What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-14 · 275 added, 188 removed, 248 unchanged (65% of the section changed)

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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.

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

The key to our immunotherapeutic approach is elimination of senescent cells and the proinflammatory factors they secrete.

Our most advanced product candidates include three immunotherapeutic drugs we created with the proprietary TOBI (Tissue factOr-Based fusIon) drug discovery platform:

This is a clinical-stage molecule currently being evaluated in a Phase 2 clinical study in patients with ovarian cancer with the University of Pittsburgh Medical Center as sponsor.

For this study, HCW9218 will be administered in combination with neoadjuvant chemotherapy as a first-line treatment with neoadjuvant chemotherapy alone serving as a control arm.

The Settlement Agreement among the Company, Dr.

Wong, Altor, NantCell and ImmunityBio, which was entered into as of July 13, 2024, and is described in Part II, Item 1.

– “Legal Proceedings” below, eliminated the uncertainty of the outcome of the previously disclosed arbitration proceedings and provided clarity for the future direction and emphasis of our clinical development

The settlement involved intellectual property the Company developed, including the proprietary TOBI TM drug discovery platform and its unique Tissue-Factor scaffold used to create protein-fusion molecules that include several elements, such as multiple protein targets, including cytokines, single-chain antibodies, and ligands, as well as proprietary TOBI-based molecules.

The Backbone of the Company’s Clinical Development Program:

Two Novel Proprietary Drug Discovery Platforms

Two Novel Drug Discovery Platforms.

HCW Biologics created two novel drug discovery platforms, using two distinctly different scaffolds to anchor the composition of immunotherapeutic fusions.

This results in the creation of molecules with different mechanisms of action, which opens up different pathways for treatment of diseases promoted by chronic inflammation.

TOBI TM (Tissue factOr-Based fusIon) Platform .

This patented drug discovery platform is built around a Tissue Factor scaffold.

The TOBI TM platform packs multiple protein targets, including cytokines, single-chain antibodies, and ligands, into a single fusion molecule.

These molecules are capable of engaging immunostimulatory functions and addressing many signaling pathways simultaneously.

Some of these fusion protein complexes have ex vivo and in vivo applications, although the Company is primarily focused on drugs developed using subcutaneous injection.

Molecules created with the TOBI TM platform are reproducible and suitable for cGMP manufacturing.

We have manufactured quantities of four TOBI-based molecules in a cGMP manufacturing setting.

The Company’s clinical development program includes the following TOBI-based immunotherapeutics:

This is a clinical-stage bifunctional molecule that can impact senescence by reducing senescent cells (i.e., senescent-cell-reducing effect) and eliminating the proinflammatory factors they secrete (i.e., senomorphic effect).

Subcutaneous administration of HCW9218 activates NK cells, innate lymphoid group-1, and CD8 + T cells, and neutralizes TGF-β.

This is a bifunctional molecule that can impact senescence by reducing senescent cells (i.e., senescent-cell-reducing effect) and eliminating the proinflammatory factors they secrete (i.e., senomorphic effect).

Our future HCW9218 program will focus on ovarian cancer for our oncology program, with the primary focus on other senescence-associated diseases and conditions beyond cancer.

This is a molecule currently completing IND-enabling activities.

Subcutaneous administration of 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.

We expect to file our IND application at the end of the third quarter in 2024.

We are also exploring the utility of HCW9302 for other aging-related diseases, such as neurodegenerative diseases, in relevant animal models.

Our plan is to identify the Recommended Phase 2 Dose (“RP2D”) in patients based on a Phase 1b clinical trial to evaluate HCW9302 in an autoimmune indication, then expand to a neurodegenerative disease indication in a Phase 2 trial utilizing this RP2D.

This preclinical molecule is beginning IND-enabling activities.

It has a unique design that results in a multi-functional compound with three powerful cytokines:

IL-7, IL-15, and IL-21.

Subcutaneous administration of HCW9206 results in T cell proliferation and activation, enhances NK cell cytotoxicity, and improves overall immune surveillance against pathogens or tumors.

HCW9206 is being considered to be the basis of our future oncology program.

Our future HCW9218 program includes a Phase 2 study in ovarian cancer in a neoadjuvant setting.

The primary focus for future clinical development of HCW9218 will be in other senescence-associated diseases and conditions beyond cancer.

The Company has exclusive rights to develop treatments for all other age-related diseases other than cancer using HCW9218.

We will be able to use the Recommended Phase 2 Dose (“RP2D”) and other learnings based on findings in the Phase 1 studies which wrapped up at the beginning of 2024.

The Company has non-exclusive rights to develop HCW9218 treatments for ovarian cancer in a neoadjuvant setting.

The University of Pittsburgh Medical Center (“UMPC”) is the sponsor for an ongoing Phase 2 clinical study to evaluate HCW9218 in the treatment of ovarian cancer in a neoadjuvant setting.

For this study, HCW9218 will be administered in combination with neoadjuvant chemotherapy as a first-line treatment with neoadjuvant chemotherapy alone serving as a control arm.

The Company has learned that UPMC may change the principal investigator for this study, due to some changes at the institution.

Patient recruitment is in progress, but no patients have been enrolled in this study as of the reporting date.

Under the terms of the Settlement Agreement, UPMC has until year end to launch this study.

The Settlement Agreement among the Company, Dr.

Wong, Altor, NantCell and ImmunityBio, which was entered into as of July 13, 2024, and is described in Part II, Item 1.

However, under the Settlement Agreement, the Company agreed to transfer the HCW9218 master cell line to ImmunityBio.

In turn, ImmunityBio agreed to enter into a supply agreement with the Company by the end of January 2025 to ensure clinical supply of HCW9218 is available to carry on clinical studies.

HCW9302 is the basis for the Company’s autoimmune program.

Subcutaneous administration of HCW9302 is designed to activate and expand T reg cells to reduce senescence by suppressing the activity of inflammasome-bearing immune cells and the inflammatory factors which they secrete.

The Company filed our IND application to the U.S.

Food and Drug Administration (“FDA”), which is currently under review.

The Company is seeking approval to conduct a clinical study to evaluate HCW9302 in an autoimmune indication.

The Company cannot provide any assurance that the FDA will authorize it to initiate its planned clinical trials on a timely basis, or at all.

In the event that the FDA does not accept the Company’s IND, the Company may also be required to seek feedback, and the feedback may be unfavorable.

In the event that the Company does not receive feedback on a timely basis, or the Company is required to change the design of the clinical protocol or address other feedback, clinical development of the products would be delayed and the costs may increase.

Moreover, if the FDA does not accept the Company’s IND, the Company may be required to conduct additional preclinical testing or other IND-enabling activities, which would result in further delay and additional costs.

We intend to explore utility of HCW9302 for other aging-related diseases, such as neurodegenerative diseases, in relevant animal models.

Our plan is to identify the RP2D in patients based on a Phase 1b clinical trial to evaluate HCW9302 in an autoimmune indication, then expand to a neurodegenerative disease indication in a Phase 2 trial utilizing this RP2D.

HCW Biologics maintains the rights to the injectable form of HCW9206.

This form of HCW9206 is preclinical, and we are beginning IND-enabling activities.

Ex vivo rights have been licensed to Wugen.

This form of HCW9206 is clinical stage, and Wugen is evaluating it in combination with HCW9201 in a Phase 1 clinical trial.

HCW9206 has a unique design consisting of a multi-functional compound constructed with three powerful cytokines:

IL-7, IL-15, and IL-21.

It is designed to stimulate T cell proliferation and activation, enhance NK cell cytotoxicity, and improve overall immune surveillance against pathogens or tumors.

HCW9206 is being considered to be the basis of our future oncology and anti-infectious disease programs.

This is a clinical-stage molecule currently being evaluated by Wugen in a Phase 1 clinical trial in Acute Myeloid Leukemia, as a cell-based treatment.

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We are exploring intra-tumoral injection of HCW9201 for treatment of cancer.

New Drug Discovery Platform with Novel Protein-Based Scaffold.

Our recently discovered a new drug development platform uses a novel protein scaffold that is not based on tissue factor, which differentiates it from TOBI TM platform.

With immunotherapeutic compounds that are constructed with this new platform without tissue factor, we expand the diseases and conditions that may be treated.

The Company has already used this novel protein scaffold to construct several immunotherapeutic fusions, which we are testing to determine the most promising programs, including those that could be licensed to others.

This scaffold has the capability to construct multiple classes of immunotherapeutic compounds, including:

• Multifunctional, cytokine-based immunotherapeutic compounds.

• Constructs with immune-cell engagers targeting tissue factor and other cell-surface antigens associated with diseased cells.

• Multifunctional immunotherapeutic fusions which improve the performance of immune checkpoint inhibitors.

The Company is conducting rigorous preclinical animal studies using several different models to characterize these new compounds and identify those that indicate the greatest potential to evaluate in treatments of cancer and other diseases promoted by chronic inflammation.

The clinical development plan is for at least one molecule constructed with this novel platform to be in clinical development in 2026, either through a Company-owned program or through an out-licensing program.

Business and Financing Strategies

The Company is exploring numerous additional molecules with substantial potential applications.

The Company considers business development transactions, such as out-licensing agreements, to be fundamental elements of our financing strategy to provide future non-dilutive capital required to fund clinical development of the Company’s lead immunotherapeutic programs.

We signed our first out-license agreement at the end of 2020, which was an exclusive worldwide license (the “Wugen License”) with Wugen, Inc.

(“Wugen”), a company that specializes in cell-based therapies for cancer.

As part of the upfront license fee, the Company received shares of Wugen’s common stock that currently represents a 5.6% ownership interest based on fully converted issued and outstanding shares.

Wugen licensed limited rights to develop, manufacture, and commercialize cell-based therapy treatments for cancer based on two of our internally-developed, multi-cytokine fusion protein molecules, HCW9201 and HCW9206.

The licensed molecules are the basis for Wugen’s memory-like NK cell therapy program.

Wugen also has a promising CAR-T program, based on its lead molecule WU-CART-007.

The WU-CART007 program was recognized by two regulatory designations by the FDA and EU, respectively, that have expedited regulatory review.

Wugen has been cleared to initiate a pivotal Phase 2 study in the first quarter of 2025 for its first-in-class, investigational, anti-CD7 CAR-T cell therapy, WU-CART-007, in patients with relapsed or refractory (R/R) T cell acute lymphoblastic leukemia or T cell lymphoblastic lymphoma (T-ALL/LBL).

We plan to continue to work with the National Institutes of Health and the National Cancer Institute (“NCI”) for collaborative agreements and assistance with funding research and clinical studies.

In 2022, the Company entered a Cooperative Research and Development Agreement (“CRADA”), and under the CRADA we collaborated with NCI on a Phase 1b/2 clinical study in patients with advanced/metastatic and chemo-refractory/chemo-resistant pancreatic cancer.

Our plan is to leverage these relationships to benefit the clinical development of HCW9206 and immunotherapeutic fusions we create in the future in cancer indications.

The Company remains committed to establishing some control over our clinical supply of materials, and the supply of licensed molecules for our licensees.

The Company has retained manufacturing rights for the licensed molecules under the Wugen License and intends to use the same framework in future if we enter other licensing agreements.

On September 9, 2024, the House of Representatives passed the BIOSECURE Act (the “Act”).

With strong bi-partisan support, the bill is expected to become law in 2024.

Somewhat unusually, the Act names specific companies as automatically qualifying as “biotechnology companies of concern.” The expectation is that this provision of the Act would effectively prohibit U.S.

companies from doing business with five Chinese firms, including WuXi AppTec, Complete Genomics and MGI Tech.

For life sciences companies, WuXi is one of the largest global providers of contract development and manufacturing services in the world.

By some estimates, WuXi, an important partner with many biotech and pharma companies, is involved in developing 25% of the drugs used in the United States.

The Act would effectively ban WuXi from conducting business in the United States, which is expected to disrupt the supply chain for life sciences companies.

The result is expected to produce delays, price increases, and supply shortages for many years as the industry replaces WuXi’s capacity as well as other firms named in the Act.

Business Highlights

Implementation of Arbitration Settlement Agreement

Remediation and Dismissal of Arbitration

• The Settlement Agreement among the Company, Dr.

Wong, Altor, NantCell and ImmunityBio, which was entered into as of July 13, 2024, and is described in Part II, Item 1.

– Legal Proceedings” below, eliminated the uncertainty of the outcome of the previously disclosed arbitration proceedings and provided clarity for the future direction and emphasis of our clinical development strategy.

The settlement involved intellectual property the Company developed, including the proprietary TOBI TM drug discovery platform and its unique tissue-factor scaffold used to create protein-fusion molecules that include several elements, such as multiple protein targets, including cytokines, single-chain antibodies, and ligands, as well as proprietary TOBI TM -based molecules.

The primary molecule involved in the settlement was HCW9218, a bi-functional immunotherapeutic designed to with the cytokine IL-15, known to rejuvenate the immune system and reduce senescence, as well as a “trap” or neutralize TGF-β, a powerful cytokine that drives immunosuppressive activity.

HCW9218 had been evaluated in two initial-stage clinical studies in cancer indications.

One of the benefits of the Settlement Agreement is that the Company now has a clear path for the future, and the TOBI TM -based product candidates and indications that will be part of our clinical development strategy.

We are in the process of reassessing our clinical assets and will make some adjustments to our definition of the indications and markets that will be our core focus, but we remain committed to developing immunotherapeutic treatments for age-related diseases, especially cancer.

We will need to make some adjustments with respect to the development of TOBI TM -based molecules to treat cancer indications, in particular, with respect to our lead product candidate, HCW9218, and other derivative molecules designed with TGF-β traps.

The TGF-β trap is designed to neutralize the immunosuppressive nature of TGF-β, but there are other approaches to do so.

Under the Settlement Agreement, we retain the non-exclusive rights related to the clinical development of HCW9218 for the treatment of ovarian cancer using HCW9218 in combination with neoadjuvant chemotherapy, as well as the exclusive right to clinical development of HCW9218 for the treatment of all indications outside of oncology.

We retain the rights for HCW9206, a protein-fusion molecule designed with IL-7, IL-21 and IL-15 anchored to the TOBI TM platform.

We have accelerated the development of this molecule since it has shown potential for the treatment of cancer in preclinical research conducted by the Company as well as collaborators at leading research institutions.

Because of its central role in the regulation of conventional T cell homeostasis, including proliferation, survival, and memory formation without eliciting autoimmunity, IL-7 has been considered from early on as a key factor in immunotherapeutics.

In our preclinical studies, HCW9206 has exhibited many of the properties to reduce senescent cells and the proinflammatory factors they secrete that are characteristic of HCW9218, without relying on a TGF-β trap in its design.

For our autoimmune disease program based on HCW9302, we do not foresee the need to make any significant adjustments to the current program, and we remain on track to file an IND application to evaluate HCW9302 for treatment of autoimmune disease in the third quarter of 2024.

In addition, we retain unrestricted rights with respect to the creation of new compounds based on the TOBI TM discovery platform, so long as they do not include a TGF-β domain.

• Capital-raising activities provided $8.0 million in 2024, consisting of the following:

o $2.5 million in a private placement of common stock in which we sold an aggregate of 1,785,718 shares to certain officers and members of the Company’s board of directors at a purchase price of $1.40 per share.

o $5.5 million from the issuance of senior secured notes (“Secured Notes”).

The Company is authorized to raise up to $10.0 million in Secured Notes and will continue to seek investors for the remaining $4.5 million of Secured Notes available for issuance.

• We have launched our plans to expand our capital-raising activities, including financing through direct investment as well as business development transactions, such as licensing and collaborative agreements.

• The Company is in the process of reassessing our product candidates to determine which compounds, indications and markets will be considered “core assets,” We will continue to seek business development transaction for our non-core assets through licenses for rights to certain compounds, disease indications and markets.

• As of June 30, 2024, we believe that substantial doubt exists regarding our ability to continue as a going concern for at least 12 months from the date of issuance, without additional funding or financial support.

After giving consideration to elements of our financing plan that were probable to occur within a year of the date of issuance, we concluded that substantial doubt was not alleviated in the going concern analysis.

• We have received written notices from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) notifying us that we are not in compliance with continued listing requirements on the Nasdaq Global Market for the market value of listed securities as of June 17, 2024;

minimum bid price as of August 6, 2024;

and the market value of publicly held shares as of August 8, 2024.

Under Nasdaq Listing Rules, the Company has a period of 180 calendar days from the date of notice in which to regain compliance.

We intend to take all reasonable measures available to us to regain compliance with the continued listing requirements for the Nasdaq Global Market.

– “Legal Proceedings” below.

• As required under the terms of the Settlement Agreement, the Company has substantially completed remediation procedures required to be in compliance with the terms of the Settlement Agreement.

• Under the provisions of the Settlement Agreement, upon completion of remediation procedures, the parties mutually agreed to stipulate that the Arbitration and Complaint should be dismissed.

As of the filing date, the parties to the Settlement Agreement are working together to finalize the notices and related final documentation to obtain dismissal of the Arbitration and Complaint.

• In the three-month period ended September 30, 2024, the Company launched a new financing plan.

With the execution of the Settlement Agreement, we resolved the attendant uncertainties for the outcome of the arbitration and additional complexities that hampered our ability to raise capital.

• We have a multi-faceted financing plan, and have already taken the first steps to put on financing plan into action during the third quarter of 2024:

o Licensing non-core assets is a fundamental facet of our financing plan.

On September 25, 2024, the Company entered into a nonbinding term sheet with a party interested in licensing one of the Company’s preclinical molecules.

The proposed license is for one of the Company’s preclinical molecules created with our new platform.

The Company has generated data from testing conducting in various animal models which have met requirements of the prospective licensee.

Definitive agreements are being finalized and the closing is expected in the fourth quarter of 2024.

The proposed license agreement includes guaranteed minimum payments which are expected within the first year of the term.

o We have launched a multi-step equity financing plan.

On November 13, 2024, we entered into an engagement letter with the Maxim Group to act as the exclusive placement agent for equity financings.

o Through October 31, 2024, the Company issued $6.9 million Secured Notes, secured by the Company’s Wugen shares.

We are authorized to issue up to $10.0 million in Secured Notes and we continue our fund-raising efforts to issue the fully authorized amount.

Additional closings can take place by amending the purchase agreement.

o The financing plan includes regaining compliance with all Listing Qualifications of the Nasdaq Stock Market LLC (“Nasdaq”) for the Nasdaq Global Market.

We have a deadline regain compliance by December 16, 2024.

We intend to take all reasonable measures available to us to regain compliance with the continued listing requirements for the Nasdaq Global Market, and we will utilize our right to appeal to Nasdaq to extend our deadline to regain compliance based on a solid financial plan that we are already beginning to execute.

• As of September 30, 2024, we believe that substantial doubt exists regarding our ability to continue as a going concern for at least 12 months from the date of issuance, without additional funding or financial support.

After considering elements of our financing plan that were probable to occur within a year of the date of issuance, we concluded that substantial doubt was not alleviated in the going concern analysis.

Clinical Development

• There is an ongoing Investigator-sponsored Phase 2 clinical trial to evaluate HCW9218 in patients with metastatic advanced stage ovarian cancer in combination with neoadjuvant chemotherapy, sponsored by the University of Pittsburgh Medical Center.

(NCT05145569)

• In the coming year, after finalizing the supply agreement with ImmunityBio, we intend to conduct investigative studies to evaluate HCW9218 in senescence-associated diseases and disorders beyond cancer.

• We are in the final stages of completing the IND application to evaluate HCW9302 in an autoimmune disease, which we plan to submit by the end of the third quarter 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.

• In June 2024, a scientific paper authored by our scientific research team led by Dr.

Wong was published in the peer-reviewed journal, Cancer Immunology, Immunotherapy, entitled, “A ‘Prime and Expand’ Strategy Using Multifunctional Fusion Proteins to Generate Memory-Like NK Cells for Cell Therapy.” The paper features HCW9206 and highlights that the “prime and expand” strategy represents a simple feeder cell-free approach to streamline manufacturing of clinical-grade Memory-Like NK cells to support multidose and off-the-shelf Adoptive Cellular Therapy.

Rights to develop cell-based therapies based on HCW206 is licensed to Wugen.

• We have filed our IND application to seek approval from the FDA to conduct clinical trials to evaluate HCW9302 in an autoimmune disease, and we are currently under review.

In the review process, we will receive feedback from the FDA which may not be given on a timely basis, or we may be required to change the design of our clinical protocol in order to address the feedback, potentially resulting in delays and increased costs.

• The Company has filed provisional patents for its new drug discovery platform and several immunotherapeutic compounds constructed using this platform, based on a novel backbone different from Tissue Factor.

This new drug discovery platform will open new pathways to create first-in-class immunotherapy for the treatment of diseases promoted by chronic inflammation.

Trends and Uncertainties

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No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in connection with the matter.

The Company is completing procedures required to be in compliance with the terms of the Settlement Agreement.

The Settlement Agreement provides that, upon completion of these procedures, the parties will stipulate that the Arbitration and Complaint should be dismissed.

In accordance with 17 CFR 229.601 (Item 601), the Company intends to include the Settlement Agreement in the Company’s third quarter report on Form 10-Q.

The Company has substantially completed remediation procedures required to be in compliance with the terms of the Settlement Agreement.

Under the Settlement Agreement, upon completion of these procedures, the parties mutually agreed to stipulate that the Arbitration and Complaint should be dismissed.

In accordance with 17 CFR 229.601 (Item 601), the Company has included the Settlement Agreement in this Quarterly Report on Form 10-Q.

As of the filing date, the parties to the Settlement Agreement are working together to finalize the notices and related final documentation to obtain dismissal of the Arbitration and Complaint.

Nonoperating Loss

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The Company is pursuing all available remedies to recover this loss.

Given the limited success that these efforts have had to date for the recovery of funds, the Company recognized a loss of $1.3 million in the three- and six-month periods ended June 30, 2024.

Given the limited success that these efforts have had to date for the recovery of funds, the Company recognized a loss of $1.3 million in the nine-month period ended September 30, 2024.

Interest Expense

Interest expense includes interest paid on debt.

This includes interest due on the Cogent Bank loan and senior secured notes issued by the Company.

Other Income, Net

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Cost of revenues

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Interest expense

Other (expense) income, net

Comparison of the Three Months ended June 30, 2023 and June 30, 2024

The Company recognized revenues of $662,807 and $618,854 for the three months ended June 30, 2023 and 2024, respectively.

Other income, net

Comparison of the Three Months ended September 30, 2023 and September 30, 2024

The Company recognized revenues of $853,102 and $426,423 for the three months ended September 30, 2023 and 2024, respectively.

Revenues were derived exclusively from the sale of licensed molecules to Wugen.

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Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2023 and June 30, 2024:

The following table summarizes our research and development expenses for the three months ended September 30, 2023 and September 30, 2024:

Three Months Ended

September 30,

Salaries, benefits and related expenses

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Total research and development expenses

Research and development expenses increased by $412,250, or 26%, from $1.6 million for the three months ended June 30, 2023 to $2.0 million for the three months ended June 30, 2024.

The increase was primarily due to an increase in manufacturing and materials, offset by a decline in preclinical and clinical trial expenses.

Salaries, benefits, and related expenses decreased by $1,547, or less than 1%, from $758,193 for the three months ended June 30, 2023 to $756,646 for the three months ended June 30, 2024.

This decrease was primarily attributable to a $15,655 increase in salaries and related taxes, offset by a $11,103 decrease in expenses recognized for stock compensation and a $6,099 decrease in expenses for employee benefits.

Manufacturing and materials expense increased by $651,383, or 649%, from $100,387 for the three months ended June 30, 2023 to $751,770 for the three months ended June 30, 2024.

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

Production runs to build up a 12 - 24 month supply of clinical supply of HCW9218 and HCW9302 were completed.

In the three months ended June 30, 2024, costs were primarily attributable to increased costs of production and materials related to manufacturing high-producing cell line of HCW9101, an affinity ligand we use in our manufacturing process.

Expenses associated with preclinical activities decreased by $65,219, or 20%, from $323,695 for the three months ended June 30, 2023 to $258,476 for the three months ended June 30, 2024.

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

In the three months ended June 30, 2024, toxicology and other IND-enabling studies were winding down, as we prepare to submit the IND application in the third quarter of 2024.

Expenses associated with clinical activities decreased by $132,816, or 67%, from $197,936 for the three months ended June 30, 2023 to $65,120 for the three months ended June 30, 2024.

The decrease in costs was primarily attributable a $105,959 decrease in the expenses associated with patient fees and a $21,958 decrease in consulting and other professional fees.

Subject to our ability to successfully execute our plans to obtain financing, we anticipate expenses related to clinical activities will increase substantially in the future, as we continue with a Phase 2 clinical trial to evaluate HCW9218 in ovarian cancer, as well as other indications.

Research and development expenses decreased by $480,529, or 29%, from $1.7 million for the three months ended September 30, 2023 to $1.2 million for the three months ended September 30, 2024.

The decrease was primarily attributable to a decrease in expenses for manufacturing and materials, preclinical activities and clinical studies.

Salaries, benefits, and related expenses decreased by $39,740, or 6%, from $692,607 for the three months ended September 30, 2023 to $652,867 for the three months ended September 30, 2024.

The decrease reflects cost cutting measures put in place in the second quarter of 2024, which resulted in a $11,572 decrease in salaries and related taxes and a $29,801 decrease in costs related to employee benefits for the three-month period ended September 30, 2024.

Manufacturing and materials expense decreased by $158,402, or 77%, from $206,150 for the three months ended September 30, 2023 to $47,748 for the three months ended September 30, 2024.

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

In the three months ended September 30, 2024, costs were associated with ancillary activities such as shipping and storage.

Expenses associated with preclinical activities decreased by $161,598, or 53%, from $306,344 for the three months ended September 30, 2023 to $144,746 for the three months ended September 30, 2024.

In the three months ended September 30, 2023 and 2024, costs were incurred primarily for IND-enabling studies to prepare for the submission of an IND application to evaluate HCW9302 in a clinical study.

Expenses associated with clinical activities decreased by $179,682, or 52%, from $343,821 for the three months ended September 30, 2023 to $164,139 for the three months ended September 30, 2024.

The decrease in costs was primarily attributable a $188,637 decrease in the expenses associated with patient fees, partially offset by a $9,290 increase in consulting and other professional fees.

Subject to our ability to successfully execute our plans to obtain financing, we anticipate expenses related to clinical activities will increase substantially in the future, in the event that we successfully advance our immunotherapeutic fusion molecules in clinical development.

If we are unable to complete planned capital-raising transactions and business development transactions for out-licensing, we may have to curtail or cease operations.

Other expenses, which include overhead allocations, decreased by $39,281, or 17%, from $236,455 for the three months ended June 30, 2023 to $197,174 for the three months ended June 30, 2024.

This decrease is primarily attributable to a $29,561 decrease in allocation of depreciation and a $6,880 decrease in travel and travel-related expenses.

Other expenses, which include overhead allocations, increased by $58,893, or 50%, from $118,520 for the three months ended September 30, 2023 to $177,413 for the three months ended September 30, 2024.

This increase is primarily attributable to a change in allocation of overhead to cost of good sold and a $62,031 decrease in travel-related expenses partially offset by a $9,786 increase in costs associated with IT, office supplies and other office equipment.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended June 30, 2023 and June 30, 2024:

The following table summarizes our general and administrative expenses for the three months ended September 30, 2023 and September 30, 2024:

Three Months Ended

September 30,

Salaries, benefits and related expenses

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Total general and administrative expenses

General and administrative expenses related to the ordinary course of business were $1.6 million and $1.6 million for the three months ended June 30, 2023 and 2024, respectively, with an increase of $6,332, or 0%.

Salaries, benefits and related expenses decreased by $97,915, or 12%, from $812,889 for the three months ended June 30, 2023 to $714,974 for the three months ended June 30, 2024.

The decrease reflects cost cutting measures put in place in the three-month period ended June 30, 2024, which resulted in a $78,626 decrease in salaries and related taxes.

In addition, there was a $12,499 decrease in expenses related to stock-based compensation.

Professional services increased by $28,148, or 14%, from $201,815 for the three months ended June 30, 2023 to $229,963 for the three months ended June 30, 2024.

General and administrative expenses related to the ordinary course of business increased by $129,216, or 9%, from $1.5 million for the three months ended September 30, 2023 to $1.6 million for the three months ended September 30, 2024.

The increase is primarily attributable to an increase in professional services, mainly legal fees related to patents, and an increase in other expenses, mainly costs related to insurance, offset by a decrease in salaries and benefits.

Salaries, benefits and related expenses decreased by $156,886, or 20%, from $775,956 for the three months ended September 30, 2023 to $619,070 for the three months ended September 30, 2024.

The decrease reflects cost cutting measures put in place in the second quarter of 2024, which resulted in a $152,332 decrease in salaries and related taxes and a $15,511 decrease in costs related to employee benefits for the three-month period ended September 30, 2024.

These costs were offset by an increase of $10,957 in expenses related to stock-based compensation.

Professional services increased by $169,095, or 81%, from $207,815 for the three months ended September 30, 2023 to $376,910 for the three months ended September 30, 2024.

Professional services include corporate legal services, legal services for procuring patents, as well as other professional services, such as auditing and tax advisory fees.

The increase is primarily attributable to a $39,850 increase in auditing and tax advisory fees, partially offset by a $11,652 decrease in legal fees for services incurred in connection with procuring patents.

Facilities and office expenses increased by $63,256, or 45%, from $141,459 for the three months ended June 30, 2023 to $204,715 for the three months ended June 30, 2024, primarily due to a $73,462 increase in software and other licensing fees, offset by a $10,966 decrease in facilities expenses such as electricity and waste disposal.

Other expenses decreased by $13,202, or 4%, from $327,137 for the three months ended June 30, 2023 to $313,934 for the three months ended June 30, 2024.

The increase is primarily attributable to a $43,228 increase in financing expenses, offset by a $27,462 decrease in insurance-related costs and a $27,642 decrease in Delaware franchise taxes.

The increase is primarily attributable to a $133,263 increase legal fees for services incurred in connection with procuring patents and a $35,832 increase in costs related to other professional services such as auditing and tax advisory fees.

As a result of the Settlement Agreement, the Company agreed to maintain patent protection for rights retained under the agreement.

Facilities and office expenses decreased by $41,114, or 23%, from $175,694 for the three months ended September 30, 2023 to $134,580 for the three months ended September 30, 2024, primarily due to a $62,791 decrease in software and other licensing fees, partially offset by a $13,558 increase in other IT related expenses and a $10,818 increase in facilities expenses such as electricity and waste disposal.

Other expenses increased by $139,046, or 55%, from $251,016 for the three months ended September 30, 2023 to $390,046 for the three months ended September 30, 2024.

The increase is primarily attributable to a $115,668 increase in insurance-related costs and a $37,730 increase in finance costs.

Legal Expenses

Legal expenses were $1.4 million in the three months ended June 30, 2023 and $10.4 million for the three months ended June 30, 2024.

In the three months ended June 30, 2023, costs were incurred in connection with several legal proceedings which culminated by consolidating Altor/NantCell’s action against the Company with the Altor/NantCell arbitration demand against Dr.

Legal expenses were $2.1 million in the three months ended September 30, 2023 and $1.0 million for the three months ended September 30, 2024.

In the three months ended September 30, 2023, costs were incurred in connection with several legal proceedings which culminated by consolidating Altor/NantCell’s action against the Company with the Altor/NantCell arbitration demand against Dr.

Thereafter, proceedings against the Company and Dr.

Wong were consolidated in the arbitration before JAMS.

In the three months ended June 30, 2024, the arbitration hearing was held from May 20, 2024 to May 31, 2024.

The Company incurred legal fees for a large team of lawyers require to represent the Company;

Peter Rhode, our Chief Scientific Officer and Vice President of Clinical Affairs and an officer of the Company;

as well as other employees.

The hearing was followed by an extended period of intense negotiations which culminated in a Settlement Agreement entered into by the Company and Dr.

Wong as of July 13, 2024 with Altor/NantCell and its parent, ImmunityBio.

In the three months ended September 30, 2024, the Company reached a Settlement Agreement with the other parties to the arbitration and undertook the necessary steps for remediation and transfer of information required under the terms of the agreement.

As of the filing date, the parties to the Settlement Agreement are working together to finalize the notices and related final documentation to obtain dismissal of the Arbitration and Complaint.

While the Company has relief from the future burden of ongoing legal expenses related to these proceedings, we incurred significant legal expenses for our defense and for the defense of officers and employees.

We require a reasonable payment plan to prevent these expenses from overwhelming the Company’s resources.

We are engaged in discussions with the law firms involved with this matter.

We are engaged in discussions with the law firms involved with this matter to work out payment plans.

Interest Expense

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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 $93,438 and $93,789 in cash for interest for the three months ended June 30, 2023 and 2024, respectively.

For the three months ended June 30, 2023, interest was expensed.

For the three months ended June 30, 2024, interest was capitalized.

We paid $95,514 and $93,936 in cash for interest on the Cogent Bank loan for the three months ended September 30, 2023 and 2024, respectively.

For the three months ended September 30, and September 30, 2024, interest was expensed.

As of September 30, 2024, the Company had issued $6.5 million in senior secured notes which bear interest at an annual rate of 9%, payable quarter in arrears.

We paid $87,386 in cash interest on the senior secured notes for the three months ended September 30, 2024.

There were no senior secured notes outstanding in 2023.

Other Income, Net

Other income, net decreased from $301,615 for the three months ended June 30, 2023 to $15,485 for the three months ended June 30, 2024.

The decrease is primarily attributable to a decrease in interest earned for money market deposits and unrealized gains for investments in U.S.

Other income, net decreased from $234,753 for the three months ended September 30, 2023 to $11,310 for the three months ended September 30, 2024.

The decrease is primarily attributable to a decline in interest earned from money market deposits and a decrease in unrealized gains from investments in U.S.

government-backed securities.

In addition, for the three months ended June 30, 2023, Other income included rental income.

In addition, for the three months ended September 30, 2023, Other income included 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, which terminated in the year ended December 31, 2023.

We received rental income of $59,453 for the three months ended June 30, 2023.

Comparison of the Six Months ended June 30, 2023 and June 30, 2024

The Company recognized $664,690 and $1.7 million of revenues for the six months ended June 30, 2023 and 2024, respectively.

We received rental income of $60,003 for the three months ended September 30, 2023.

Comparison of the Nine Months ended September 30, 2023 and September 30, 2024

The Company recognized $1.5 million and $2.2 million of revenues for the nine months ended September 30, 2023 and 2024, respectively.

Revenues were derived exclusively from the sale of licensed molecules to Wugen.

Under the terms of the supply agreement between Wugen and the Company, the Company earns an industry-standard gross margin.

Under the terms of the supply

agreement between Wugen and the Company, the Company earns an industry-standard gross margin.

Occasionally, Wugen acquires product which is part of inventory we made for our own use.

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Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2023 and June 30, 2024:

Six Months Ended

The following table summarizes our research and development expenses for the nine months ended September 30, 2023 and September 30, 2024:

Nine Months Ended

September 30,

Salaries, benefits and related expenses

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Total research and development expenses

Research and development expenses increased by $279,991, or 7%, from $3.9 million for the six months ended June 30, 2023 to $4.2 million for the six months ended June 30, 2024.

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

Salaries, benefits, and related expenses increased by $33,375, or 2%, from $1.5 million for the six months ended June 30, 2023 to $1.5 million for the six months ended June 30, 2024.

This increase was primarily attributable to a $42,888 increase in salaries and related taxes, partially offset by a $9,766 decrease in expenses related to stock-based compensation.

Manufacturing and materials expense increased by $942,779, or 245%, from $385,293 for the six months ended June 30, 2023 to $1.3 million for the six months ended June 30, 2024.

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

In the six months ended June 30, 2024, costs were primarily attributable to the costs of production and materials related to manufacturing the high producing cell-line of HCW9101.

Expenses associated with preclinical activities decreased by $517,814, or 49%, from $1.1 million for the six months ended June 30, 2023 to $543,567 for the six months ended June 30, 2024.

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

In the six months ended June 30, 2024, toxicology and other IND-enabling studies were winding down, as we prepare to submit the IND application late in the third quarter of 2024.

Expenses associated with clinical activities decreased by $112,537, or 25%, from $444,295 for the six months ended June 30, 2023 to $331,758 for the six months ended June 30, 2024.

Research and development expenses decreased by $200,536, or 4%, from $5.5 million for the nine months ended September 30, 2024 to $5.3 million for the nine months ended September 30, 2024, primarily due to an increase in manufacturing and materials expenses, partially offset by a decrease in preclinical and clinical expenses.

Salaries, benefits, and related expenses decreased by $6,015, or 0%, from $2.2 million for the nine months ended September 30, 2023 to $2.2 million for the nine months ended September 30, 2024.

This decrease was primarily attributable to a difference in the costs allocated to cost of goods sold, as well as a $121,139 decrease in salaries, benefits and related expenses as a result of cost cutting measures put in place in the second quarter of 2024, consisting of a $83,893 decrease in salaries, bonuses and related taxes and a $29,185 decrease in costs related to employee benefits, for the nine-month period ended September 30, 2024.

Manufacturing and materials expense increased by $752,045, or 121%, from $623,785 for the nine months ended September 30, 2023 to $1.4 million for the nine months ended September 30, 2024.

In the nine months ended September 30, 2023, costs were incurred primarily for production activities associated with the master cell bank characterization for a high production cell line for HCW9101;

a 200L cGMP manufacturing run of HCW9302;

and ancillary activities such as shipping, insurance and storage.

In the nine months ended September 30, 2024, costs were primarily attributable to the costs of production and materials related to manufacturing the high producing cell-line of HCW9101, which is used in the manufacturing process for all TOBI-based molecules.

Expenses associated with preclinical activities decreased by $679,415, or 50%, from $1.4 million for the nine months ended September 30, 2023 to $688,310 for the nine months ended September 30, 2024.

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

In the nine months ended September 30, 2024, toxicology and other IND-enabling studies were winding down, and the IND application was finalized, submitted and is now under review.

Expenses associated with clinical activities decreased by $292,206, or 37%, from $788,116 for the nine months ended September 30, 2023 to $495,910 for the nine months ended September 30, 2024.

The decrease was primarily attributable to a $341,271 decrease in patient fees, partially offset by a $61,080 increase costs for post-clinical studies that we conducted through collaborations.

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

In the six months ended June 30, 2024, we completed enrollment in the Phase 1/1b clinical trials and the majority of our activities were focused on post-clinical correlative studies which we conducted through collaborations.

In the nine months ended September 30, 2023, there were two ongoing clinical trials, including a Phase 1 study sponsored by the University of Minnesota to evaluate HCW9218 in the treatment of various solid tumors, and a Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in chemo-refractory/chemo-resistant pancreatic cancer.

In the nine months ended September 30, 2024, we completed enrollment in the Phase 1/1b clinical trials and the majority of our activities were focused on post-clinical correlative studies which we conducted through collaborations.

As a result of the Settlement Agreement, ImmunityBio has the exclusive right to the use of HCW9218 in the treatment of pancreatic cancer.

We will continue to evaluate HCW9218 in combination with neoadjuvant chemotherapy in the treatment of ovarian cancer.

Other expenses, which include overhead allocations, decreased by $66,172, or 14%, from $478,852 for the six months ended June 30, 2023 to $412,680 for the six months ended June 30, 2024.

The decrease in other expenses is primarily attributable to a $60,089 decrease in the allocation of depreciation and a $9,911 decrease in travel-related expenses.

Other expenses, which include overhead allocations, increased by $25,055, or 4%, from $565,028 for the nine months ended September 30, 2023 to $590,083 for the nine months ended September 30, 2024.

The decrease in other expenses is primarily attributable to a decrease in the allocation of depreciation to cost of goods sold, partially offset by a $38,055 decrease in travel-related expenses.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the six months ended June 30, 2023 and June 30, 2024:

Six Months Ended

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2023 and September 30, 2024:

Nine Months Ended

September 30,

Salaries, benefits and related expenses

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Total general and administrative expenses

General and administrative expenses related to the ordinary course of business decreased by $436,454, or 12%, from $3.6 million for the six months ended June 30, 2023 to $3.2 million for the six months ended June 30, 2024.

The decrease is primarily attributable to a decrease in expenses as a result of cost-cutting measures put in place in the six months ended June 30, 2024, and a decrease in legal fees incurred in connection with procuring patents, partially offset by an increase in software licensing fees.

Salaries, benefits and related expenses decreased by $396,080, or 24%, from $1.6 million for the six months ended June 30, 2023 to $1.2 million for the six months ended June 30, 2024.

The decrease reflects cost cutting measures put in place in the six month period ended June 30, 2024, which resulted in a $54,525 decrease in salaries and $304,174 decrease resulting from the waiver of deferred bonus payments due to officers of the Company.

In addition, there was a $28,357 decrease in expenses related to stock-based compensation.

Professional services decreased by $217,223, or 27%, from $800,992 for the six months ended June 30, 2023 to $583,769 for the six months ended June 30, 2024.

General and administrative expenses related to the ordinary course of business decreased by $307,237, or 6%, from $5.1 million for the nine months ended September 30, 2023 to $4.8 million for the nine months ended September 30, 2024.

The decrease is primarily attributable to a decrease in salaries and bonuses as a result of cost-cutting measures put in place in the second quarter of 2024.

Salaries, benefits and related expenses decreased by $552,962, or 23%, from $2.4 million for the nine months ended September 30, 2023 to $1.9 million for the nine months ended September 30, 2024.

The decrease is primarily attributable to a $212,014 decrease in salaries and related taxes, a $19,372 decrease in expenses for employee benefits, and a $304,175 decrease resulting from the waiver of performance-based bonuses earned in 2022 but deferred.

Professional services decreased by $48,127, or 5%, from $1,008,807 for the nine months ended September 30, 2023 to $960,680 for the nine months ended September 30, 2024.

Professional services include corporate legal services, legal services for procuring patents, as well as other professional services, such as auditing and tax advisory fees.

The decrease is primarily attributable to a $203,062 decrease in legal fees incurred in connection with procuring patents.

Facilities and office expenses increased by 144,633, or 55%, from $263,681 for the six months ended June 30, 2023 to $408,314 for the six months ended June 30, 2024, primarily due to a $140,980 increase in software and other licensing fees and a $23,756 increase in costs for waste disposal, offset by a $20,808 decrease in facilities expenses such as office supplies and services.

Other expenses decreased by $7,748, or 1%, from $683,467 for the six months ended June 30, 2023 to $691,215 for the six months ended June 30, 2024.

The increase is primarily attributable to a $190,585 increase in financing expenses primarily related to our search for a lender to complete the construction of the Company’s new headquarters, partially offset by a $84,680 decrease in insurance-related costs and a $99,514 decrease in Delaware franchise taxes.

The decrease is primarily attributable to a $69,797 decrease in legal fees incurred in connection with procuring patents, partially offset by a $21,670 increase in fees for other professional services such as audit and tax advisory fees.

As a result of the Settlement Agreement, the Company agreed to maintain patent protection for rights retained under the agreement.

Facilities and office expenses increased by $103,517, or 24%, from $439,373 for the nine months ended September 30, 2023 to $542,890 for the nine months ended September 30, 2024, primarily due to a $78,185 increase in software and other licensing fees and a $21,157 increase in costs for waste disposal.

Other expenses increased by $138,175, or 15%, from $943,122 for the nine months ended September 30, 2023 to $1.1 million for the nine months ended September 30, 2024.

The increase is primarily attributable to a $227,470 increase in financing expenses primarily related to our search for a lender to complete the construction of the Company’s new headquarters and a $30,528 increase in insurance-related costs, partially offset by a $102,505 decrease in Delaware franchise taxes.

Legal Expenses

Legal expenses were $2.5 million in the six months ended June 30, 2023 and $14.8 million for the six months ended June 30, 2024.

In the six months ended June 30, 2023, costs were incurred in connection with several legal proceedings which culminated by consolidating Altor/NantCell’s action against the Company with the Altor/NantCell arbitration demand against Dr.

Legal expenses were $4.6 million in the nine months ended September 30, 2023 and $15.8 million for the nine months ended September 30, 2024.

In the nine months ended September 30, 2023, costs were incurred in connection with several legal proceedings which culminated by consolidating Altor/NantCell’s action against the Company with the Altor/NantCell arbitration demand against Dr.

Thereafter, proceedings against the Company and Dr.

Wong were consolidated in the arbitration before JAMS.

In the six months ended June 30, 2024, preparations for the arbitration were taking place with witness preparation and depositions.

In the nine months ended September 30, 2024, preparations for the arbitration were taking place with witness preparation and depositions.

The arbitration hearing was held from May 20, 2024 to May 31, 2024, which required a large team of lawyers to represent the Company;

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We paid $93,438 and $93,789 in cash for interest for the six months ended June 30, 2023 and 2024, respectively.

For the six months ended June 30, 2023, interest was expensed.

For the six months ended June 30, 2024,three months interest was capitalized and three months interest was expensed.

We paid $284,465 and $282,098 in cash for interest related to the Cogent Bank loan for the nine months ended September 30, 2023 and 2024, respectively.

For the nine months ended September 30,2023, interest was expensed.

Interest was capitalized the last quarter of 2023 and ceased in the second quarter of 2024.

In all other periods, interest was expensed.

As of September 30, 2024, the Company had issued $6.5 million in senior secured notes which bear interest at an annual rate of 9%, payable quarter in arrears.

We paid $152,679 in cash interest on the senior secured notes for the nine months ended September 30, 2024.

There were no senior secured notes outstanding in 2023.

Other Income, Net

Other income, net decreased from $684,936 for the six months ended June 30, 2023, to $41,086 for the six months ended June 30, 2024.

Other income, net decreased from $919,688 for the nine months ended September 30, 2023, to $52,397 for the nine months ended September 30, 2024.

The decrease is primarily attributable to a decrease interest earned for money market deposits and unrealized gains for investments in U.S.

government-backed securities.

Other income included rental income for the six months ended June 30, 2023.

Other income included rental income for the nine months ended September 30, 2023.

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, which terminated in the year ended December 31, 2023.

We received rental income of $118,907 for the six months ended June 30, 2023.

We received rental income of $178,910 for the nine months ended September 30, 2023.

Liquidity and Capital Resources

Sources of Liquidity

As of June 30, 2024, our principal source of liquidity was $1.2 million in cash and cash equivalents, and there is substantial doubt over as to whether the Company has sufficient capital to operate for the next 12 months from the issuance date of this Quarterly Report based on this liquidity.

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 the 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 June 30, 2024, 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 condensed interim financial statements included elsewhere in this Quarterly Report.

As of June 30, 2024, we were in compliance with all covenants under the loan agreement and related documents.

Since the year end, we raised $8.0 million in financings.

As of September 30, 2024, we concluded that there is substantial doubt over as to whether the Company has sufficient capital to operate for the next 12 months from the issuance date of this Quarterly Report based on our liquidity, revenues and ongoing operating losses, as well as the legal fees incurred in conjunction with an arbitration with ImmunityBio prior to the Settlement Agreement executed in the third quarter of 2024.

As of September 30, 2024, our principal source of liquidity was $1.0 million in cash and cash equivalents.

To date, the Company has funded operations primarily through the sale of stock, issuance of senior secured notes and revenues generated the Wugen License, pursuant to which Wugen licensed limited rights to develop, manufacture, and commercialize cell therapy treatments for cancer based on two of the Company’s internally-developed multi-cytokine fusion protein molecules, and its manufacturing and supply arrangement with Wugen.

As of September 30, 2024, the Company had not generated any revenue from commercial product sales of its internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases.

In the course of its development activities, the Company has sustained operating losses and expects to continue to incur operating losses for the foreseeable future.

On August 15, 2022, the Company entered into the 2022 Loan Agreement with Cogent Bank, pursuant to which it received $6.5 million in proceeds to purchase a building that will become the Company's new headquarters.

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

As of September 30, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction of its new manufacturing facilities and upgraded research laboratories.

The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements;

however, as of the reporting date, the lender has not elected to do so.

As of September 30, 2024, the Company has reflected this loan as Short-term debt, net, to reflect that the lender has the right to accelerate the loan under a discretionary default provision.

The Company continues to seek the financing required to complete the construction project, with the cooperation of the lender and lien holders.

See Part I, Item 4.

-- “Controls and Procedures.”

In 2024, we have raised $9.4 million in 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 June 30, 2024, we received $3.7 million from the issuance of Secured Notes, which were issued to certain of our officers and members of the Board of Directors, as well as other investors.

On June 30, 2024, the Company issued $100,000 in Secured Notes including $90,000 invested by the Chairman of the Company’s board of directors and $10,000 from another member of the board of directors.

Subsequent to the reporting period, the Company issued an additional $1.8 million in Secured Notes, including an investment of $75,000 from the Company’s Founder and Chief Executive Officer, $25,000 from a member of the board of directors, and $25,000 from an officer of the Company.

As of September 30, 2024, we received $6.5 million from the issuance of Secured Notes, and subsequent to the reporting period, the Company issued an additional $375,000 in Secured Notes.

Of the total issuance of Secured Notes, the Company issued $2.9 million to members of the Company’s board of directors and officers, including $2.4 million purchased by Dr.

Wong, Founder and CEO, $220,000 purchased by Rebecca Byam, Chief Financial Officer, $140,000 purchased by Scott T.

Garrett, Chairman of the board of directors, $60,000 purchased by Gary M.

Winer, member of the board of directors, $25,000 purchased by Lee Flowers, Senior Vice President for Business Development, and $25,000 purchased by Rick S.

Greene, member of the board of directors.

The Company expects the funds raised through the issuance of Secured Notes to be sufficient capital to reach a milestone in the fourth quarter of 2024.

Management has made some reductions in costs and there may be further reductions or restructuring in the future after we complete the reassessment of our clinical development strategy.

A benefit of reaching a Settlement Agreement and concluding the Arbitration is a release from restrictions related to protection of privileged information, which hampered investor ability to conduct due diligence.

As a result, we believe that other avenues of financing are now available to us, namely, capital-raising activities for equity and equity-like investments as well as business development transactions such as out-licensing agreements for rights for our proprietary molecules.

However, there can be no assurance of our success in our capital-raising activities.

If we are not successful in raising additional capital, we have the ability to revise our business plan and reduce costs.

If such revisions are insufficient, we may have to curtail or cease operations.

The Company and Dr.

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- “Legal Proceedings.” While the Settlement Agreement has resolved uncertainty regarding the outcome of these proceedings and the ongoing legal expenses, the Company incurred significant legal expenses in the period leading up to the Settlement Agreement.

As of June 30, 2024, we reported a balance of $10.0 million for legal fees incurred but not yet paid that were included within Accounts payable and an accrual of $4.8 million for accrued legal fees within Accrued liabilities and other current liabilities in the accompany condensed balance sheet.

As of September 30, 2024, we reported a balance of $14.4 million for legal fees incurred but not yet paid in the accompany condensed balance sheet.

In order not to overwhelm the Company’s resources, a reasonable payment plan will be required.

The Company is engaged in discussions with the law firms involved with this matter.

We have emerged from the Settlement Agreement with a strong portfolio of TOBI-based molecules, but we may need to make some adjustment to our clinical development plan as a result of rights transferred to ImmunityBio, particularly related to clinical development of HCW9218 in cancer indications.

Management has made some reductions in costs and there may be further reductions or restructuring in the future after we complete the reassessment of our clinical development strategy.

The Company continues to pursue bridge financing through the issuance of up to $10.0 million in Secured Notes.

Subsequent to the end of the second quarter of 2024, the Company issued an additional $1.8 million in Secured Notes, bringing the total issuance of Secured Notes to $5.5 million.

With the Settlement Agreement and imminent dismissal of the Arbitration and other claims, the attendant uncertainties for the outcome and additional complexities, as well as on-going legal costs of the dispute have been lifted.

As a result, management intends to pursue the issuance of secured notes as well as other capital-raising activities.

We have developed and are implementing our financing plan involving equity and equity-like financings which we intend to close by year-end.

In addition, near-term financing plans may include cooperative agreements for clinical trials and third-party collaboration funding.

Longer term, we plan to continue to pursue business development transactions such as licenses for non-core assets, although there can be no assurance of our success in doing so.

If we are not successful in raising additional capital, we have the ability to revise our business plan and reduce costs.

If such revisions are insufficient, we may have to curtail or cease operations.

We considered elements of our financing plan that were probable and likely to be implemented within the next year to determine if financing activities currently underway are sufficient mitigate the substantial doubt in our going concern analysis.

The Company launched a financing plan in the third quarter of 2024.

The plan includes several capital-raising activities, such as issuance of secured notes, equity financings, as well as business development transactions, such as license agreements with guaranteed minimum payments.

Through October 31, 2024, the Company had issued an aggregate of $6.9 million in secured notes.

On September 25, 2024, the Company entered into a nonbinding term sheet with a party interested in licensing one of the Company’s preclinical molecules.

The Company expects to close this license transaction in the fourth quarter of 2024.

The proposed terms of the license include a guaranteed minimum payments which are expected within the first year of the term.

On November 13, 2024, we entered into an engagement letter with the Maxim Group to act as the exclusive placement agent for a multi-step equity financing.

If the Company is not successful in raising additional capital through these activities, management intends to revise its business plan and reduce costs.

If such revisions are insufficient, the Company may have to curtail or cease operations.

The accompanying interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business.

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After considering management’s plan for financing and funds raised that are probable to occur within one year, as well as that the Company expects to continue to incur losses from operations for the foreseeable future, management concluded that the substantial doubt that existed in its going concern analysis was not alleviated.

As a result, we believe that other avenues of financing are now available to us, namely, capital-raising activities for equity and equity-like investments.

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.

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

Comparison of the Cash Flows for the Six Months Ended June 30, 2023 and June 30, 2024

The following table summarizes our cash flows for the six months ended June 30, 2023 and June 30, 2024:

Six Months Ended

Comparison of the Cash Flows for the Nine Months Ended September 30, 2023 and September 30, 2024

The following table summarizes our cash flows for the nine months ended September 30, 2023 and September 30, 2024:

Nine Months Ended

September 30,

Cash used in operating activities

Cash used in investing activities

Cash provided by (used in) investing activities

Cash provided by financing activities

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Operating Activities

Net cash used in operating activities were $13.0 million for the six months ended June 30, 2023 and $8.5 million for the six months ended June 30, 2024.

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

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

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

Cash used in operating activities for the six months ended June 30, 2024 consisted primarily of net loss for the period of $22.7 million, partially offset by cash from a $11.9 million increase in accounts payable primarily related to legal fees incurred in connection with the Arbitration and Settlement Agreement, a $880,784 decrease in accounts receivable, and a $703,805 decrease in prepaid expenses and other assets, as well as cash provided by non-cash adjustments, consisting of $373,433 of cash provided for adjustment for depreciation and amortization and $484,506 of cash provided for adjustment for stock-based compensation.

Net cash used in operating activities were $18.6 million for the nine months ended September 30, 2023 and $11.4 million for the nine months ended September 30, 2024.

Cash used in operating activities for the nine months ended September 30, 2023 consisted primarily of a net loss of $14.3 million, as well as a deposit $5.3 million used to establish an interest reserve for future interest payments, as required under the terms of the Credit Agreement intended to be used to fund the construction and renovation of the Company’s new headquarters.

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

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

Cash used in operating activities for the nine months ended September 30, 2024 consisted primarily of net loss for the period of $26.7 million, partially offset by a $12.4 million increase in accounts payable and other liabilities, a decrease of $883,917 in accounts receivable and a decrease of $829,043 in prepaid expenses and other current assets.

Further offset to the use of case resulted from noncash adjustments of $1.2 million, consisting primarily of $501,882 of cash provided by an adjustment for depreciation and amortization and $716,940 of cash provided by an adjustment for stock-based compensation.

Investing Activities

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

Cash used by investment activities for the six months ended June 30, 2024 consisted of $111,142 used for purchases of property and equipment.

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

Cash used by investment activities for the nine months ended September 30, 2024 consisted of $148,205 used for purchases of property and equipment.

Financing Activities

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

During the six months ended June 30, 2024, cash provided by financing activities consisted of a $2.5 million private placement of the Company’s common stock and $3.7 million from the issuance of Secured Notes, partially offset by $58,829 of cash used for debt repayment.

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

Cash provided by financing activities for the nine months ended September 30, 2024 resulted from a $2.5 million private placement of the Company’s common stock and $6.5 million from the issuance of Secured Notes, partially offset a $88,388 principal repayment under the 2022 Loan Agreement related to the acquisition financing used to purchase a building.

Critical Accounting Policies, Significant Judgements and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed interim financial statements, which have been prepared in accordance with U.S.

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods.

The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of

contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis