Item 7. Management’s Discussion and Analysis
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes thereto included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions, which are based on the beliefs of our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report.
Company Overview
HCW Biologics Inc. (“HCWB” or the “Company”) is a clinical-stage biopharmaceutical company developing proprietary immunotherapies to treat diseases promoted by chronic inflammation, especially age-related and senescence-associated diseases. Our immunotherapeutics represent a new class of drug that we believe has the potential to fundamentally change the treatment of cancer and many other diseases and conditions that are promoted by chronic inflammation — and in doing so, improve patients’ quality of life and possibly extend longevity.
2024 was a pivot point for us. In July 2024, we entered a settlement and general release agreement (“Settlement Agreement”) resolving a long-running arbitration proceeding brought against the Company and Dr. Hing C. Wong, our Founder and Chief Executive Officer, by Altor BioScience, LLC, NantCell, Inc. and ImmunityBio, Inc. (collectively herein, “ImmunityBio”). With the Settlement Agreement, we closed the chapter on an approximately 18-month period during which our clinical development, business development and capital-raising activities were placed substantially on “hold,” awaiting resolution of claims made against us and Dr. Wong by ImmunityBio. See Part I, Item 3. - “Legal Proceedings.” The Settlement Agreement related to the Company’s TOBI Molecules, including HCW9218 and HCW9302, our lead product candidates, among others.
The Company retains all rights to develop and commercialize HCW9302, our clinical-stage, lead product candidate for our autoimmune and proinflammatory disease program. In addition, we hold exclusive rights to develop and commercialize HCW9218 in non-oncology indications, as well as HCW9206 and HCW9201 in all indications. The Settlement Agreement had no impact on our exclusive worldwide license agreement with Wugen Inc. (“Wugen License”). We entered the Wugen License in 2020, granting Wugen Inc. (“Wugen”) limited rights to develop cell-based immunotherapeutic treatments for cancer indications using HCW9206 and HCW9201. WU-NK-101, the Wugen product developed using the licensed molecules, is now being evaluated in a Phase 2 clinical study in solid tumors. ImmunityBio controls the supply of HCW9218, and one of the critical components of continuing our development of HCW9218 is successfully obtaining a supply agreement with ImmunityBio.
In the fourth quarter of 2024, we revealed a new drug discovery and development platform, with a novel scaffolding or “backbone” of proteins called T-cell Receptor β Chain constant region (“TRBC”). The TRBC platform leverages our in-depth knowledge of T cell and natural killer (“NK”) cell immunology. We have developed molecules in each of these classes for treatments of hematologic and solid tumors, virally infected cells, and cellular senescence diseases associated with aging. TRBC Molecules are grouped into three classes, based on their utilities: Class I: Multi-Functional Immune Cell Stimulators; Class II: Second-Generation Immune Checkpoint Inhibitors and Multi-Specific Targeting Fusions; and Class III: Enhanced Immune Cell Engagers. The Company is making an efficacy assessment using relevant animal models, by the end of 2025, results of these studies are expected to show the optimal construction for lead product candidates(s).
With clarity on ownership of intellectual property, the Company reassessed its clinical development pipeline and the future direction of our Company. Our expertise is in immunotherapeutic treatments and our clinical development pipeline will remain so. Our focus continues to be to develop protein-based immunotherapies that are administered by subcutaneous injection. We remain focused on diseases promoted by chronic inflammation driven by senescence, including cancer, especially age-related diseases. The diseases we will target will have no curative FDA approved treatments. Finally, we have selected programs that include life-threatening diseases, such as pancreatic and ovarian cancer, as well as “quality-of-life” indications, such as alopecia areata and senile lentigo. HCW9302 will remain one of our lead product candidates. Future drug discovery and new drug development will be based on TRBC Molecules. There are several potential candidates in each class of TRBC Molecules from which the Company will select lead molecules for each program. Part of this selection will be to determine which TRBC molecules will be developed in-house and which are more appropriate to develop through business development transactions, such as out-licensing agreements.
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Business Highlights
Business Development Transaction
On November 17, 2024, the Company entered an exclusive worldwide license agreement with WY Biotech Co., Ltd. (“WY Biotech”), a China-based company specializing in the early-stage development of recombinant protein drugs and gene/cell therapies, to develop and commercialize HCW11-006, one of the Company’s product candidates generated with our TRBC drug discovery platform, for therapeutic use (the “WY License Agreement”). Key terms of the WY License Agreement include that WY Biotech has agreed to pay HCWB $7.0 million in an upfront payment.
As the Company disclosed in the Form 8-K filed on March 19, 2025, the Company and WY Biotech agreed to amend the WY Biotech License Agreement due to a delay in WY Biotech coming to a definitive agreement with their designated contract development and manufacturing organization (“CDMO”). Specifically, in order to accommodate the delay, the parties agreed to restructure the payment schedule for the $7.0 million upfront license fees, including delaying the initial $4.0 million portion thereof that was originally due on or about March 17, 2025, to reduce the performance milestones that the Company must complete in order to earn the full $7.0 million nonrefundable upfront payment in June 2025, and to provide that either party may terminate the Agreement if WY Biotech is not able to definitively engage its CDMO by June 2025. Under the amended terms, the Company expects to fulfill our performance obligations and earn the full $7.0 million upfront fee in June 2025. There were no other material changes to the WY Biotech License Agreement, which involves the grant to WY Biotech of an exclusive, world-wide license to use and apply HCW11-006 for in vivo applications. See Exhibits 10.27 and 10.28 to this Annual Report on Form 10-K.
The Company has now completed extensive preclinical studies that further support our belief in the potential for HCW11-006 for both an in vivo and ex vivo therapy. The in vivo therapy is licensed by WY Biotech, however, the Company retained all rights to the ex vivo therapy and applications as a reagent in cell-based therapy treatments, including cell-based therapies, such as CAR-T therapies. The Company considers WY Biotech License provisions for the Opt-In Right to take over the development of HCW11-006 for the Americas markets to be an important feature of the WY Biotech License. We believe our right to recapture this market is a potentially high value opportunity. Further, we will be able to base our decision to opt-in on the human-data read-out from a Phase 1 clinical trial, which will mitigate our development risks and provide valuable clinical information about the potential for the indications we will use for Phase 2 clinical studies. See Part I, “Business —Out-License Programs.”
The Company has identified the Class III TRBC Molecules, Immune Cell Engagers, as the next program for out-licensing. In light of recent transactions coupled with the challenges of clinical development, we plan to take advantage of industry interest in this breakthrough drug. The Company continually assesses our portfolio of molecules in order to identify potential business development opportunities.
Financing
• On February 20, 2024, we sold an aggregate of 1,785,718 shares of our common stock to certain of our officers and directors, at a purchase price of $1.40 per share, for an aggregate purchase price of $2.5 million.
• Through October 31, 2024, the Company issued an aggregate of $6.9 million in Senior Notes, which are secured by the Company’s shares of Wugen common stock which were consideration for the license fee for the Wugen License. The holders of $6.6 million of the outstanding principal for the Senior Notes have agreed to Principal Terms for the conversion into shares of the Company’s Common Stock at a conversion price of $0.65 per share, warrants to purchase $3.3 million of the Company’s Common Stock at an exercise price of $0.65 per share, and some of the Company’s shares of Wugen common stock. The conversion is subject to stockholder approval. See Part II, Item 9B, “Other Information” for more information on the Special Meeting of the Stockholders.
• On November 18, 2024, the Company entered a $6.9 million securities purchase agreement with an institutional investor, involving a registered direct offering and a concurrent private placement of common stock and warrants. The offering, priced above market under Nasdaq rules and closed on November 20, 2024. As a result of this offering, the Company issued 6,717,000 shares of Common Stock and warrants to purchase 6,717,000 shares of Common Stock at $1.03 per shares, at a combined price of $1.03 per unit consisting of one share of Common Stock and one five-year warrant to purchase a share of Common Stock.
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Compliance with Nasdaq Listing Rules
• On March 3, 2025, the Nasdaq Hearings Panel (the “Panel”) of The Nasdaq Stock Market LLC (“Nasdaq” or the “Exchange”) granted the Company an extension in which to regain compliance with all Nasdaq continued listing rules. The Panel’s determination followed a hearing on February 13, 2025, at which the Panel considered the Company’s plan to regain compliance with Listing Rules 5450(a)(1), 5450(b)(2)(A) and 5450(b)(2&3)(C), the minimum bid price (“Bid Price”), the market value of publicly held securities (“MVPHS”) and the market value of listed securities (“MVLS”) rules, respectively. As a result of the extension, the Panel granted the Company’s request for continued listing on the Exchange, provided that the Company demonstrates compliance with the Bid Price Rule by April 28, 2025, and all other Exchange continued listing rules by June 15, 2025.
Clinical Development
• On January 28, 2025, the Company received clearance of its IND from the FDA to initiate a first-in-human Phase 1 dose escalation clinical trial to evaluate one of its lead drug candidates, HCW9302, in patients with moderate-to-severe alopecia areata, a common autoimmune disease in humans that currently has no curative FDA approved treatments.
• As of December 31, 2024, the Company was required to close the Phase 2 clinical study to evaluate HCW9218 in combination with neoadjuvant chemotherapy in the treatment of ovarian cancer sponsored by the University of Pittsburgh Medical Center, as required under the Settlement Agreement, due to lack of enrollment.
Trends and Uncertainties
Inflationary Cost Environment, Banking Crisis, Supply Chain Disruption and the Macroeconomic Environment
Our operations have been affected by many headwinds, including inflationary pressures, rising interest rates, ongoing global supply chain disruptions resulting from increased geopolitical tensions such as the war between Russia and Ukraine, the war in the Middle East, China-Taiwan relations, financial market volatility and currency movements. These headwinds, specifically the supply chain disruptions, have adversely impacted our ability to procure certain services and materials, which in some cases impacts the cost and timing of clinical trials and IND-enabling activities. In addition, we have been impacted by inflation when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Further, rising interest rates would also increase borrowing costs to the extent that the Company takes on any additional debt. The Company uses a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines. However, the extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable.
For discussion of risks related to potential impacts of supply chain, inflation, geopolitical and macroeconomic challenges on our operations, business results and financial condition, see Item 1A. “Risk Factors” in this Annual Report.
Components of Results of Operations
Revenues
We have no products approved for commercial sale and have not generated any revenue from commercial product sales of internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases. The principal source of our revenues to date have been generated from worldwide exclusive licenses for rights to develop and commercialize some of our proprietary molecules. See Note 1 to our audited financial statements included elsewhere in this Annual Report for more information.
Wugen License
We derive revenue from a license agreement granting rights to Wugen to further develop and commercialize products based on two of our internally-developed molecules. Consideration under our contract included a nonrefundable upfront payment, development, regulatory and commercial milestones, and royalties based on net sales of approved products. Additionally, HCW Biologics retained manufacturing rights and has agreed to provide Wugen with clinical and research grade materials for clinical development and commercialization of licensed products under separate agreements.
We assessed which activities in the Wugen License should be considered distinct performance obligations that should be accounted for separately. We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the Wugen License.
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Performance obligations relating to the granting a license and delivery of licensed product and R&D know-how were satisfied when transferred upon the execution of the Wugen License on December 24, 2020. The Company recognized revenue for the related consideration at a point in time. The revenue recognized from a transaction to supply clinical and research grade materials entered into under the MSA and covered by a Statement of Work, represents one performance obligation that is satisfied over time. The Company recognizes revenue generated for supply of material for clinical development using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company’s progress toward completion.
WY Biotech License
We expect to derive revenue from a license agreement granting rights to WY Biotech to further develop and commercialize products based on one of our internally-developed molecules. Consideration under our contract included a nonrefundable upfront payment, development, regulatory and commercial milestones, and royalties based on net sales of approved products.
We assessed which activities in the WY Biotech License, as amended, should be considered distinct performance obligations that should be accounted for separately. We concluded that there is one performance obligation relating to the granting of a license and delivery of the Technology Transfer Report for certification of the licensed molecule required to develop the preclinical licensed molecule. Therefore, the Company will not recognize revenue until the Technology Transfer Report is delivered for certification of the licensed molecule, which we anticipate will take place in the second quarter of 2025.
Operating Expenses
Our operating expenses are reported as research and development expenses and general and administrative expenses.
Research and Development
Our research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
• Employee-related expenses, including salaries, benefits, and stock-based compensation expense;
• Expenses related to manufacturing and materials, consisting primarily of expenses incurred in connection with CMOs, which produce cGMP materials for clinical trials on our behalf;
• Expenses associated with preclinical activities, including research and development and other IND-enabling activities;
• Expenses incurred in connection with clinical trials; and
• Other expenses, such as facilities-related expenses, direct depreciation costs for capitalized scientific equipment, and allocation for overhead.
We expense research and development costs as they are incurred. Costs for contract manufacturing are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the agreement, and the pattern of payments for goods and services will change depending on the material. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed.
We expect research and development expenses to increase substantially for the foreseeable future as we continue the development of our product candidates. We cannot reasonably determine the nature, timing, and costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. Product candidates in later stages of development generally have higher development costs than those in earlier stages. See “Risk Factors -- Risks Related to the Development and Clinical Testing of Our Product Candidates,” elsewhere in this Annual Report for a discussion of some of the risks and uncertainties associated with the development and commercialization of our product candidates. Any changes in the outcome of any of these risks and uncertainties with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.
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General and administrative expenses consist primarily of employee-related expenses, including salaries, related benefits, and stock-based compensation expense for employees in the executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include third-party costs such as insurance costs, fees for professional services, such as legal fees in the ordinary course of business, auditing and tax services, facilities administrative costs, and other expenses.
We expect general and administrative expenses incurred in the normal course of business for other purposes, such as costs for recruitment and retention of personnel, service fees for consultants, advisors and accountants, as well as costs to comply with government regulations, corporate governance, internal control over financial reporting, insurance and other requirements for a public company, to continue to increase for the foreseeable future as we build our clinical programs.
Legal Expenses
Legal expenses consist of fees incurred by the Company in its own defense and that of officers and employees in connection with a legal matter brought against the Company and Dr. Hing C. Wong, our Founder and Chief Executive Officer, by a former employer of Dr. Wong.
During the period ended December 31, 2022, Altor/NantCell initiated legal proceedings against Dr. Wong and the Company. On April 26, 2023, the parties stipulated that Altor/NantCell’s action against the Company would be consolidated with the Altor/NantCell arbitration demand against Dr. Wong. On April 27, 2023, the U.S. District Court for the Southern District of Florida (the “Court”) with jurisdiction over the lawsuit against the Company approved the parties’ stipulation and ordered the parties to arbitration. On May 1, 2023, Altor/NantCell filed a demand against the Company before JAMS. On May 3, 2023, Altor/NantCell dismissed the federal court action without prejudice and the Court ordered the case dismissed without prejudice and closed the case. Proceedings against the Company and Dr. Wong were consolidated in the arbitration before JAMS (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. The Arbitration hearing was held on May 20, 2024 to May 31, 2024, after which the parties entered into settlement negotiations.
As reported in the Company’s Form 8-K filed on July 18, 2024 and further described in Part I, Item 3. – “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 a 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 connection with the matter. In accordance with the provisions of the Settlement Agreement, upon completion of these procedures, the parties mutually stipulated that the Arbitration and Complaint should be dismissed. The Arbitration and related Complaint were dismissed on or about December 24, 2024.
Reserve for Credit Losses and Other Expenses
The Company recognized a Reserve for credit losses of $5.3 million, reflecting our conclusion that it was not probable that we would recover the interest reserve deposit established upon entering the credit agreement with Prime Capital Ventures (the “Lender”) based on facts known as of December 31, 2023. As reported in the Company’s Form 8-K filed on January 12, 2024, on January 10, 2024, the Company exercised its right to terminate its credit agreement, dated April 21, 2023, with the Lender, as permitted under the terms of the credit agreement. Subsequently, the Lender defaulted on its obligation to return the interest reserve deposit. The Company entered the credit agreement to obtain financing for the purpose of building its proposed manufacturing facility and upgrading its research and laboratory facilities at a property the Company owns in Miramar, Florida.
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 year ended December 31, 2024.
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Interest Expense
Interest expense includes interest paid on debt. This includes interest due on the Cogent Bank loan and Senior Notes issued by the Company.
Other Income, Net
Other income, net consists of interest earned on our cash, cash equivalents, unrealized gains and losses related to our investments in U.S. government-backed securities, and other income and expenses related to non-operating activities.
Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2023 and 2024:
Years Ended
December 31,
2023
2024
Revenues:
Revenues
$
2,841,794
$
2,566,792
Cost of revenues
(2,281,434
)
(1,607,389
)
Net revenues
560,360
959,403
Operating expenses:
Research and development
7,676,316
6,388,994
General and administrative
6,779,515
6,839,596
Legal expenses
6,571,689
15,910,480
Reserve for credit losses and other expenses
5,250,000
1,300,000
Total operating expenses
26,277,520
30,439,070
Loss from operations
(25,717,160
)
(29,479,667
)
Interest expense
(283,042
)
(631,137
)
Other income, net
1,005,925
86,990
Net loss
$
(24,994,277
)
$
(30,023,814
)
Revenue
In the year ended December 31, 2023, we recognized $2.8 million of revenue and cost of revenues of $2.3 million. Revenues were derived exclusively from the sale of licensed molecules to Wugen. There were no deferred revenues as of December 31, 2023.
In the year ended December 31, 2024, we recognized $2.6 million of revenue and cost of revenues of $1.6 million. Revenues were derived exclusively from the sale of licensed molecules to Wugen. There is currently one ongoing Phase 1 clinical study evaluating WU-NK-101, the Wugen product candidate created using the licensed molecules, in solid tumors. There were no deferred revenues as of December 31, 2024.
Research and Development Expenses
The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2024:
Years Ended
December 31,
2023
2024
$ Change
% Change
Salaries, benefits and related expenses
$
2,940,979
2,797,370
$
(143,609
)
(5
)%
Manufacturing and materials
1,280,351
1,425,734
145,383
11
%
Preclinical expenses
1,607,601
859,701
(747,900
)
(47
)%
Clinical trials
1,059,731
558,215
(501,516
)
(47
)%
Other expenses
787,654
747,974
(39,680
)
(5
)%
Total research and development expenses
$
7,676,316
$
6,388,994
$
(1,287,322
)
(17
)%
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Research and development expenses decreased by $1.3 million, or 17%, from $7.7 million for the year ended December 31, 2023 to $6.4 million for the year ended December 31, 2024. This decrease was primarily attributable to decreased expenses from preclinical and clinical activities.
Salaries, benefits and related expenses decreased by $143,609, or 5%, from $2.9 million for the year ended December 31, 2023 to $2.8 million for the year ended December 31, 2024. This decrease was primarily attributable to decreases of $43,850 in salaries and related taxes, $52,383 in the cost of benefits and $42,621 in performance-based bonuses. The Company had a staff reduction in May 2024, and continues to operate with the reduced headcount.
Manufacturing and materials expenses increased by $145,383, or 11%, from $1.3 million for the year ended December 31, 2023 to $1.4 million for the year ended December 31, 2024. For the year ended December 31, 2023, the costs we incurred were primarily for production activities associated with the master cell bank characterization for the high-expressing version of HCW9101, which is used in the manufacturing process for all TOBI-based molecules, including those licensed to Wugen. For the year ended December 31, 2024, costs were primarily attributable to the production of HCW9101.
Expenses associated with preclinical activities decreased by $747,900, or 47%, from $1.6 million for the year ended December 31, 2023 to $859,701 for the year ended December 31, 2024. This decrease was primarily attributable to a decline in costs for completing toxicology studies related to IND-enabling activities for HCW9302. In the year ended December 31, 2023, toxicology and other IND-enabling studies were winding down, and we began the process of preparing the IND for submission. In the year ended December 31, 2024, the Company submitted the IND to obtain clearance from the FDA to evaluate HCW9302 in a Phase 1 clinical trial in patients with alopecia areata. The Company received clearance to begin this trial on January 28, 2025.
Expenses associated with clinical trials, including patient fees, ancillary studies, clinical site operating expenses, professional fees related to regulatory filings and outside collaborations, decreased by $501,516, or 47%, from $1.1 million for the year ended December 31, 2023 to $558,215 for the year ended December 31, 2024. For the year ended December 31, 2023, the Company had two ongoing clinical studies: (1) an Investigator-sponsored Phase 1 clinical trial at the Masonic Cancer Center, University of Minnesota to evaluate HCW9218 in chemo-refractory/chemo-resistant solid tumors and (2) a Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in advanced pancreatic cancer, with the National Cancer Institute as the lead clinical site. Both of these studies were completed in the first half of 2024.
Other expenses, which include overhead allocations, decreased by $39,680, or 5%, from $787,654 for the year ended December 31, 2023 to $747,974 for the year ended December 31, 2024. This decrease is primarily attributable to decreases of $50,823 in travel and travel-related expenses and $12,695 in facilities-related expenses, partially offset by increases of $19,879 in rent and occupancy costs and $4,407 for public relations activities, such as press releases.
General and Administrative Expenses
The following table summarizes our general and administrative expense for the years ended December 31, 2023 and 2024:
Years Ended
December 31,
2023
2024
$ Change
% Change
Salaries, benefits and related expenses
$
3,216,860
2,563,936
$
(652,924
)
(20
)%
Professional services
1,257,879
1,171,885
(85,994
)
(7
)%
Facilities and office expenses
634,080
654,996
20,916
3
%
Accretion of fixed bonus upon maturity of Senior Notes
—
527,304
527,304
0
%
Depreciation
266,763
277,554
10,791
4
%
Rent and occupancy expense
156,807
205,511
48,704
31
%
Other expenses
1,247,126
1,438,410
191,284
15
%
Total general and administrative expenses
$
6,779,515
$
6,839,596
$
60,081
1
%
General and administrative expenses increased by $60,081, or 1%, from $6.8 million for the year ended December 31, 2023 to $6.8 million for the year ended December 31, 2024. The increase is mainly attributable to an accretion expense of $527,304 for the accretion of the fixed bonus payment that holders of Secured Notes will receive if the Secured Notes are repaid on their Maturity Date of August 31, 2026 and an increase in other expenses, primarily insurance costs, partially offset by a decrease in salaries and benefits.
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Salaries, benefits and related expenses decreased by $652,924, or 20%, from $3.2 million for the year ended December 31, 2023 to $2.6 million for the year ended December 31, 2024. There was a $322,214 decrease in salaries and related taxes resulted from a reduction in staff and temporary salary reductions as part of cost reductions which took place in the second quarter. In addition, there was a $304,174 decrease in performance-based bonuses, resulting from the waiver of performance-based bonuses due to officers of the Company that were earned in 2022 and deferred until the time they were waived in the second quarter of 2024.
Professional services decreased by $85,994, or 7%, from $1.3 million in the year ended December 31, 2023 to $1.2 million in the year ended December 31, 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 $117,382 decrease in legal fees incurred in connection with procuring patents, partially offset by a $31,389 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 certain patent protection for rights retained under the Settlement Agreement.
Facilities and office expenses increased by $20,916, or 3%, from $634,080 for the year ended December 31, 2023 to $654,996 for the year ended December 31, 2024, primarily due to increases of $18,290 for janitorial and disposal services and $13,793 for IT services and software licenses, partially offset by a decrease of $12,454 for office equipment and supplies.
There was no accretion in year ended December 31, 2023, but in the year ended December 31, 2024, there was $527,304 in accretion for the fixed bonus payment for Senior Notes issued during 2024. The terms of the Senior Notes were amended in the third quarter of 2024, adding the provision for the fixed bonus payment if the Senior Notes are held to Maturity.
Other expenses increased by $191,284, or 15%, from $1.3 million for the year ended December 31, 2023 to $1.4 million for the year ended December 31, 2024. The increase is primarily due to increases of $178,828 in financing-related costs and $162,522 in insurance costs, partially offset by decreases of $138,158 in Delaware franchise taxes and $12,434 in travel-related expenses.
Reserve for credit losses and other expenses
In the year ended December 31, 2023, the Company recognized a Reserve for credit losses of $5.3 million, reflecting our conclusion that it was not probable that we would recover the interest reserve deposit established upon entering the credit agreement with Prime Capital Ventures (the “Lender”) based on facts known as of December 31, 2023. Subsequent to December 31, 2023, the Lender defaulted on its obligation to refund the interest reserve deposit. In coordination with other entities who were also defrauded by the Lender, the Company continues efforts to recover funds paid for an interest reserve through ongoing receivership and legal remedies.
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 pursued all available remedies to recover this loss and reported this matter to legal authorities. Given the limited success that these efforts for the recovery of funds, the Company recognized a loss of $1.3 million in the year ended December 31, 2024.
Interest
On August 15, 2022, we entered into a loan and security agreement with Cogent Bank to partially fund our purchase of the property we acquired on that same date. We borrowed $6.5 million under this agreement. Amounts outstanding on the term loan accrue interest at a rate per annum equal to 5.75%. We were obligated to make interest-only payments on this loan from September 2022 through August 2023 and principal and interest payments in 47 equal monthly installments, based on a 25-year maturity schedule, commencing September 15, 2023. We paid $283,042 and $280,794 for interest on this loan for the years ended December 31, 2023 and 2024, respectively.
During the year ended December 31, 2024, the Company issued $6.9 million of Secured Notes, which bear interest at a rate of 9% per annum, payable quarterly in arrears. For the year ended December 31, 2024, the Company paid $350,343 for interest on the Senior Notes.
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Other Income, Net
Other income, net decreased by $918,935, from $1.0 million for the year ended December 31, 2023 to $86,990 for the year ended December 31, 2024. The decrease is primarily attributable to decreases in interest earned for money market deposits and unrealized gains for investments in U.S. government-backed securities. Other income for the year ended December 31, 2023 also includes rental income of $185,941. On August 15, 2022, the Company entered into a short-term, market-rate lease with the former owner of the building we purchased on the same date. In the year ended December 31, 2023, the lease terminated.
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2024, our principal source of liquidity was $4.7 million in cash and cash equivalents, including money market investments, and as a result, there was substantial doubt over whether the Company had sufficient capital to operate for the next twelve months from the issuance date of this Annual Report. We considered elements of our financing plan that were probable and likely to be implemented within the next year. While we have already begun to successfully execute our financing plan, including a $6.9 million financing and a license agreement with $7.0 million in minimum guarantees payments which the Company expects to receive in 2025, we concluded that remaining steps in our financing plan are not probable and thus they were not sufficient to include in our going concern analysis.
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 December 31, 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. On December 16, 2024, BE&K Building Group, the prime contractor on the project, sent the Company a draft, unfiled lawsuit and requested the parties discuss payment. On January 22, 2025, the Company entered into a forbearance agreement with BE&K to allow the Company until March 31, 2025 to continue efforts to find the financing required to complete the construction and renovation of the building. Pursuant to the forbearance agreement, the Company made an initial payment of $1.0 million in partial satisfaction of amounts owing to BE&K and its subcontractors. 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 our knowledge, the lender has not elected to do so. As of December 31, 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 at any time. See Part II, Item 9A. -- “Controls and Procedures.” The Company continues to seek the financing required to complete the construction project, with the cooperation of the lender and lien holders.
The Company and Dr. Wong, our Founder and Chief Executive Officer, entered into a Settlement Agreement and Release of the previously reported Arbitration as of July 13, 2024, subsequently, the Arbitration and related Complaint were dismissed on December 24, 2024. See Part I., Item 3. - “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 December 31, 2024, we reported a balance of $14.4 million for legal fees incurred but not yet paid in the accompany audited balance sheet. Subsequent to the year end, the Company received the benefit of a $2.0 million insurance payment, which was paid directly to the law firm who represented Dr. Wong for his defense during the Arbitration. In order not to overwhelm the Company’s resources, a reasonable payment plan is required, and the Company is engaged in discussions with the law firms involved with this matter.
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.
In 2024, we have raised $16.3 million in financings from the following capital-raising activities:
• 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.
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• As of October 31, 2024, we received approximately $6.9 million from the issuance of 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. Hing C. 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.
• On November 20, 2024, the Company closed on an investment from a single institutional investor (the “Purchaser”) in which the Company issued 4,160,000 shares of the Company’s Common Stock and Pre-Funded Warrants to purchase up to 2,557,000 shares of Common Stock in a registered direct offering. In a concurrent private placement, the Company issued unregistered warrants to purchase up to an aggregate of 6,717,000 shares of Common Stock (“Common Stock Warrants”). The combined purchase price for each share and accompanying Common Stock Warrant to purchase one share of common stock is $1.03 per Share and the combined purchase price for each Pre-Funded Warrant and accompany Common Stock Warrant to purchase one share of common stock is $1.0299. The Purchaser elected to exercise the Pre-Funded Warrants on the date of issuance. As a result, the Company issued an aggregate of 6,717,000 shares of Common Stock and Common Stock Warrants to purchase up to an aggregate 6,717,000 shares of Common Stock for a period of five years.
Subsequent to the end of the reporting period, on February 20, 2025, the Company entered into an Equity Line of Credit Agreement (“ELOC”) for up to $20.0 million (with the potential to increase by an additional $20.0 million) as another element of the Company’s multi-step financing plan. We intend to register shares that will allow us to access the ELOC based on the financial information included in this Annual Report on Form 10-K.
On November 17, 2024, HCW Biologics entered into an exclusive worldwide license agreement with WY Biotech for the rights to develop and commercialize one of HCWB’s preclinical product candidates, HCW11-006. WY Biotech Co., Ltd. is a China-based company specializing in the early-stage development of recombinant protein drugs and gene/cell therapies. As the Company disclosed in the Form 8-K filed on March 19, 2025, the Company and WY Biotech agreed to amend the WY Biotech License Agreement due to a delay in WY Biotech coming to a definitive agreement with their designated contract design CDMO. Specifically, in order to accommodate the delay, the parties agreed to restructure the payment schedule for the $7.0 million upfront license fees, including delaying the initial $4.0 million portion thereof that was originally due on or about March 17, 2025, to reduce the performance milestones that the Company must complete in order to earn the full $7.0 million nonrefundable upfront payments in June 2025, and to provide that either party may terminate the Agreement if WY Biotech is not able to definitively engage its CDMO by June 2025. Under the amended terms, the Company expects to fulfill our performance obligations and earn the full $7.0 million upfront fee in June 2025. There were no other material changes to the WY Biotech License Agreement, which involves the grant to WY Biotech of an exclusive, world-wide license to use and apply HCW11-006 for in vivo applications. In particular, the Company will retain the Opt-In Right thereunder, which gives the Company the option to assume all control and responsibility for the development, manufacture and commercialization of HCW11-006 for in vivo applications in the North America, South America, and Central America. The Company retains ex vivo rights. See Exhibits 10.27 and 10.28 to this Annual Report on Form 10-K.
We considered future 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. We have capital-raising activities planned for the first half of 2025, for which Maxim Group will act as our Placement Agent. If the Company is not successful in raising additional capital through these activities, management may need to revise its business plan and reduce costs. If such revisions are insufficient, the Company may have to curtail or cease operations.
The accompanying audited 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 audited financial statements, without additional funding or financial support. 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 as of December 31, 2024 was not alleviated.
Because of the numerous risks and uncertainties associated with the clinical development and commercialization of immunotherapeutics, we are unable to estimate the exact amount of capital requirements to pursue these activities. Our funding requirements will depend on many factors, including, but not limited to:
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• timing, progress, costs, and results of our ongoing preclinical studies and clinical trials of our immunotherapeutic products;
• costs, timing, and outcome of regulatory review of our product candidates;number of trials required for regulatory approval;
• whether we enter into any cooperative, collaboration or co-development agreements and the terms of such agreements;
• whether we raise additional funding through bank loan facilities, other debt arrangements, out-licensing or joint ventures, cooperative agreements or strategic collaborations;
• effect of competing technology and market developments;
• cost of maintaining, expanding, and enforcing our intellectual property rights;
• impact of arbitration, litigation, regulatory inquiries, or investigations, as well as costs to indemnify our officers and directors against third-party claims related to our patents and other intellectual property:
• cost and timing of buildout of the Company’s new headquarters, including manufacturing for biologics and upgraded research and development facilities, including risks of cost overruns and delays, and ability to obtain additional financing, if needed; and
• costs and timing of future commercialization activities, including product manufacturing, marketing, sales, and distribution, for any of our product candidates for which we receive regulatory approval.
A change in the outcome of any of these or other factors with respect to the clinical development and commercialization of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures.
Summary of Statements of Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2023 and 2024:
Years Ended
December 31,
2023
2024
Cash used in operating activities
$
(22,514,121
)
$
(14,227,428
)
Cash provided by (used in) investing activities
3,797,400
(261,617
)
Cash (used in) provided by financing activities
(14,534
)
15,568,516
Net (decrease) increase in cash and cash equivalents
$
(18,731,255
)
$
1,079,471
Operating Activities
Net cash used in operating activities was $22.5 million for the year ended December 31, 2023 and $14.2 million for the year ended December 31, 2024.
Cash used in operating activities for the year ended December 31, 2023 consisted primarily of a net loss of $25.0 million, which includes a $5.3 million noncash charge for reserve for credit losses related to the full impairment of the interest reserve deposit. Other cash used in operating activities includes $5.3 million to establish the interest reserve account which occurred in April 2023; $1.1 million cash decrease arising from an increase in accounts receivable; and $326,742 cash decrease arising from a decrease in a lease liability. These uses were partially offset primarily by a $432,410 cash increase arising from a decrease in prepaid expenses and other assets; a $1.6 million cash increase arising from an increase in accounts payable and other liabilities; and a net increase of $7.3 million arising from adjustments for noncash expenses, consisting of $5.3 million for reserve for credit losses, $1.0 million for stock-based compensation expense, $1.1 million for depreciation and amortization expense, partially offset by a decrease of $248,445 for net unrealized gain on investments.
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Cash used in operating activities for the year ended December 31, 2024 consisted primarily of a net loss of $30.0 million, which includes $15.9 million of legal expenses related to legal proceedings and a $1.3 million loss related to a misdirection of funds resulting from the Company being a victim of criminal activity. Cash provided by operating activities included a $11.9 million increase resulting from the increase of accounts payable and other liabilities; a $1.0 million increase resulting from a decrease in accounts receivable; and a $831,622 increase related to a decrease in prepaid expenses and other assets. Adjustments for noncash changes also gave rise to an increase in cash from operating activities, including increases of $1.2 million for depreciation, amortization and accretion and a $1.0 million from unrealized losses.
Investing Activities
For the year ended December 31, 2023, cash provided by investment activities was $3.8 million, consisting of proceeds for maturity of short-term investments of $10.0 million, offset by $6.2 million of cash used for construction of our new headquarters and manufacturing facility.
For the year ended December 31, 2024, cash used in investment activities was $261,617, consisting of cash used for construction of our new headquarters and manufacturing facility.
Financing Activities
For the year ended December 31, 2023, cash used in financing activities was $14,534, consisting of cash used for debt repayment of $38,273, partially offset by cash provided by proceeds from the issuance of common stock of $23,739.
For the year ended December 31, 2024, cash provided by financing activities was $15.7 million, consisting of $6.5 million of cash provided through the issuance of common stock, $6.9 million of cash provided through the issuance of Secured Notes, $2.9 million of cash provided through the issuance of warrants, partially offset by $119,398 of cash used for debt repayment and $638,045 of cash used for issuance costs for common stock and warrants.
Contractual Obligations and Commitments
As of December 31, 2023, we had $28,693 of obligations remaining in the lease terms for non-cancellable operating lease agreements related to our facilities in Miramar, Florida. Effective March 1, 2022, we entered into a lease extension for our current location for a period of two years, ending February 29, 2024. On January 30, 2024, we entered into a new one-year lease for the same location, effective March 1, 2024. On January 27, 2025, we entered into a Lease Modification and Extension Agreement for a one-year lease for the same location, effective March 1, 2025.
We have commitments with a third-party manufacturing organization to supply us with clinical grade materials. As of December 31, 2024, we are under contract for obligations of $1.2 million that we expect to pay during the year ending December 31, 2025. As of December 31, 2023, we had commitments to fund $6.9 million in construction costs related to the buildout of our new headquarters and manufacturing facility.
In the normal course of business, we enter into contracts for non-clinical studies, preclinical testing, and other services and products. These contracts generally provide for termination following a certain period after notice and therefore we believe that our non-cancellable obligations under these agreements are not material.
Cogent Loan Agreement
On August 15, 2022, we entered into a loan and security agreement with Cogent Bank to partially fund our purchase of the property that will become our new headquarters. The agreement provides for a term loan of up to $6.5 million. Amounts outstanding on the term loan will accrue interest at a fixed rate per annum equal to 5.75%. We were obligated to make interest-only payments on the term loan from September 2022 through August 2023 and principal and interest payments in 47 equal monthly installments, based on a 25-year amortization schedule, commencing September 15, 2023 followed by one final balloon payment of all remaining principal, interest and fees due on the maturity date of August 15, 2027. Our obligations under the agreement are secured by, among other things, a mortgage on our new corporate headquarters and related real property. As of December 31, 2024, $6.3 million was outstanding under the term loan and we were in current in our interest and principal payments. In accordance with the terms of our loan and security agreement, the Company maintains an account at Cogent Bank as security, with a balance sufficient for the payment of interest, principal and insurance costs for a period of 90 - 120 days.
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As of December 31, 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 loan agreement with Cogent Bank 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 December 31, 2024, the Company has reflected this loan as Short-term debt, net, to reflect that Cogent Bank has the right to accelerate the loan under a discretionary default provision, even though they have not elected to do so. The Company continues to seek the financing required to complete the construction project, with the cooperation of the lender and lien holders. See Part II, Item 9A. -- “Controls and Procedures.”
Critical Accounting Policies, Significant Judgements and Use of Estimates
The audited financial statements included elsewhere in this Annual Report are prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in the periods presented. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. We believe the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in developing estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. Refer to Note 1 to our audited financial statements included elsewhere in this Annual Report for our significant accounting policies related to our critical accounting estimates.
We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgements and estimates.
Revenue Recognition
We recognize revenue under the guidance of Topic 606. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer.
If all conditions are not met for revenue recognition, the Company recognizes deferred revenue. The Company’s policy is to recognize deferred revenue only to the extent product release occurred after meeting specification required, product is shipped, and cash payment is received.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between fair value measurements based on market data (observable inputs), and those based on our own assumptions (unobservable inputs). This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
• 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.
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Fair Value
Under the Wugen License, we received shares of common stock of Wugen on the effective date of the Wugen License. We estimated that the fair value of the stock was $1.6 million. As the common stock of Wugen is not currently publicly traded, the fair value was determined based on inputs other than a public market price. We relied primarily on the most recent third-party financing completed by Wugen. In addition, we considered the results of a third-party valuation assessment. Since our ownership interest in Wugen is less than 20% and we do not have significant influence over the operations of Wugen, we account for these securities as a cost method investment. We will carry this investment at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee. We assess the investment each reporting period to determine if an impairment has occurred. In the event that a public market becomes available for the common stock of Wugen in the future and the shares become freely tradeable, we will recognize changes in fair value according to the market price in other income in the statements of operations.
Stock-based Compensation
As described in Note 1 and Note 11 to our audited financial statements included elsewhere in this Annual Report, we maintain a stock-based compensation plan as a long-term incentive for employees, non-employees, and directors. The plan allows for grants of incentive stock options, non-qualified stock options, and other forms of equity awards. We have granted options with service-based and performance-based vesting conditions.
We measure our stock-based awards granted to employees and directors based on the estimated fair value of the option on the date of grant (grant date fair value) and recognize compensation expense over the vesting period. Compensation expense is recorded as either research and development or general and administrative expenses in the statements of operations based on the function to which the related services are provided. Forfeitures are accounted for as they occur. We estimate grant date fair value using the Black-Scholes option-pricing model.
For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria are probable of being met.
In determining the fair value of the stock-based awards, we use the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and its determination generally requires significant judgment. These assumptions include, but are not limited to:
• Fair Value of Common Stock —Prior to our initial public offering, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuation of our common stock as well as our Board's assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent third-party valuation to the date of the grant. Since the completion of our initial public offering on July 19, 2021, the fair value of each share of common stock underlying stock option grants is based the quoted market price on the primary stock exchange on which our common stock is traded on the day the stock award or option is granted.
• Expected term —The expected term of stock options is determined using the “simplified” method, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data.
• Expected volatility —Since there is no trading history for our common stock, the expected volatility was estimated based on the historical equity volatility for comparable publicly traded biotechnology companies. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.
• Risk-free interest rate —The risk-free interest rate is based on the U.S. Treasury Bond in effect at the time of grant for periods corresponding with the expected term of the exit event.
• Dividend yield —The expected dividend yield is 0% because the Company has not historically paid, and does not expect, for the foreseeable future, to pay a dividend on its common stock.
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Income Taxes
We recognize deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. In evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance.
As of December 31, 2023 and 2024, we had available federal net operating loss (“NOL”) carryforwards of $40.0 million and $62.2 million, respectively. We also had available state NOLs carryforwards of approximately $40.0 million and $62.3 million, as of December 31, 2023 and 2024, respectively. The federal and state NOLs will carryforward indefinitely. The federal NOLs are available to offset 80% of taxable income for state taxes for tax years starting after 2020. In addition, we had federal research and development credits carryforwards of $1.3 million and $1.5 million, as of December 31, 2023 and 2024, respectively. These credits are available to reduce future federal income taxes, if any, and carryforwards expire from 2038 through 2044 and are subject to review and possible adjustment.
Under Sections 382 and 383 of the Code, substantial changes in our ownership may limit the amount of NOL and research and development credit carryforwards that could be used annually in the future to offset taxable income. The tax benefits related to future utilization of federal and state NOL carryforwards, credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period. We have not completed a Section 382/383 analysis under the Code regarding the limitation of NOL and credit carryforwards. If a change in ownership were to have occurred, the annual limitation may result in the expiration of NOL carryforwards and credits before utilization.
We record unrecognized tax benefits as liabilities or reduce the underlying tax attribute, as applicable, and adjust them when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
Recent Accounting Pronouncements
See Note 1 to our audited financial statements included elsewhere in this Annual Report for more information about recent accounting pronouncements.
Emerging Growth Company and Smaller Company Reporting Status
As an emerging growth company, or EGC, under the JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited financial statements in a registration statement for an initial public offering, or IPO, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements.
We may remain classified as an EGC until the December 31, 2026, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1.235 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year. We also would cease to be an EGC if we issue more than $1 billion of non-convertible debt over a three-year period.
We are also a “smaller reporting company,” as defined in Rule 12b-2 under the Exchange Act. Similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations, such as an ability to provide simplified executive compensation information and only two years of audited financial statements in an annual report on Form 10-K, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure.
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Item 7A Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company, as defined by Rule 12b-2 under the Exchange Act and are not required to provide the information under this item.
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