HCW BIOLOGICS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our unaudited condensed interim financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report on Form 10-Q") and (ii) our audited financial statements and related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year endedDecember 31, 2021 included in the Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission (the "SEC") onMarch 29, 2022 . Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the "Company," "HCW Biologics ," "we," "us" and "our" refer toHCW Biologics Inc.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success, plans and objectives of management for future operations, adequacy of our cash resources and working capital, impact of COVID-19 pandemic on our research and development activities and business operations, and future results of anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "could," "intend," "target," "project," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A -"Risk Factors," in this Quarterly Report on Form 10-Q and in other filings we make with theSEC from time to time. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. These forward-looking statements speak only as of the date hereof. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Overview
HCW Biologics Inc. ("HCW Biologics ," "HCW," the "Company," or "we") is a clinical-stage biopharmaceutical company focused on discovering and developing novel immunotherapies to lengthen health span by disrupting the link between chronic, low-grade inflammation and age-related diseases. We believe age-related, chronic, low-grade inflammation, or "inflammaging," is a significant contributing factor to several diseases and conditions, such as cancer, cardiovascular disease, diabetes, neurodegenerative diseases, and autoimmune diseases. The induction and retention of low-grade inflammation in an aging human body is mainly the result of the accumulation of non-proliferative but metabolically active senescent cells, which can also be caused by persistent activation of protein complexes, known as inflammasomes, in innate immune cells. These two elements share common mechanisms in promoting secretion of pro-inflammatory proteins and in many cases interact to drive senescence, and thus, inflammaging. Our novel approach is to eliminate senescent cells and the pro-inflammatory factors they secrete systemically through multiple pathways. We believe our approach has the potential to fundamentally change the treatment of age-related diseases. Senescence is a physiologic process important in promoting wound healing, tissue homeostasis, regeneration, embryogenesis, fibrosis regulation, and tumorigenesis suppression. However, accumulation of senescent cells with a senescence-associated pro-inflammatory factors has been implicated as a major source of chronic sterile inflammation leading to many aging-related pathologies. Subcutaneous administration of our lead drug candidate, HCW9218, activates Natural Killer ("NK") cells, innate lymphoid group-1, and CD8+ T cells, and neutralizes transforming growth factor beta ("TGF-?"). This bifunctionality gives HCW9218 the ability to reduce senescent cells, that is function as a senolytic, as well as eliminate senescence-associated pro-inflammatory factors, that is function as a senomorphic. As a result, HCW9218 has the ability to lower chronic inflammation and restore tissue homeostasis. 14 -------------------------------------------------------------------------------- HCW9218 reached the clinical stage of its development in the first half of 2022, with the initiation of a Phase 1 clinical trial by theMasonic Cancer Center to evaluate HCW9218 in the treatment of solid tumor cancers that progressed after standard-of-care treatment. The first patient was dosed in a multi-center Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in patients with chemo-refractory/chemo-resistant advanced pancreatic cancer inOctober 2022 . In both of these studies in solid tumor cancers, we will be gathering additional data to obtain insights for future phases of clinical trials, such as the level of immune system reaction and serum TGF-? neutralization to and by HCW9218 as well as any incidence of mucosal bleeding caused by the HCW9218 TGF-? trap. In addition, theMasonic Cancer Center will present preliminary human data from the solid tumor trial in a poster presentation at theSociety for Immunotherapy of Cancer ("SITC") conference to be held fromNovember 8 through November 12, 2022 inBoston, Massachusetts . We are targeting a readout of preliminary human data from the pancreatic study in the first half of 2023. We expect that the human data from these two clinical trials in cancer will guide future development of HCW9218 for other age-related pathologies. We believe that HCW9218 may represent a new class of safe and effective senolytic and senomorphic drugs for the treatment of a broad range of inflammaging indications, including cancer, metabolic dysfunctions, fibrosis-related pathologies, as well as neuro-inflammation and neurodegenerative diseases HCW9302 is another lead drug candidate which is designed to activate and expand regulatory T ("Treg") cells to reduce senescence by suppressing the activity of inflammasome-bearing cells and the inflammatory factors which they secrete. This molecule is a single-chain, IL-2-based fusion protein. Preclinical studies in mouse models have demonstrated the ability of HCW9302 to expand and activate Treg cells and reduce inflammation-related diseases, supporting the potential of HCW9302 to treat a wide variety of autoimmune and proinflammatory diseases, such as atherosclerosis. IND-enabling activities are currently in progress, but due to COVID-related delays, the completion date for toxicology studies required by theFederal Drug Administration ("FDA") for an Investigational New Drug Application ("IND") is expected to extend to the first half of 2023. If we are successful in completing IND-enabling activities and have no further delays in the expected schedule, we continue to plan to file an IND to obtain approval from the FDA for a Phase 1b/2 clinical trial to evaluate HCW9302 in an autoimmune disorder in the first half of 2023.
Recent Developments
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OnAugust 15, 2022 , the Company purchased a building located inMiramar, Florida for approximately$10.0 million , as our new headquarters. The Company received a$6.5 million five-year loan to finance the purchase of the new property. The loan bears a fixed interest of 5.75% per annum with interest only payment due in the first year.
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The multi-center, Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in patients with chemo-refractory/chemo-resistant advanced pancreatic cancer has initiated.HonorHealth Research Institute dosed its first patient onOctober 17, 2022 , and a second patient onOctober 31, 2022 . We are in the process of activating other clinical sites at NCI-designated Comprehensive Cancer Centers.
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As ofSeptember 30, 2022 , there were no reports of dose-limited toxicity in the Phase 1 clinical trial to evaluate HCW9218 in patients with chemo-refractory/chemo-resistant solid tumors with disease progression after prior treatment with standard of care therapies, being conducted at theMasonic Cancer Center . Patients have been enrolled and dosed for two levels of dose escalation in this trial.
•
On
•
The 37th Annual Meeting of theSociety for Immunotherapy of Cancer accepted an abstract submitted by theMasonic Cancer Center ,University of Minnesota , entitled: A phase 1 study of HCW9218, a bifunctional TGF-? Antagonist/IL-15 protein complex, in advanced solid tumors. Preliminary clinical results from the Phase 1 clinical study to evaluate HCW9218 in chemo-refractory/chemo-resistant solid tumors will be presented in a poster at the SITC 2022 conference by Dr.Melissa Geller , Principal Investigator.
Trends and Uncertainties
COVID-19
The spread of COVID-19, including the resurgence of cases related to the spread of new variants, has caused significant volatility in theU.S. and international markets sinceMarch 2020 . There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on theU.S. and international economies and, as such, we are unable to determine how long it will impact our operations and if it will have a material impact over time. 15 -------------------------------------------------------------------------------- The extent to which the COVID-19 or outbreaks of its variants may affect our IND-enabling activities, clinical trials, business, financial condition, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, such as the potential spread of the vaccine/treatment-resistant disease, the duration of the outbreaks, travel restrictions, and actions to contain the outbreaks or treat their impact, such as social distancing and quarantines or lock-downs inthe United States and other countries, business closures, or business disruptions and the effectiveness of actions taken inthe United States and other countries to contain and treat the disease. Future developments in these and other areas present material uncertainty and risk with respect to our clinical trials, IND-enabling activities, buildout of our new headquarters, business, financial condition, and results of operations.
Inflationary Cost Environment, 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 betweenRussia andUkraine , Chinese aggression towardsTaiwan , financial market volatility and currency movements. These headwinds, specifically the supply chain disruptions, have adversely impacted our ability to procure certain services and materials, which in some cases impacts the cost and timing of clinical trials and IND-enabling activities. In addition, the Company may be impacted by inflation when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Further, rising interest rates would also increase borrowing costs to the extent that the Company takes on any additional debt. 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 "Part II, Item 1A. Risk Factors."
Components of our Results of Operation
Revenues
We have no products approved for commercial sale and have not generated any revenue from commercial product sales of internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases. The principal source of our revenues to date have been generated from our Wugen License and MSA with Wugen. See Note 1 to our condensed interim financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for these definitions and more information. We derive revenue from a license agreement granting rights to Wugen to further develop and commercialize products based on two of our proprietary molecules. Consideration under our contract included a nonrefundable upfront payment, development, regulatory and commercial milestones, and royalties based on net sales of approved products. Additionally,HCW Biologics retained manufacturing rights and has agreed to provide Wugen with clinical and research grade materials for clinical development and commercialization of licensed products under separate agreements. We assessed which activities in the Wugen License should be considered distinct performance obligations that should be accounted for separately. We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the Wugen License. Performance obligations relating to the granting a license and delivery of licensed product and R&D know-how were satisfied when transferred upon the execution of the Wugen License onDecember 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 SOW, represents one performance obligation that is satisfied over time. The Company recognizes revenue generated for supply of material for clinical development using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company's progress toward completion.
Operating Expenses
Our operating expenses are reported as research and development expenses and general and administrative expenses.
Research and Development
Our research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
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Employee-related expenses, including salaries, benefits, and stock-based compensation expense.
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Expenses related to manufacturing and materials, consisting primarily of expenses incurred primarily in connection with third-party contract manufacturing organizations ("CMO"), which produce cGMP materials for clinical trials on our behalf.
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Expenses associated with preclinical activities, including research and development and other IND-enabling activities.
•
Expenses incurred in connection with clinical trials.
•
Other expenses, such as facilities-related expenses, direct depreciation costs for capitalized scientific equipment, and allocation for overhead.
We expense research and development costs as they are incurred. Costs for contract manufacturing are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the agreement, and the pattern of payments for goods and services will change depending on the material. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed. We expect research and development expenses to increase substantially for the foreseeable future as we continue the development of our product candidates. We cannot reasonably determine the nature, timing, and costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. Product candidates in later stages of development generally have higher development costs than those in earlier stages. See "Risk Factors -- Risks Related to the Development and Clinical Testing of Our Product Candidates," elsewhere in this Quarterly Report on Form 10-Q for a discussion of some of the risks and uncertainties associated with the development and commercialization of our product candidates. Any changes in the outcome of any of these risks and uncertainties with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries, related benefits, and stock-based compensation expense for employees in the executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include third-party costs such as insurance costs, fees for professional services, such as legal, auditing and tax services, facilities administrative costs, and other expenses. During the period endedSeptember 30, 2022 , allegations were made by a former employer of Dr.Hing C. Wong , our Founder and Chief Executive Officer, againstDr. Wong and the Company related to certain of our core intellectual property assets. Although no claims have been filed, we began incurring legal expenses on our own behalf as well as on behalf ofDr. Wong , as required under the Company's indemnification agreement with our officers and directors. We expect that our general and administrative expenses will continue to be higher in the foreseeable future due to expenses relating to our operations as a public company, including increased costs for the recruitment and retention of personnel and payment to outside consultants, advisors and accountants, as well as increased costs to comply with government regulations, corporate governance, internal control, insurance and similar requirements applicable to public companies. In addition, we also expect we may have increased legal expenses in connection with any matters or claims arising from the allegations ofDr. Wong's former employer.
Interest and Other Income (Loss), Net
Interest and other income, net consists of interest earned on our cash, cash equivalents, unrealized gains and losses related to our investments inU.S. government-backed securities, other income related to non-operating activities, and other non-operating expenses. OnAugust 15, 2022 , the Company entered into a short-term, market-rate lease with the former owner of the building purchased by the Company on the same date. The lease provides the tenant with the right to occupy offices that comprise approximately 15,000 square feet for a period of one year, endingAugust 14, 2023 . The lease may be terminated at any time by the tenant with 60 days written notice. During the three months endedSeptember 30, 2022 , the Company reported$30,894 in miscellaneous income, which is included within Interest and other income (loss), net in the condensed statements of operation for the three and nine months endedSeptember 30, 2022 included elsewhere in this Quarterly Report on Form 10-Q. 17
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Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2022 2021 2022
Revenues:
Revenues $ - $ 1,809,025 $ - $ 5,380,570
Cost of revenues - (1,447,220 ) - (3,062,496 )
Net revenues - 361,805 - 2,318,074
Operating expenses:
Research and development 2,687,341 2,648,794 6,690,317 6,408,353
General and administrative 1,404,823 1,732,666 3,565,013 5,321,262
Total operating expenses 4,092,164 4,381,460 10,255,330 11,729,615
Loss from operations (4,092,164 ) (4,019,655 ) (10,255,330 ) (9,411,541 )
Interest and other income (loss), net (2,540 ) 105,461 566,268 (70,421 )
Net loss $ (4,094,704 ) $ (3,914,194 )
Comparison of the Three Months ended
Revenues
OnJune 18, 2021 , the Company entered into a MSA with Wugen for the supply of materials for clinical development of licensed products. The terms set forth in the MSA were not sufficient to meet all the requirements for the Company to determine that a contract exists. In order for a contract to exist, additional terms are needed that must be set forth in a SOW. UntilMarch 14, 2022 , the Company has not entered into any SOWs for transactions to supply Wugen with clinical and research grade materials, and all amounts received for such transactions were recorded as deferred revenue. OnMarch 14, 2022 , the Company entered into SOWs with Wugen for each of the then-current and historical purchases of clinical and research grade materials under the MSA. As a result, the Company determined that all requirements were met for these transactions to qualify as contracts under Topic 606. As ofSeptember 30, 2021 , the Company did not recognize any revenue for supply of clinical and research grade materials, since we did not have a contract in place. For the three months endedSeptember 30, 2022 , the Company recognized$1.8 million of revenues in the condensed statement of operations that appears elsewhere in this Quarterly Report on Form 10-Q. For any transactions to supply materials for clinical development for which a SOW has not been finalized, revenue is not recognized because one or more of the criteria for revenue recognition has not been met, in which case, the Company records deferred revenue. There were$1.1 million and nil of short-term deferred revenues as ofSeptember 30, 2021 andSeptember 30, 2022 , respectively.
Research and Development Expenses
The following table summarizes our research and development expenses for the
three months ended
Three Months Ended
September 30,
2021 2022 $ Change % Change
Salaries, benefits and related expenses $ 675,155 $ 693,774 $ 18,619 3 %
Manufacturing and materials 1,034,080 751,945 (282,135 ) (27 )%
Preclinical expenses 769,179 729,172 (40,007 ) (5 )%
Clinical trials 69,556 292,276 222,720 320 %
Other expenses 139,371 181,627 42,256 30 %
Total research and development expenses
(1 )%
Research and development expenses decreased by $38,547 , or 1%, from $2.7 million
for the three months ended September 30, 2021 to $2.6 million for the three
months ended September 30, 2022 . This decrease was primarily due to a decline in
manufacturing expenses of $282,135 and an increase in clinical trial expenses of
$222,720 .
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Salaries, benefits, and related expenses increased by $18,619 , or 3%, from
$675,155 for the three months ended September 30, 2021 to $693,744 for the three
months ended September 30, 2022 . This increase was primarily attributable to a
$78,314 increase in salaries and wages and a $13,262 increase in compensation
expenses related to stock-based compensation, offset by a reimbursement from
Wugen for certain expenses incurred under the terms of the Wugen License that
was $74,667 greater for the three months ended September 30, 2022 versus the
comparable period in 2021.
Manufacturing and materials expense decreased by $282,135 , or 27%, from $1.0
million for the three months ended September 30, 2021 to $751,945 for the three
months ended September 30, 2022 . In the three months ended September 30, 2021 ,
manufacturing activities focused on our lead molecules, HCW9218 and HCW9302. For
HCW9218, we finalized a 200L GMP run as well as initiated the fill/finish
process and final testing for product release for clinical trials. For HCW9302,
we initiated master cell bank production and completed a scale-up run of GMP
materials. In the three months ended September 30, 2022 , costs were primarily
from the initiation of a 1000L GMP run for HCW9218. Looking ahead for the
remainder of 2022, costs are expected to be primarily associated with several
procedures required to finalize production of HCW9302, including GMP process
closeout through finalization of reports, fill/finish activities, as well as
drug substance and drug product release testing. In addition, we expect to
complete the 1000L GMP manufacturing run and fill/finish activities for HCW9218
that was initiated in the second quarter of 2022.
Expenses associated with preclinical activities decreased by $40,007 , or 5%,
from $769,179 for the three months ended September 30, 2021 to $729,172 for the
three months ended September 30, 2022 . In the three months ended September 30,
2021 , expenses were related primarily to the cost of toxicology studies and
experimental materials for IND-enabling activities required to prepare our IND
for clinical trials to evaluate HCW9218 in difficult-to-treat solid tumor
cancers. In the three months ended September 30, 2022 , expenses were related
primarily to the cost of toxicology studies and experimental materials related
to IND-enabling activities required to prepare our IND for clinical trials to
evaluate HCW9302 in an autoimmune indication, alopecia areata.
Expenses associated with clinical activities increased by $222,720 , or 320%,
from $69,556 for the three months ended September 30, 2021 to $292,276 for the
three months ended September 30, 2022 . We anticipate expenses related to
clinical activities will increase substantially in the future, as there will be
multiple clinical trials in progress for the foreseeable future. HCW9218, our
lead drug candidate, entered clinical stage in the first half of 2022, upon the
initiation of an Investigator-sponsored Phase 1 clinical trial at the Masonic
Cancer Center , University of Minnesota for a dose escalation study of HCW9218 as
a monotherapy in chemo-refractory/chemo-resistant solid tumors, such as breast,
ovarian, prostate and colorectal cancers. The trial is designed to identify the
maximum tolerated dose for future evaluation. Depending on the toxicities
observed in the treated patients, between 12 and 24 patients may be enrolled.
For a Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in
patients with chemo-refractory/chemo-resistant advanced pancreatic cancer, three
clinical sites were opened as of September 30, 2022 . The first patient was dosed
by HonorHealth on October 17, 2022 . We plan to enroll up to 24 patients from
several clinical sites at NCI-designated Comprehensive Cancer Centers. The
primary objectives of this study are to determine safety, maximum tolerable
dose, and the recommended Phase 2 dose. Besides safety and dosing data, during
the course of these clinical studies, we are gathering additional data to obtain
further insights for future phases of clinical trials, such as immune system
reaction and serum TGF-? neutralization to and by HCW9218 and incidence of
mucosal bleeding caused by the HCW9218 TGF-? trap.
Other expenses, which include overhead allocations increased by $42,256 , or 30%,
from $139,371 for the three months ended September 30, 2021 to $181,627 for the
three months ended September 30, 2022 . The increase in other expenses was
primarily attributable to an increase of $14,294 in facility-related expenses
for warranties, $7,451 in travel and travel-related activities to attend
scientific conferences, and an increase of $15,709 in depreciation expense.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
three months ended
Three Months Ended
September 30,
2021 2022
$ Change % Change
Salaries, benefits and related expenses
49 %
Professional services 331,706 352,166 20,460 6 %
Facilities and office expenses 83,623 85,661 2,038 2 %
Depreciation 44,820 31,939 (12,881 ) (29 )%
Rent expense 24,893 31,217 6,324 25 %
Other expenses 395,963 451,970 56,007 14 %
Total general and administrative expenses
23 %
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General and administrative expenses increased by $327,843 , or 23%, from $1.4
million for the three months ended September 30, 2021 to $1.7 million for the
three months ended September 30, 2022 . This increase was primarily due to an
increase of $255,895 in salaries, benefits and related expenses, resulting
primarily from an increase of $287,398 in compensation expense for stock-based
compensation associated with an equity award to the CEO upon completion of the
IPO, expensing $144,870 of offering costs incurred in connection with our shelf
registration statement on Form S-3, and an increase of $20,000 for the Company's
Board of Directors ("Board") compensation under our non-employee director
compensation program put in place post-IPO. These increases were partially
offset by a decrease of $75,000 in performance bonuses and a decrease of $10,326
for employee benefits in the three months ended September 30, 2022 versus the
comparable period in 2021.
Professional services expense increased by $20,460 , or 6%, from $331,706 for the
three months ended September 30, 2021 to $352,166 for the three months ended
September 30, 2022 . The increase is primarily attributable to an increase of
$75,236 for legal services related to patents, offset by a decrease of $46,800
in fees paid to advisors for investor relations and communications and a
decrease of $13,177 in fees paid to other professional services.
Depreciation expense decreased by $12,881 primarily due to a decrease of $26,494
in amortization for leasehold improvements and an increase of $15,709 in
depreciation expense. The Company accelerated amortization of leasehold
improvements when the underlying lease expired in February 2022 . Depreciation
expenses increased as a result of the purchase of a new building for the
Company's headquarters in August 2022 .
Other expenses increased by $56,007 , or 14%, from $395,963 for the three months
ended September 30, 2021 to $451,970 for the three months ended September 30,
2022 . The increase is primarily due to expensing offering costs of $144,870
incurred in connection with our shelf registration statement on Form S-3 and an
increase of $16,200 primarily resulting from an increase in Delaware franchise
tax, offset by a net decrease of $117,800 in insurance costs.
Comparison of the Nine Months ended
Revenues
There was no revenue for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the Company recognized$5.4 million of revenues in the unaudited statements of operations included elsewhere in this Quarterly Report on Form 10-Q. All revenues were generated under the MSA with Wugen. Revenue was recognized for all transactions made under the MSA for which the Company entered SOWs, since we determined that all requirements were met for the related transactions to qualify as a contract under Topic 606. For those transactions for which revenues were not recognized because one or more of the criteria for revenue recognition had not been met under Topic 606, the Company recorded deferred revenue. There were$1.1 million and nil of short-term deferred revenues as ofSeptember 30, 2021 andSeptember 30, 2022 , respectively.
Research and Development Expenses
The following table summarizes our research and development expenses for the
nine months ended
Nine Months Ended
September 30,
2021 2022 $ Change % Change
Salaries, benefits and related expenses $ 2,147,907 $ 2,268,755 $ 120,848 6 %
Manufacturing and materials 2,109,534 1,273,902 (835,632 ) (40 )%
Preclinical expenses 1,764,117 1,841,809 77,692 4 %
Clinical trials 227,108 486,992 259,884 114 %
Other expenses 441,651 536,895 95,244 22 %
Total research and development expenses
(4 )%
Research and development expenses decreased by $281,964 , or 4%, from $6.7
million for the nine months ended September 30, 2021 to $6.4 million for the
nine months ended September 30, 2022 . The decrease of $835,632 in manufacturing
and materials expenses were partially offset by increases in all other expenses.
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Salaries, benefits, and related expenses increased by $120,848 , or 6%, from $2.1
million for the nine months ended September 30, 2021 to $2.3 million for the
nine months ended September 30, 2022 . This increase was primarily attributable
to a $275,209 increase in salaries and wages, performance bonuses, and benefits
and an increase of $34,819 in compensation expense related to stock-based
compensation. These increases were partially offset by a reimbursement from
Wugen for certain expenses incurred under the terms of the Wugen License that
was $185,333 greater for the nine months ended September 30, 2022 versus the
comparable period in 2021.
Manufacturing and materials expense decreased by $835,632 , or 40%, from $2.1
million for the nine months ended September 30, 2021 to $1.3 million for the
nine months ended September 30, 2022 . Manufacturing and materials expenses in
the nine months ended September 30, 2021 resulted from activities related to
establishing master cell banks for several molecules, effecting a technology
transfer to our contract manufacturer required for internally-developed
manufacturing processes, and successfully completing multiple cGMP production
runs for our molecules. For HCW9218, we successfully completed cGMP
manufacturing runs in multiple quantities and initiated the fill/finish process
and testing for product release. For HCW9302, we had initiated master cell bank
production and completed a scale-up run of cGMP-grade material. In the nine
months ended September 30, 2022 , costs were primarily from a 1000L GMP run for
HCW9218 as well as HCW9302 technology transfer and development process closeout
through finalization of reports and the project initiation.
Expenses associated with preclinical activities increased by $77,692 , 4%, from
$1.8 million for the nine months ended September 30, 2021 to $1.8 million for
the nine months ended September 30, 2022 . In the nine months ended September 30,
2021 , expenses were related primarily to the cost of toxicology studies and
experimental materials for IND-enabling activities required to prepare our IND
for clinical trials to evaluate HCW9218 in difficult-to-treat solid tumor
cancers. In the nine months ended September 30, 2022 , expenses were related
primarily to the cost of toxicology studies and experimental materials related
to IND-enabling activities required to prepare our IND for clinical trials to
evaluate HCW9302 in an autoimmune indication, alopecia areata.
Expenses associated with clinical activities increased by $259,884 , or 114%,
from $227,108 for the nine months ended September 30, 2021 to $486,992 for the
nine months ended September 30, 2022 . We anticipate expenses related to clinical
activities will increase substantially in the future. HCW9218, our lead drug
candidate, entered clinical stage in the first half of 2022, upon the initiation
of an Investigator-sponsored Phase 1 clinical trial at the Masonic Cancer
Center , University of Minnesota for a dose escalation study of HCW9218 as a
monotherapy in chemo-refractory/chemo-resistant solid tumors, such as breast,
ovarian, prostate and colorectal cancers. As of September 30, 2022 , there were
three clinical sites opened for the Company-sponsored Phase 1b/2 clinical trial
to evaluate HCW9218 in chemo-refractory/chemo-resistant advanced pancreatic
cancer. The first patient was dosed on at HonorHealth Research Institute on
October 17, 2022 . For the pancreatic cancer study, we plan to enroll up to 24
patients from several clinical sites.
Other expenses, which include overhead allocations, increased by $95,244 , or
22%, from $441,651 for the nine months ended September 30, 2021 to $536,895 for
the nine months ended September 30, 2022 . The increase in other expenses is
primarily attributable to an increase of $22,640 in facility-related expenses
for warranties, an increase of $42,467 in travel and travel-related activities
to attend scientific conferences and an increase of $19,512 in depreciation
expense.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
nine months ended
Nine Months Ended
September 30,
2021 2022
$ Change % Change
Salaries, benefits and related expenses
37 %
Professional services 1,000,206 1,098,530 98,324 10 %
Facilities and office expenses 211,038 299,595 88,557 42 %
Depreciation 172,545 84,484 (88,061 ) (51 )%
Rent expense 74,711 96,493 21,782 29 %
Other expenses 472,465 1,504,319 1,031,854 218 %
Total general and administrative expenses
49 %
General and administrative expenses increased by $1.7 million , or 49%, from $3.6
million for the nine months ended September 30, 2021 to $5.3 million for the
nine months ended September 30, 2022 . The increase was primarily due to an
increase of $787,307 related to stock-based compensation expense associated with
an equity award to the CEO upon completion of the IPO and an increase of
$755,092 related to an increase in insurance coverage appropriate for a public
company.
21
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Salaries, benefit and related expenses increased by $603,793 , or 37%, from $1.6
million for the nine months ended September 30, 2021 to $2.2 million for the
three months ended September 30, 2022 . The increase was primarily due to an
increase of $99,657 in salaries, benefits and related expenses, an increase of
$787,307 related to stock-based compensation expense associated with an equity
award to the CEO upon completion of the IPO, and an increase of $103,214 for
Board compensation under our non-employee director compensation program put in
place post-IPO offset by a $370,750 reduction in performance bonuses.
Professional services increased by $98,324 , or 10%, from $1.0 million for the
nine months ended September 30, 2021 to $1.1 million for the nine months ended
September 30, 2022 , primarily due to a $174,339 increase for corporate legal
services, a $103,905 increase in expenses for other professional services, such
as auditing and tax advisers, and a $47,813 increase in other consulting
services, such as architectural services related to the Company's new
headquarters building. These increases were partially offset by a decrease of
$226,277 in fees for legal services related to patent filings.
Other expenses increased by $1.0 million , or 218%, from $472,465 for the nine
months ended September 30, 2021 to $1.5 million for the nine months ended
September 30, 2022 . The increase is primarily due to an increase of $755,092 in
insurance costs associated with being a public company, expensing $144,870 of
offering costs related to our shelf registration statement on Form S-3 and an
increase of $109,047 in Delaware franchise taxes.
Liquidity and Capital Resource
Sources of Liquidity
As of
OnAugust 15, 2022 , we purchased a 36,000 square foot building located inMiramar, Florida for approximately$10.1 million , including transaction costs. A portion of the acquisition cost was funded with a$6.5 million five-year term facility, secured by the building. The remainder of the purchase price was funded with cash. Amounts borrowed under the term facility have a fixed interest rate of 5.75%, with interest only payments required for the first year and 25-year amortization thereafter. With our remaining IPO proceeds, we estimate we have adequate capital to fund operations and the buildout of our new facility to the end of 2023. We have based our projections of operation expenses requirements on assumptions that may prove to be incorrect, and we may use all of our available capital sooner than we expect. Because of the numerous risks and uncertainties associated with the clinical development and commercialization of immunotherapeutics, we are unable to estimate the exact amount of capital requirements to pursue these activities. Our funding requirements will depend on many factors, including, but not limited to:
•
timing, progress, costs, and results of our ongoing preclinical studies and clinical trials of our immunotherapeutic products;
•
impact of COVID-19 on the timing and progress of our IND-enabling activities, clinical trials and our ability to identify and enroll patients;
•
costs, timing, and outcome of regulatory review of our product candidates;
•
number of trials required for regulatory approval;
•
whether we enter into any collaboration or co-development agreements and the terms of such agreements;
•
whether we raise additional funding through bank loan facilities;
•
effect of competing technology and market developments;
•
cost of maintaining, expanding, and enforcing our intellectual property rights;
•
impact of litigation, regulatory inquiries, or investigations, as well as costs to indemnify our officers and directors against third-party claims related to our patents and other intellectual property;
•
cost and timing of buildout of new headquarters, including risks of cost overruns and delays, and ability to obtain additional bank financing under existing term facility, 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.
22
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Comparison of the Cash Flows for the Nine Months Ended
The following table summarizes our cash flows for the nine months ended
Nine Months Ended
September 30,
2021 2022
Cash used in operating activities $ (7,599,123 ) $ (6,596,739 )
Cash (used in) provided by investing activities (34,995,011 ) 14,777,079
Cash provided by financing activities 49,263,373 6,313,243
Net increase in cash and cash equivalents
Operating Activities
Net cash used in operating activities was
Cash used in operating activities for the nine months endedSeptember 30, 2021 consisted primarily of a net loss of$9.7 million ,$2.2 million from an increase in prepaid expenses and other assets, and$567,311 from extinguishment of debt. The$2.2 million increase in prepaid expenses primarily relates to an increase in insurance premiums. These were offset by cash provided from a$2.5 million decrease in accounts receivable, a$2.0 million increase in accounts payable, and a noncash adjustment of$436,135 for depreciation and amortization. The decrease in accounts receivable reflects collection of the$2.5 million cash payment due from Wugen under the terms of the Wugen License. The increase in accounts payable and other liabilities primarily reflects an increase in deferred revenue and purchase of manufacturing materials. Cash used in operating activities for the nine months endedSeptember 30, 2022 consisted primarily of a net loss of$9.5 million ,$222,555 cash decrease arising from an increase accounts receivable, and$202,979 cash decrease arising from a decrease in accounts payable and other currently liabilities. These uses were partially offset by a$1.9 million cash increase arising from a decrease in prepaid expenses and other assets and noncash adjustments of$834,003 for stock-based compensation expense and$456,696 for depreciation and amortization expense. Investing Activities During the nine months endedSeptember 30, 2021 , cash used in investing activities reflects the purchase ofU.S. government-backed securities with the proceeds of our IPO and the purchase of scientific lab equipment and general office equipment. As ofSeptember 30, 2021 , we held$35.0 million in short-termU.S. government-backed securities.
During the nine months ended
Financing Activities
During the nine months ended
During the nine months ended
Critical Accounting Policies, Significant Judgements and Use of Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our unaudited condensed interim financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 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. 23 --------------------------------------------------------------------------------
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.
See Note 1 to our condensed interim financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information.
Other than the above, there have been no material changes to our critical
accounting policies and estimates from those described under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations- Critical Accounting Policies, Significant Judgements and Use of
Estimates" in our Annual Report on Form 10-K for the year ended
Recent Accounting Pronouncements
See Note 1 to our unaudited condensed interim financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information about recent accounting pronouncements.
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