conduct an Investigator-sponsored Phase 2 clinical trial to evaluate HCW9218 in patients with metastatic advanced stage ovarian cancer in combination with neoadjuvant chemotherapy. Patient enrollment is expected to begin in the first half of 2024. • In the first half of 2024, we expect to initiate a randomized Phase 2 clinical trial with NCI, operating under our existing CRADA, to evaluate HCW9218 in the treatment of advanced pancreatic cancer in combination with standard-of-care chemotherapy. • In the coming year, we are considering expanding our clinical studies to other age-related indications beyond cancer, some of which may be secondary endpoints of studies in cancer indications. For example, we are currently evaluating a Phase 2 clinical studies in skin cancer which could give us an opportunity to evaluate HCW9218 in the treatment of senile lentigo, the age-related disease that is characterized by benign, darkened spots on the skin, as a secondary endpoint of the cancer study. • In the coming year, we intend to have our second lead product candidate, HCW9302, enter the clinical stage of development. We are preparing an IND application to evaluate HCW9302 in an autoimmune disease, which we plan to submit in the first half of 2024. There can be no assurance that 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. Scientific Publications and Conferences in 2023 • In April 2023, 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”, was presented at the 2023 Annual Meeting of the American Association of Cancer Research. • In May 2023, a pivotal scientific paper authored by our scientific research team was published in the peer-reviewed journal, Aging Cell , entitled, “Immunotherapeutic Approach to Reduce Senescent Cells and Alleviate Senescence-Associated Secretory Phenotype in Mice.” • In November 2023, there was a preliminary human data readout at the 38th Annual Meeting of the Society for Immunotherapy of Cancer conference, from the Phase 1 clinical trial to evaluate HCW9218 in patients with chemo-refractory/chemo-resistant solid tumors. 75 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, the war in the Middle East, China-Taiwan relations, 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, we have been impacted by inflation when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Further, rising interest rates would also increase borrowing costs to the extent that the Company takes on any additional debt. The Company uses a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines. However, the extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable. For discussion of risks related to potential impacts of supply chain, inflation, geopolitical and macroeconomic challenges on our operations, business results and financial condition, see Item 1A. “Risk Factors” in this Annual Report. Components of Results of Operations Revenues We have no products approved for commercial sale and have not generated any revenue from commercial product sales of internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases. The principal source of our revenues to date have been generated from our Wugen License and 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 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; and 76 • 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/NantCell, a former employer of Dr. Hing C. Wong, our Founder and Chief Executive Officer, initiated legal proceedings against Dr. Wong and the Company. On April 26, 2023, the parties stipulated that Altor/NantCell’s action against the Company would be consolidated with the Altor/NantCell arbitration demand against Dr. Wong. On April 27, 2023, the U.S. District Court for the Southern District of Florida (the “Court”) with jurisdiction over lawsuit against the Company approved the parties’ stipulation and ordered the parties to arbitration. On May 1, 2023, Altor/NantCell filed a demand against the Company before JAMS. On May 3, 2023, Altor/NantCell dismissed the federal court action without prejudice and the Court ordered the case dismissed without prejudice and closed the case. Altor/NantCell’s proceeding against the Company is now proceeding in arbitration before JAMS, with an arbitration hearing scheduled for May 20, 2024. In connection with claims brought against Dr. Wong, Altor/NantCell has advancement obligations to him for claims brought against him and is currently advancing half of Dr. Wong’s legal fees while the Company advances the other half of Dr. Wong’s legal fees; however, Altor/NantCell is seeking reimbursement of all the legal fees and expenses it has advanced to Dr. Wong. The Company also has incurred legal expenses on its own behalf in the period ended December 31, 2023, and we expect to continue to incur material costs and expenses in connection with defending the Company in the foregoing legal matters during the first half of 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 Interest expense include interest paid on debt. Other Income, Net 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, and other income and expenses related to non-operating activities. 77 Results of Operations The following table summarizes our results of operations for the years ended December 31, 2022 and 2023: Years Ended December 31, 2022 2023 Revenues: Revenues $ 6,722,090 $ 2,841,794 Cost of revenues (4,135,712 ) (2,281,434 ) Net revenues 2,586,378 560,360 Operating expenses: Research and development 9,338,365 7,676,316 General and administrative 8,326,791 13,351,204 Reserve for credit losses — 5,250,000 Total operating expenses 17,665,156 26,277,520 Loss from operations (15,078,778 ) (25,717,160 ) Interest expense (126,660 ) (283,042 ) Other (expense) income, net 304,735 1,005,925 Net loss $ (14,900,703 ) $ (24,994,277 ) Revenue In the year ended December 31, 2022, we recognized $6.7 million of revenue and cost of revenues of $4.1 million. Revenues were derived exclusively from the sale of licensed molecules to our licensee, Wugen. The licensed molecules are one of the inputs for manufacturing Wugen’s products. Revenues included $1.8 million of revenue that was deferred at December 31, 2021. During 2022, we entered into SOWs with Wugen for each of the then-current and historical purchases of clinical and research grade materials under the MSA, upon which we determined all requirements for revenue recognition under Topic 606 were met for these transactions for the year ended December 31, 2022. There were no deferred revenues as of December 31, 2022. In the year ended December 31, 2023, we recognized $2.8 million of revenue and cost of revenues of $2.3 million. Revenues were derived exclusively from the sale of licensed molecules to Wugen. Wugen limited its purchases in 2023, due primarily to changes in its clinical development program and delays in ramping up its manufacturing process. There were no deferred revenues as of December 31, 2023. Research and Development Expenses The following table summarizes our research and development expenses for the years ended December 31, 2022 and 2023: Years Ended December 31, 2022 2023 $ Change % Change Salaries, benefits and related expenses $ 3,146,472 $ 2,940,979 $ (205,493 ) (7 )% Manufacturing and materials 2,421,953 1,280,351 (1,141,602 ) (47 )% Preclinical expenses 2,178,411 1,607,601 (570,810 ) (26 )% Clinical trials 795,749 1,059,731 263,982 33 % Other expenses 795,780 787,654 (8,126 ) (1 )% Total research and development expenses $ 9,338,365 $ 7,676,316 $ (1,662,049 ) (18 )% Research and development expenses decreased by $1.7 million, or 18%, from $9.4 million for the year ended December 31, 2022 to $7.7 million for the year ended December 31, 2023. This decrease was primarily attributable to decreased expenses for manufacturing and materials, preclinical expenses and performance-based bonuses. Salaries, benefits and related expenses decreased by $205,493, or 7%, from $3.1 million for the year ended December 31, 2022 to $2.9 million for the year ended December 31, 2023. This decrease was primarily attributable to decreases of $185,651 in performance-based bonuses and $115,200 for allocation of costs from salaries, benefits and related expenses to cost of goods sold. 78 These decreases were partially offset by increases of $43,970 for health insurance and other benefits and $29,640 for payroll and withholding taxes. Manufacturing and materials expenses decreased by $1.2 million, or 47%, from $2.4 million for the year ended December 31, 2022 to $1.3 million for the year ended December 31, 2023. In the year ended December 31, 2022, costs were primarily attributable to a 1,000 L GMP run for HCW9218 and completion of a 200 L cGMP run of HCW9302, including finalizing manufacturing reports, fill and finish activities. In the year ended December 31, 2023, the nature of manufacturing activities changed, as we completed a major manufacturing run for our clinical-stage molecules, HCW9218. For the year ended December 31, 2023, the costs we incurred were primarily for production activities associated with the master cell bank characterization for the high-expressing version of HCW9101 and ancillary activities such as shipping, insurance and storage. Expenses associated with preclinical activities decreased by $570,810 or 26%, from $2.2 million for the year ended December 31, 2022 to $1.6 million for the year ended December 31, 2023. This decrease was primarily attributable to a decline in costs for completing toxicology studies related to IND-enabling activities. In the year ended December 31, 2022, expenses were related primarily to the cost of toxicology studies and experimental materials in connection with IND-enabling activities required to prepare our IND application to the FDA for permission to conduct a Phase 1b/2 clinical trial to evaluate HCW9302 in an autoimmune indication, alopecia areata. In the year ended December 31, 2023, toxicology and other IND-enabling studies were winding down, and we began the process of preparing the IND for submission, which we intend to submit in the first half of 2024. We experienced delays in completing the toxicology studies, as the service provider we engaged had a large backlog of projects due to the government-mandated shutdown during COVID-19 outbreaks. Expenses associated with clinical trials including professional fees related to regulatory filings, increased by $263,982, or 33%, from $795,749 for the year ended December 31, 2022 to $1.1 million for the year ended December 31, 2023. We anticipate expenses related to clinical activities will increase substantially in the future, as we enter Phase 2 clinical trials to evaluate HCW9218 in ovarian and pancreatic cancer, as well as other indications. HCW9218 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 to evaluate HCW218 in chemo-refractory/chemo-resistant solid tumors, such as breast, ovarian, prostate and colorectal cancers. A Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in advanced pancreatic cancer initiated in October 2022. Both of these studies completed patient enrollment, dosing and the safety-evaluation period in February 2024. Other expenses, which include overhead allocations, decreased by $8,126, or 1%, from $795,780 for the year ended December 31, 2022 to $787,654 for the year ended December 31, 2023. This decrease is primarily attributable to a decrease in travel and travel-related expenses. General and Administrative Expenses The following table summarizes our general and administrative expense for the years ended December 31, 2022 and 2023: Years Ended December 31, 2022 2023 $ Change % Change Salaries, benefits and related expenses $ 3,379,264 $ 3,216,860 $ (162,404 ) (5 )% Professional services 2,374,526 7,829,568 5,455,042 230 % Facilities and office expenses 408,562 634,080 225,518 55 % Depreciation 338,458 266,763 (71,695 ) (21 )% Rent and occupancy expense 132,739 156,807 24,068 18 % Other expenses 1,693,242 1,247,126 (446,116 ) (26 )% Total general and administrative expenses $ 8,326,791 $ 13,351,204 $ 5,024,413 60 % General and administrative expenses increased by $5.0 million, or 60%, from $8.3 million for the year ended December 31, 2022 to $13.4 million for the year ended December 31, 2023. In addition, there was an increase in professional fees, primarily related to legal fees associated with the Altor/NantCell matter. Salaries, benefits and related expenses decreased by $162,404, or 5%, from $3.4 million for the year ended December 31, 2022 to $3.2 million for the year ended December 31, 2023. The decrease was primarily due to a decrease of $343,412 related to performance-based bonuses and $119,910 related to equity awards granted to officers and executives, which were partially offset by increases of $217,894 in salaries and wages and $61,377 for health insurance and other benefits. 79 Professional services increased by $5.4 million, or 230%, from $2.4 million for the year ended December 31, 2022 to $7.8 million for the year ended December 31, 2023. The increase primarily consisted of a $5.0 million increase in fees for legal services related to the Altor/NantCell matter. Fees for professional services other than legal advisors, such as auditors and tax advisors, increased by $152,424 for the year ended December 31, 2023 versus the comparable period in 2022. Fees paid for consulting services, such as investor relations and public relations, decreased by $117,492 for the year ended December 31, 2023 versus the comparable period in 2022. Facilities and office expenses increased by $225,518, or 55%, from $408,562 for the year ended December 31, 2022 to $634,080 for the year ended December 31, 2023, primarily due to increases of $147,922 in software license fees and $77,596 in costs for office services and equipment. Other expenses decreased by $446,116, or 26%, from $1.7 million for the year ended December 31, 2022 to $1.3 million for the year ended December 31, 2023. The decrease is primarily due to a decrease of $580,486 in insurance costs associated with being a public company, partially offset by an increase of $110,412 in Delaware franchise taxes. Reserve for credit losses The Company recognized a Reserve for credit losses of $5.3 million, reflecting our conclusion that it was not probable that we would recover the interest reserve deposit established upon entering the credit agreement with Prime Capital Ventures (the “Lender”) based on facts known as of December 31, 2023. Subsequent to December 31, 2023, the Lender defaulted on its obligation to refund the interest reserve deposit. Interest On August 15, 2022, we entered into a loan and security agreement with Cogent Bank to partially fund our purchase of the property we acquired on that same date. We borrowed $6.5 million under this agreement. Amounts outstanding on the term loan will accrue interest at a rate per annum equal to 5.75%. We were obligated to make interest-only payments on this 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. We paid $126,660 and $283,042 for interest on this loan for the years ended December 31, 2022 and 2023, respectively. Other Income, Net Other income, net increased by $701,190, from $304,735 for the year ended December 31, 2022 to $1.0 million for the year ended December 31, 2023. The increase is primarily attributable to an increase in interest earned for money market deposits and unrealized gains for investments in U.S. government-backed securities. Other income includes rental income. On August 15, 2022, the Company entered into a short-term, market-rate lease with the former owner of the building we purchased on the same date. In the year ended December 31, 2023, the lease terminated. We received rental income of $115,915 and $185,941 in the years ended December 31, 2022 and 2023, respectively. Liquidity and Capital Resources Sources of Liquidity As of December 31, 2023, our principal source of liquidity was $3.6 million in cash and cash equivalents, including money market investments, and as a result, there was substantial doubt over whether the Company had sufficient capital to operate for the next twelve months from the issuance date of this Annual Report. We considered elements of our financing plan that were probable and likely to be implemented within the next year, and we concluded such financing plans were not sufficient to mitigate substantial doubt in our going concern analysis. 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 building. The remainder of the purchase price was funded with cash. Amounts borrowed under the term facility have a fixed interest rate of 5.75%, with interest only payments required for the first year and 25-year amortization thereafter. There is no prepayment penalty. As of December 31, 2023, a balance of $6.4 million remains due for this obligation, $6.3 million of which is classified as a noncurrent liability included in Debt, net in the balance sheet included in the audited financial statements included elsewhere in this Annual Report. As of December 31, 2023, we were in compliance with all covenants under the loan agreement and related documents. 80 Since December 31, 2023, we received $4.5 million from additional financings. On February 20, 2024, we completed a $2.5 million private placement of common stock in which we sold an aggregate of 1,785,718 shares to certain of our officers and directors, at a purchase price of $1.40 per share. As of March 31, 2024, we received $2.0 million from the issuance of senior secured notes, which were issued to certain of our officers and a member of the Board of Directors, as well as other investors. In a Current Report on Form 8-K filed with the SEC on May 1, 2024, we reported that we were the victim of a criminal scheme that resulted in a loss of $1.3 million. Management is currently in discussions with the Audit Committee of the Company’s Board of Directors to assess the effect of this incident. The loss did not have any impact on our cash position, results of operations or other financial information contained in the financial statements as of and for the year ended December 31, 2023. Management has made some reductions in costs, but in order to continue the clinical development for our lead product candidates, we must maintain a core group of scientists. We continue to pursue our plan to obtain bridge financing through the issuance of up to $10.0 million in Secured Notes, $2.0 million of which have already been issued as of March 31, 2024. We anticipate this bridge financing, if fully subscribed, will allow us to reach such time as we can execute plans for business development transactions such as licenses for non-core assets and capital-raising transactions, although we cannot assure you of this outcome for many reasons, including uncertainties regarding the Company’s ongoing arbitration proceedings with Altor/NantCell, as described in Item 3. - “Legal Proceedings.” In addition to the bridge financing in the form of the sale of additional Secured Notes, other potential near-term financing plans may include cooperative agreements for clinical trials and third-party collaboration funding. If the Company is not successful in raising additional capital, management has the intent and ability to revise its business plan and reduce costs. If such revisions are insufficient, the Company may have to curtail or cease operations. 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; and • costs and timing of future commercialization activities, including product manufacturing, marketing, sales, and distribution, for any of our product candidates for which we receive regulatory approval. A change in the outcome of any of these or other factors with respect to the clinical development and commercialization of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures. 81 Summary of Statements of Cash Flows The following table summarizes our cash flows for the years ended December 31, 2022 and 2023: Years Ended December 31, 2022 2023 Cash used in operating activities $ (10,386,110 ) $ (22,514,121 ) Cash provided by investing activities 14,708,392 3,797,400 Cash provided by (used in) financing activities 6,273,397 (14,534 ) Net increase (decrease) in cash and cash equivalents $ 10,595,679 $ (18,731,255 ) Operating Activities Net cash used in operating activities was $10.4 million for the year ended December 31, 2022 and $22.5 million for the year ended December 31, 2023. 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. Cash used in operating activities for the year ended December 31, 2023 consisted primarily of a net loss of $22.5 million, which includes a $5.3 million noncash charge for reserve for credit losses related to the full impairment of the interest reserve deposit. Other cash used in operating activities includes $5.3 million to establish the interest reserve account which occurred in April 2023; $1.1 million cash decrease arising from an increase in accounts receivable; and $326,742 cash decrease arising from a decrease in a lease liability. These uses were partially offset primarily by a $432,410 cash increase arising from a decrease in prepaid expenses and other assets; a $1.6 million cash increase arising from an increase in accounts payable and other liabilities; and a net increase of $7.3 million arising from adjustments for noncash expenses, consisting of $5.3 million for reserve for credit losses, $1.0 million for stock-based compensation expense, $1.1 million for depreciation and amortization expense, partially offset by a decrease of $248,445 for net unrealized gain on investments. Investing Activities 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 the property which we intend to convert to our new headquarters and manufacturing facility. For the year ended December 31, 2023, cash provided by investment activities was $3.8 million, consisting of proceeds for maturity of short-term investments of $10.0 million, offset by $6.2 million of cash used for construction of our new headquarters and manufacturing facility. Financing Activities 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. For the year ended December 31, 2023, cash used in financing activities was $14,534, consisting of cash used for debt repayment of $38,273, offset by cash provided by proceeds from the issuance of common stock of $23,739. 82 Contractual Obligations and Commitments As of December 31, 2023, we had $28,693 of obligations remaining in the lease terms for non-cancellable operating lease agreements related to our facilities in Miramar, Florida. Effective March 1, 2022, we entered into a lease extension for our current location for a period of two years, ending February 29, 2024. On January 30, 2024, we entered into a new one-year lease for the same location, effective March 1, 2024. The remaining lease payments under the new short-term lease is $274,823. We have commitments with a third-party manufacturing organization to supply us with clinical grade materials. As of December 31, 2023, we are under contract for obligations of $1.2 million that we expect to pay during the year ending December 31, 2024. As of December 31, 2023, we had commitments to fund $6.9 million in construction costs related to the buildout of our new headquarters and manufacturing facility. 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 a fixed rate per annum equal to 5.75%. We were 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 amortization 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, 2023, $6.4 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. 83 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: • Level 1: Observable inputs such as quoted prices in active markets; • Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and • Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions. Fair Value 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. 84 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. Income Taxes 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, 2022 and 2023, we had available federal net operating loss (“NOL”) carryforwards of $31.3 million and $40.0 million, respectively. We also had available state NOLs carryforwards of approximately $32.5 million and $40.0 million, as of December 31, 2022 and 2023, 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. In addition, we had federal research and development credits carryforwards of $720,165 and $1.3 million, as of December 31, 2022 and 2023, respectively. These credits are available to reduce future federal income taxes, if any, and carryforwards expire from 2038 through 2043 and are subject to review and possible adjustment. 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. 85 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 Company 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 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” disclosure. 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. 86