HCW Biologics Inc. 10-Q

Item 1. Financial Statements. HCW Biologics Inc. Condensed Balance Sheets December 31, September 30, 2023 2024 Unaudited ASSETS Current assets: Cash and cash equivalents $ 3,595,101 $ 998,221 Accounts receivable, net 1,535,757 651,840 Prepaid expenses 1,042,413 356,156 Other current assets 230,916 88,131 Total current assets 6,404,187 2,094,348 Investments 1,599,751 1,599,751 Property, plant and equipment, net 20,453,184 22,833,904 Other assets 56,538 28,476 Total assets $ 28,513,660 $ 26,556,479 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Liabilities Current liabilities: Accounts payable $ 6,167,223 $ 22,666,107 Accrued liabilities and other current liabilities 2,580,402 1,056,716 Short-term debt, net — 6,340,511 Total current liabilities 8,747,625 30,063,334 Debt, net 6,304,318 6,462,769 Total liabilities 15,051,943 36,526,103 Commitments and contingencies (Note 8) Stockholders’ equity (deficit): Common stock: Common, $ 0.0001 par value; 250,000,000 shares authorized and 36,025,104 shares issued at December 31, 2023; 250,000,000 shares authorized and 37,823,394 shares issued at September 30, 2024 3,603 3,782 Additional paid-in capital 83,990,437 87,209,457 Accumulated deficit ( 70,532,323 ) ( 97,182,863 ) Total stockholders’ equity (deficit) 13,461,717 ( 9,969,624 ) Total liabilities and stockholders’ equity (deficit) $ 28,513,660 $ 26,556,479 See accompanying notes to the unaudited condensed interim financial statements. 1 HCW Biologics Inc. Condensed Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2024 2023 2024 Revenues: Revenues $ 853,102 $ 426,423 $ 1,517,792 $ 2,171,988 Cost of revenues ( 678,325 ) ( 341,138 ) ( 1,210,077 ) ( 1,291,546 ) Net revenues 174,777 85,285 307,715 880,442 Operating expenses: Research and development 1,667,442 1,186,913 5,539,919 5,339,383 General and administrative 1,509,936 1,639,152 5,106,674 4,799,437 Legal expenses 2,075,279 949,455 4,610,091 15,761,531 Nonoperating loss — — — 1,300,000 Total operating expenses 5,252,657 3,775,520 15,256,684 27,200,351 Loss from operations ( 5,077,880 ) ( 3,690,235 ) ( 14,948,969 ) ( 26,319,909 ) Interest expense ( 95,514 ) ( 223,363 ) ( 284,465 ) ( 383,029 ) Other (expense) income, net 234,753 11,310 919,688 52,397 Net loss $ ( 4,938,641 ) $ ( 3,902,288 ) $ ( 14,313,746 ) $ ( 26,650,541 ) Net loss per share, basic and diluted $ ( 0.14 ) $ ( 0.10 ) $ ( 0.40 ) $ ( 0.71 ) Weighted average shares outstanding, basic and diluted 35,926,921 37,823,394 35,907,123 37,623,459 See accompanying notes to the unaudited condensed interim financial statements. 2 HCW Biologics Inc. Condensed Statements of Changes in Stockholders’ Equity (Deficit) For the Nine Months Ended September 30, 2023 and 2024 (Unaudited) Stockholders’ Equity Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity Balance, December 31, 2022 35,876,440 $ 3,588 $ 82,962,964 $ ( 45,538,046 ) $ 37,428,506 Issuance of Common Stock upon exercise of stock options 10,195 1 1,900 — 1,901 Stock-based compensation — — 259,206 — 259,206 Net loss — — — ( 5,070,686 ) ( 5,070,686 ) Balance, March 31, 2023 35,886,635 $ 3,589 $ 83,224,070 $ ( 50,608,732 ) $ 32,618,927 Issuance of Common Stock upon exercise of stock options 40,086 4 7,708 — 7,712 Stock-based compensation — — 263,423 263,423 Net loss — — — ( 4,304,420 ) ( 4,304,420 ) Balance, June 30, 2023 35,926,721 $ 3,593 $ 83,495,201 $ ( 54,913,152 ) $ 28,585,642 Issuance of Common Stock upon exercise of stock options 600 — 84 — 84 Stock-based compensation — — 219,848 — 219,848 Net loss — — — ( 4,938,641 ) ( 4,938,641 ) Balance, September 30, 2023 35,927,321 $ 3,593 $ 83,715,133 $ ( 59,851,793 ) $ 23,866,933 Stockholders’ Equity (Deficit) Common Stock Additional Paid-In Accumulated Total Stockholders’ Shares Amount Capital Deficit Equity (Deficit) Balance, December 31, 2023 36,025,104 $ 3,603 $ 83,990,437 $ ( 70,532,323 ) $ 13,461,717 Issuance of Common Stock upon exercise of stock options 12,572 1 2,254 — 2,255 Issuance of Common Stock upon equity subscription 1,785,718 178 2,499,827 — 2,500,005 Stock-based compensation — — 244,685 — 244,685 Net loss — — — ( 7,468,061 ) ( 7,468,061 ) Balance, March 31, 2024 37,823,394 $ 3,782 $ 86,737,203 $ ( 78,000,384 ) $ 8,740,601 Issuance of Common Stock upon exercise of stock options — — — — — Stock-based compensation — — 239,821 — 239,821 Net loss — — — ( 15,280,191 ) ( 15,280,191 ) Balance, June 30, 2024 37,823,394 $ 3,782 $ 86,977,024 $ ( 93,280,575 ) $ ( 6,299,769 ) Issuance of Common Stock upon exercise of stock options — — — — — Stock-based compensation — — 232,433 — 232,433 Net loss — — — ( 3,902,288 ) ( 3,902,288 ) Balance, September 30, 2024 37,823,394 $ 3,782 $ 87,209,457 $ ( 97,182,863 ) $ ( 9,969,624 ) See accompanying notes to the unaudited condensed interim financial statements. 3 HCW Biologics Inc. Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2023 2024 Cash flows from operating activities: Net loss $ ( 14,313,746 ) $ ( 26,650,541 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 860,634 501,882 Stock-based compensation 742,477 716,940 Unrealized loss (gain) on investments, net ( 248,445 ) — Realized loss (gain) on investments, net ( 15,625 ) — Changes in the carrying amount of right-of-use asset ( 1,045 ) ( 418 ) Changes in operating assets and liabilities: Accounts receivable ( 292,383 ) 883,917 Deposit for interest reserve ( 5,250,000 ) — Prepaid expenses and other assets ( 251,008 ) 829,043 Accounts payable and other liabilities 392,802 12,383,171 Operating lease liability ( 242,990 ) ( 56,541 ) Net cash used in operating activities ( 18,619,329 ) ( 11,392,547 ) Cash flows from investing activities: Purchases of property and equipment ( 2,486,950 ) ( 148,205 ) Proceeds for sale or maturities of short-term investments 10,000,000 — Net cash provided by (used in) investing activities 7,513,050 ( 148,205 ) Cash flows from financing activities: Proceeds from issuance of common stock 9,697 2,502,260 Proceeds from issuance of debt — 6,530,000 Offering costs — — Debt repayment ( 8,981 ) ( 88,388 ) Net cash provided by financing activities 716 8,943,872 Net (decrease) increase in cash and cash equivalents ( 11,105,563 ) ( 2,596,880 ) Cash and cash equivalents at the beginning of the period 22,326,356 3,595,101 Cash and cash equivalents at the end of the period $ 11,220,793 $ 998,221 Supplemental disclosure of cash flow information: Cash paid for interest, net of amounts capitalized $ 284,465 $ 340,988 Noncash operating, investing and financing activities: Capital expenditures accrued, but not yet paid $ 2,095,724 $ 1,910,698 Purchases of property and equipment included in accounts payable and other liabilities $ — $ 829,207 See accompanying notes to the unaudited condensed interim financial statements. 4 HCW Biologics Inc. Notes to Condensed Interim Financial Statements (Unaudited) 1. Organization and Summary of Significant Accounting Policies Organization HCW Biologics Inc. (the “Company”) is a biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen healthspan by disrupting the link between chronic, low-grade inflammation and age-related diseases. The Company believes age-related low-grade chronic inflammation, or “inflammaging,” is a significant contributing factor to several chronic diseases and conditions, such as cancer, cardiovascular disease, diabetes, neurodegenerative diseases, and autoimmune diseases. The Company is located in Miramar, Florida and was incorporated in the state of Delaware in April 2018. Liquidity and Going Concern In accordance with FASB Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements – Going Concern (“Topic 205-40”), management is required to evaluate whether there are conditions and events, considered in the aggregate that raise substantial doubt about the Company’s ability to continue as a going concern for at least 12 months from the issuance date of the Company’s condensed interim financial statements. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. 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. During its development activities, the Company has sustained operating losses and expects to continue to incur operating losses for the foreseeable future. Since inception to September 30, 2024, the Company incurred cumulative net losses of $ 94.5 million. These losses reflects the events reported in the Form 8-K filed on May 1, 2024 with the Securities and Exchange Commission (“SEC”), involving a scheme that resulted in the misdirection of approximately $ 1.3 million held in Company accounts to a fraudulent account controlled by a third party. The Company has pursued relief through insurance claims and has reported the crime to legal authorities. Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise additional capital to fully implement its business plan. As of September 30, 2024 , the Company had $ 1.0 million in cash and cash equivalents. On August 15, 2022, the Company entered into a loan and security agreement (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. See Part I, Item 4. -- “Controls and Procedures.” 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. To date, the Company has funded operations primarily through the sale of stock, issuance of senior secured notes and revenues generated from the Company’s exclusive worldwide license with Wugen, Inc. (“Wugen”), pursuant to which Wugen licensed limited rights to develop, manufacture, and commercialize cell therapy treatments for cancer based on two of the Company’s internally-developed multi-cytokine fusion protein molecules, and its manufacturing and supply arrangement with Wugen. In the three months ended September 30, 2023 and 2024, the Company recognized revenues generated from the supply of clinical and research grade material to Wugen of $ 853,102 and $ 426,423 , respectively. In the nine months ended September 30, 2023 and 2024, the Company recognized revenues generated from the supply of clinical and research grade material to Wugen of $ 1.5 million and $ 2.2 million, respectively. 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 issued an aggregate of $ 6.9 million in secured notes. On 5 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 license agreement includes 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. If such revisions are insufficient, the Company may have to curtail or cease operations. The Company has received written notices from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) informing the Company it is not in compliance with continued listing requirements on the Nasdaq Global Market for the market value of listed securities. Under Nasdaq Listing Rules, the Company has a period of 180 calendar days from the date of notice in which to regain compliance, and its first deadline is currently scheduled for December 16, 2024. The Company intend to take all reasonable measures available to us to regain compliance with the continued listing requirements for the Nasdaq Global Market, including utilizing the right to appeal to Nasdaq to extend the deadline to regain compliance based on a solid financial plan to do so. While the Company is exercising diligent efforts to maintain the listing of its common stock on Nasdaq, there can be no assurance that the Company will be able to regain or maintain compliance with the applicable continued listing standards set forth in the Nasdaq Listing Rules. As of September 30, 2024, the conclusion of a going concern assessment was that there is substantial doubt about the Company’s ability to continue as a going concern. The Company considered its financing plans for the next 12 months, along with expected continuing operating losses and the burden of expenses incurred in connection with past legal proceedings. Management concluded that there were no mitigating circumstances which alleviated the substantial doubt over its ability to continue as a going concern. As reported in the Company’s Form 8-K filed on July 18, 2024 and further described in Part II, Item 1. – “Legal Proceedings” below, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with ImmunityBio and its affiliates. The Settlement Agreement includes mutual general releases by and among the parties thereto. 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 has substantially completed remediation procedures required to be in compliance with the terms of the Settlement Agreement. The Company entered into the Settlement Agreement to avoid the costs, disruption and distraction of further litigation. In the accompanying condensed balance sheet as of September 30, 2024, the Company reported a balance of $ 14.4 million for legal fees incurred but not yet paid that were included within Accounts payable and an accrual of $ 35,000 for accrued legal fees within Accrued liabilities and other current liabilities. The Company is engaged in discussions with the law firms involved with this matter to arrange a reasonable payment plan with respect to those legal fees. With the execution of the Settlement Agreement, the Company resolved the attendant uncertainties for the outcome of the arbitration and additional complexities, and it launched its new financing plan. 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. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. The Company believes that substantial doubt exists regarding its ability to continue as a going concern for at least 12 months from the date of issuance of the Company’s condensed interim financial statements and that the substantial doubt that existed in its going concern analysis was not alleviated. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed balance sheet as of September 30, 2024, the condensed statements of operations, and condensed statements of changes in stockholders’ equity (deficit) for the three and nine-month periods ended September 30, 2023 and 2024 and the condensed statements of cash flows for the nine months ended September 30, 2023 and 2024, and all related disclosures contained in the accompanying notes have been prepared in accordance with accounting principles that are generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to Article 10 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed interim financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Company’s financial position and the results of its operations and cash flows. The results for the three and nine-month periods ended September 30, 2024 are not necessarily indicative of the results expected for the full fiscal year or any subsequent interim period. The condensed interim balance sheet at December 31, 2023 has been derived from the audited financial statements at that date but does not include all disclosures required by 6 U.S. GAAP for complete financial statements. Because all of the disclosures required by U.S. GAAP for complete financial statements are not included herein, these unaudited condensed interim financial statements and the notes accompanying them should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2023, which appear in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on May 15, 2024 (the “Annual Report”) and in other filings with the SEC. Reclassification of Prior Period Presentation of Legal Expenses Certain prior period amounts have been reclassified to distinguish between General and administrative expenses in the ordinary course of business and legal expenses incurred in connection with the arbitration and Settlement Agreement described in Notes 1. Reclassification of legal expenses incurred in connection with legal proceedings impacts the consolidated interim statements of operations. There is no effect on reporting results of operations from prior periods. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Management must apply significant judgment in this process. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from estimates. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“Topic 820”), establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between fair value measurements based on market data (observable inputs) and those based on the Company’s own assumptions (unobservable inputs). This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1: Observable inputs such as quoted prices in active markets; Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions. Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values takes into account the market for the Company’s financial assets and liabilities, the associated credit risk, and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Revenue Recognition The Company accounts for revenues in accordance with ASC 606, Revenue from Contracts with Customers (“Topic 606”). To determine revenue recognition for arrangements that fall within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services transferred to the customer. At contract inception, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. To date, the Company's revenues have been generated solely from transactions with Wugen. The Wugen License includes 7 licenses of intellectual property, cost reimbursements, upfront signing fees, milestone payments and royalties on future licensee’s product sales. In addition, the Company and Wugen have an agreement for supply of materials, from which the Company also recognizes revenues. License Grants: For out-licensing arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement. Milestone and Contingent Payments: At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event. When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. The Company’s licensees will generally pay milestones payments subsequent to achievement of the triggering event. Materials Supply: The Company provides clinical and research grade materials so that licensees may develop products based on the licensed molecules. The Company plans to enter into commercialization supply agreements when licensees enter the commercial stage of their company. The amounts billed are recognized as revenue as the performance obligations are satisfied by the Company, once the Company determines that a contract exists. On June 18, 2021, the Company entered into a master services agreement for the supply of materials for clinical development of licensed products. To meet all the criteria to qualify as a contract under Topic 606, the Company must enter into statements-of-work for purchases of clinical and research grade materials. The Company has determined that the manufacturing of the clinical and research materials supplied by the Company each represents a single performance obligation that is satisfied over time. The Company recognizes revenue using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company's progress toward completion. As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgement to determine the progress towards completion. The Company reviews its estimate of the progress toward completion based on the best information available to recognize the cumulative progress toward completion as of the end of each reporting period, and makes revisions to such estimates, if facts and circumstances change during each reporting period. For the three and nine months ended September 30, 2023, the Company recognized $ 853,102 and $ 1.5 million in revenue related to the sale of development supply materials to Wugen, respectively. For the three and nine months ended September 30, 2024 , the Company recognized $ 426,423 and $ 2.2 million in revenue related to sale of development supply materials to Wugen, respectively. Investments The Company holds a minority interest in Wugen which is accounted for using the measurement alternative whereby the investment is recorded at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee. No impairment has been recognized. As of September 30, 2024 and December 31, 2023, the Compa ny included $ 1.6 million for the investment in Wugen in Investments in the accompanying condensed interim balance sheets. The Company used its equity interest in Wugen to collateralize the Secured Notes. See Note 3. Debt, Net. Operating Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in Other assets, Accrued liabilities and other current liabilities, and Other liabilities on its condensed interim balance sheets. Operating lease Right of Use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over 8 the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company has a lease agreement with lease and non-lease components, which are accounted for separately. For short-term leases with a term of one year or less, the Company uses the practical expedient and does not record an ROU asset or lease liability for such short-term leases. Net Loss Per Share Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share of common stock includes the effect, if any, from the potential exercise of stock options and unvested shares of restricted stock, which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive. 2. Accrued Liabilities and Other Current Liabilities As of December 31, 2023 , the Company had a balance of $ 2.6 million included in Accrued liabilities and other current liabilities i n the audited balance sheet, consisting of $ 392,000 for construction expenses, $ 105,000 for manufacturing expenses, $ 1.1 million for legal fees, $ 262,000 for clinical expenses, $ 365,000 for bonus payable, $ 160,000 for salary expenses, $ 119,000 for the current portion of long-term debt, $ 28,500 for a lease liability and $ 68,500 for other liabilities. As of September 30, 2024 , the Company had a balance of $ 1.2 million included in Accrued liabilities and other current liabilities in the accompanying condensed interim balance sheet, consisting of $ 170,000 for legal fees, $ 422,000 for construction in progress, $ 49,000 for manufacturing expenses, $ 104,000 for property taxes, $ 117,000 for clinical expenses, $ 57,000 for bonus payable, $ 126,000 for the current portion of long-term debt and $ 90,000 for salary and benefits. 3. Debt, Net Cogent Bank Loan 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. The interest-only period was one year followed by 48 months of equal payments of principal and interest beginning on September 15, 2023 based on a 25-year amortization rate. The unamortized balance is due on August 15, 2027 (the “Maturity Date”), and bears interest at a fixed per annum rate equal to 5.75 %. Upon the Maturity Date, a final payment of unamortized principal will be due. The Company has the option to prepay the outstanding balance of the loan prior to the Maturity Date without penalty. 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. As of September 30, 2024 , $ 6.3 million is included in Short-term debt, net in the accompanying condensed interim balance sheet. Senior Secured Notes On March 31, 2024, the Company entered into a Note Purchase Agreement with the Purchasers (as defined in the Note Purchase Agreement), pursuant to which the Company may issue secured notes up to an aggregate principal amount up to $ 10.0 million (“Secured Notes”). As of September 30, 2024, the Company received $ 6.5 million in funding from the issuance of Secured Notes, which is included within Debt, Net on the accompanying condensed interim balance sheet. Investors included Dr. Hing C. Wong, Founder and Chief Executive Officer, who invested $ 2.4 million; Rebecca Byam, Chief Financial Officer, who invested $ 220,000 ; Lee Flowers, Senior Vice President of Business Development, who invested $ 25,000 ; Scott T. Garrett, the Chairman of the Company’s board of directors, who invested $ 140,000 ; Gary M. Winer, a member of our board of directors, who invested $ 60,000 ; Rick S. Greene, a member of the board of directors, who invested $ 25,000 , as well as unrelated parties. 9 As of July 2, 2024, existing investors in Secured Notes unanimously agreed to an Amended and Restated Note Purchase Agreement and related documents (“Amended and Restated Note Purchase Agreement”). On September 30, 2024, existing investors approved an amendment to the Amended and Restated Note Purchase Agreement which extended the last closing date to October 31, 2024. No other terms were changed. Under the terms of the Amended and Restated Note Purchase Agreement, the Secured Notes continu e to bear interest at a rate of 9 % per annum , payable quarterly in arrears. The Secured Notes will mature on August 30, 2026 (the “Maturity Date”), on which date the principal balance, accrued but unpaid interest and other amounts owed under the terms of the Amended and Restated Note Purchase Agreement shall be due and payable. The Company pledged its equity ownership interest in Wugen, which was equivalent to a 5.6 % ownership stake in that company as of September 30, 2024 (“Pledged Collateral”). The Pledged Collateral will be held and released according to the terms of the Escrow Agreement, as security for the Secured Notes. If the Company elects to prepay the Senior Notes on or before December 31, 2024, there is a 5 % prepayment penalty. The Secured Notes have a Mandatory Prepayment provision, according to which the Company is required to prepay the Secured Notes before the Maturity Date under certain circumstances. In the event of a Mandatory Prepayment, Secured Notes may receive a bonus payment based on the gross proceeds of the sale of the Pledged Collateral. If the Secured Notes are repaid on the Maturity Date, holders will receive a fixed bonus payment in addition to payment of outstanding principal and accrued and unpaid interest. If a bonus payment is paid, then there is no prepayment penalty. The Amended and Restated Note Purchase Agreement also contains default provisions, according to which, following an event of default, the Company may be required to distribute the Pledged Collateral to the Purchasers on a pro rata basis based on a $ 10.0 million issuance of Secured Notes, in full satisfaction of the indebtedness evidenced by the Secured Notes. As of September 30, 2024, the fair value of the embedded derivative, which incorporated the likelihood of certain events occurring, was immaterial. Thus, as of September 30, 2024, the Company did not recognize the embedded derivative in the accompanying condensed financial statements. The Company accounts for the bonus payment to be paid if the Secured Notes are repaid on the Maturity Date by accreting the bonus payment to the full amount due on the Maturity Date, utilizing the effective interest rate method. As of September 30, 2024, the Company did not recognize accretion of the bonus payment, which was not considered material to the accompanying condensed financial statements. 4. Preferred Stock As of December 31, 2023 and September 30, 2024 , the Company had 10,000,000 shares of preferred stock authorized and no such shares issued. 5. Net Loss Per Share The following table summarizes the computation of the basic and diluted net loss per share: Three Months Ended September 30, Nine Months Ended September 30, 2023 2024 2023 2024 Numerator: Net loss $ ( 4,938,641 ) $ ( 3,902,288 ) $ ( 14,313,746 ) $ ( 26,650,541 ) Denominator: Weighted-average common shares outstanding 35,926,921 37,823,394 35,907,123 37,623,459 Net loss per share, basic and diluted $ ( 0.14 ) $ ( 0.10 ) $ ( 0.40 ) $ ( 0.71 ) The following table summarizes the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their inclusion would be anti-dilutive: At September 30, 2023 2024 Common stock options 1,869,492 1,788,137 Potentially dilutive securities 1,869,492 1,788,137 10 6. Fair Value of Financial Instruments The carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, U.S. government-backed securities with maturity dates up to one year, accounts payable and accrued liabilities, approximate fair value due to their short-term maturities. Money market funds included in cash and cash equivalents and U.S. government-backed securities are measured at fair value based on quoted prices in active markets, which are considered Level 1 inputs. No transfers between levels occurred during the periods presented. The following table presents the Company’s assets, which were measured at fair value at December 31, 2023 and September 30, 2024: At December 31, 2023: Level 1 Level 2 Level 3 Total Assets: Money market funds $ 1,626,129 $ — $ — $ 1,626,129 Total $ 1,626,129 $ — $ — $ 1,626,129 At September 30, 2024: Level 1 Level 2 Level 3 Total Assets: Money market funds $ 83,814 $ — $ — $ 83,814 Total $ 83,814 $ — $ — $ 83,814 7. Income Taxes The Company computes its quarterly income tax expense/(benefit) by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The Company did no t have a provision for income taxes (current or deferred tax expense) as of December 31, 2023 and September 30, 2024. The Company will continue to maintain a 100 % valuation allowance on total deferred tax assets. The Company believes it is more likely than not that the related deferred tax assets will not be realized. As a result, the Company’s effective tax rate will remain at 0.00 % because no items either estimated or discrete items would impact the tax provision. 8. Commitments and Contingencies Operating Leases As of March 1, 2022, the Company entered a two-year lease, comprised of two operating leases, for approximately 12,250 square feet of space located in Miramar, Florida. Upon the commencement of those leases, the Company used its incremental borrowing rate of 6.0 % to determine the amounts to recognize for a ROU asset and a lease liability. On March 1, 2024, the Company entered a one-year lease for the same space, which expires on February 28, 2025 . If a lease has a term that is 12 months or less in duration, the lease qualifies for a short-term lease exemption under ASC 842-20-25-2. The Company elected to take advantage of this exemption, and it will account for this lease on a straight-line basis over the lease term and will not recognize a ROU asset and a lease liability as a result. The remaining lease payments under the new short-term lease ar e $ 114,510 . T he Company has no obligations under financing leases. For the three months ended September 30, 2023 and 2024 , rent expense recognized by the Company was $ 42,400 and $ 49,500 , respectively, of which $ 22,200 and $ 25,900 , respectively, are included in research and development in the accompanying condensed interim statements of operations. For the nine months ended September 30, 2023 and 2024, rent expense recognized by the Company was $ 127,200 and $ 146,400 , respectively, of which $ 66,600 and $ 75,300 , respectively are included in research and development in the accompanying condensed interim statements of operations. Contractual Commitments The Company has commitments with a third-party manufacturing organization to supply us with clinical grade materials. As of September 30, 2024, it is under contract for obligations of $ 12,500 it expects to pay during the year ending December 31, 2024. As of December 31, 2023 and September 30, 2024, the Company had commitments to fund $ 4.4 million an d $ 2.5 million, respectively, in construction costs related to the buildout of its new headquarters and manufacturing facility. 11 Project Financing On January 10, 2024 (the “Termination Date”), the Company exercised its right to terminate its credit agreement (the “Credit Agreement”), dated April 21, 2023, with Prime Capital Ventures, LLC (the “Lender”), as permitted under the terms of the Credit Agreement. These funds were intended to finance the construction and renovation of the Company’s new headquarters (the “Property”). The termination followed repeated delays in funding and related concerns. There were no borrowings under the Credit Agreement as of the Termination Date, and the Company did not incur any penalties as a result of such termination under the terms of the Agreement. Upon exercising its right to terminate the Agreement, the Company was entitled to receive the return of the $ 5.3 million that the Company placed on deposit to establish an interest reserve account with the Lender. However, the Lender defaulted on its obligation to return the interest reserve deposit. Given the uncertainty of when or if funds will be recovered from the Lender, the Company recognized a reserve for a credit loss for $ 5.3 million as of December 31, 2023. The Company intends to pursue all available remedies to recover these funds, including legal actions, receivership and insurance. The Company continues to seek financing to complete the construction and renovation of its Property, where it intends to build a new headquarters, including a biologics manufacturing facility, upgraded research laboratory facilities, vivarium, and upgraded office and common areas. Nonoperating Loss As reported in the Company’s Form 8-K filed on May 1, 2024 with the SEC, the Company became aware that it was the victim of a criminal scheme involving the impersonation of a purchaser upon the default on a legally binding commitment to purchase $ 8.0 million of secured notes from the Company. The scheme resulted in the misdirection of approximately $ 1.3 million held in Company accounts to a fraudulent account controlled by a third party. 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 nine-month periods ended September 30, 2024. Legal Legal Proceedings From time to time, the Company is a party to or otherwise involved in legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. In addition, the Company enters into agreements that may include indemnification provisions, pursuant to which the Company agrees to indemnify, hold harmless and defend the indemnified parties for losses suffered or incurred by the indemnified party. When the Company believes that the outcome of such a matter will result in a liability that is probable to be incurred and result in a potential loss, or range of loss, that can be reasonably estimated, the Company will accrue a liability and make the appropriate disclosure in the footnotes to the financial statements. Arbitration, Settlement and General Release On December 23, 2022, Altor BioScience, LLC and NantCell, Inc. (“Altor/NantCell”) initiated an arbitration against Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, in California alleging breach of contract and fiduciary duty, among other claims. On that same date, Altor/NantCell filed a lawsuit against the Company in federal court alleging misappropriation of trade secrets, inducement of breach of contract and breach of fiduciary duty, among other claims against the Company. On 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 Court 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 proceeded in arbitration before JAMS and consolidated with the arbitration Altor/NantCell initiated against Dr. Wong (the “Arbitration”). On March 26, 2024, Altor/NantCell filed a complaint (the “Complaint”) against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong. As reported in the Company’s Form 8-K filed on July 18, 2024 and described in Part II, Item 1. – “Legal Proceedings” below, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with Altor BioScience, LLC (“Altor”), NantCell, Inc. (“NantCell”), and ImmunityBio, Inc. (the parent of Altor and NantCell, together with Altor and NantCell, “ImmunityBio”), to resolve the previously disclosed Arbitration before JAMS brought by Altor and NantCell as well as the Complaint Altor filed against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong. The Settlement Agreement includes mutual general releases by and among the parties thereto. 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 12 connection with the matter. The Company has substantially completed remediation 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 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. Other Matters 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, to the Company’s knowledge, the lender has not elected to do so. Inflationary Cost Environment, Banking Crisis, Supply Chain Disruption and the Macroeconomic Environment The Company’s operations have been affected by many headwinds, including inflationary pressures, rising interest rates, ongoing global supply chain disruptions resulting from increased geopolitical tensions such as the war in the Middle East, the conflict between Russia and Ukraine, China-Taiwan relations, financial market volatility and currency movements. The Company has been impacted by inflation, and may continue to be so, when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Management employs a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines. Future developments in these and other areas present material uncertainty and risk with respect to the Company's clinical trials, IND-enabling activities, buildout of the new headquarters, as well as the Company's financial condition and results of operations. The extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable. 9. Subsequent Events Subsequent events have been evaluated through the date the financial statements were filed. In addition to the required recognition or disclosure disclosed in the footnotes herein, there were also the following subsequent events after the reporting date: During October 2024, the Company issued $ 375,000 in Additional Secured No tes, including a $5 0,000 purchase by Dr. Wong on October 31, 2024. 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. 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. 13