HCW BIOLOGICS INC. 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 on Form 10-K. This discussion contains forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions, that 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 on Form 10-K.
Overview
We are a 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 senescent cells and persistent activation of protein complexes, known as inflammasomes, in innate immune cells. These two elements share common mechanisms in promoting secretion of proinflammatory proteins and in many cases interact to drive inflammaging. Our novel approach is to treat both of these elements. We believe our approach has the potential to fundamentally change the treatment of age-related diseases.
Our gateway indication for clinical development is oncology. Advances in
immuno-stimulatory and anti-immunosuppressive therapeutics have revolutionized
cancer treatment, and our internally-developed, lead product candidate, HCW9218,
is designed with both of these functionalities. We believe the bifunctionality
of HCW9218 will allow it to be effective against solid tumor cancers because it
simultaneously provides immunostimulation of natural killer ("NK") cells and
effector T cells to enhance the cytotoxicity of immune cells against tumor
targets, while reducing immunosuppression associated with solid tumors by
capturing and neutralizing TGF-?. The FDA has permitted two clinical trials in
difficult-to-treat cancer indications to proceed. These include a
Company-sponsored trial to evaluate HCW9218 in advanced pancreatic cancer, and
an Investigator-sponsored trial by
Our internally-developed, lead product candidate, HCW9302, an IL-2-based fusion molecule that expands Treg cells in vivo and ex vivo as an injectable or cell-based strategy, is designed to reduce inflammation through deactivation of inflammasomes. Preclinical studies have demonstrated the ability of HCW9302 to reduce inflammation, allowing for the potential to treat a wide variety of autoimmune and age-related diseases. We expect to complete IND-enabling activities for an autoimmune indication by the end of 2022. Upon completion of IND-enabling activities, we intend to submit an IND for a Phase 1b clinical trial to evaluate HCW9302 in alopecia areata.
Since commencing operations in 2018, we have devoted substantially all of our
efforts and financial resources to building our research and development
capabilities, and establishing our corporate infrastructure. To date, we have
not generated any product revenue and we have never been profitable. We have
incurred significant operating losses since the commencement of our operations.
As of
To date, we have financed our operations primarily with proceeds of
We expect to continue to incur significant expenses and operating losses for the foreseeable future, as we continue our clinical development activities, particularly if and as we:
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Advance the development of our lead product candidate, HCW9218, and clinical trials for oncology, and if approved by the FDA, commercialization;
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Advance preclinical development of other indications for HCW9218, including fibrotic indications, especially those resulting in NAFLD and liver cancer;
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Advance the preclinical development of our second lead product candidate, HCW9302, for autoimmune diseases and pro-inflammatory diseases, such as coronary artery disease;
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Establish our own domestic manufacturing capability;
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Maintain, expand, and protect our intellectual property portfolio;
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Scale up our clinical and regulatory capabilities; and
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Expand operational and management information systems as well as investor relations, legal, accounting, and audit services required to operate as a public company.
As a result of these anticipated expenditures, we will need substantial additional financing to support our continuing operations and pursuit of our clinical development strategy. Until such time as we can generate significant revenues from sales of an approved drug or drugs, if ever, we expect to finance our operations through a combination of equity offerings or other financings, collaborations, strategic alliances, co-development deals, and out-licensing arrangements. We may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may need to significantly delay, scale back, or discontinue the development and commercialization of one or more of our product candidates which may have a negative impact on our financial condition.
We believe that our existing cash and cash equivalents, will be sufficient to fund our operating expenses through the end of 2023. We have based this estimate on assumptions that may prove to be wrong, we could utilize our available capital resources sooner than we expect. See the section entitled "Liquidity and Capital Resources." Our future viability beyond 2023 is dependent on our ability to raise additional capital to finance our operations and fund capital expenditure requirements. Because of the numerous risks and uncertainties associated with our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the preclinical and clinical development of our product candidates.
Recent Developments
The Company achieved several milestones in the past year:
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Initial Public Offering. On
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FDA clearance for Company-sponsored Phase 1b clinical trial in cancer. On
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FDA clearance for Investigator-sponsored Phase 1 clinical trial in cancer. On
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Three publications in peer-reviewed journals. We are successfully executing our strategy to publish pivotal scientific papers to establish our leadership in oncology and other age-related diseases in the scientific and clinical communities. Thus far, three papers have been published:
o
An article in
o
An article in Molecular Therapy on the characterization of our lead molecules,
HCW9218: Liu B et al., Bifunctional TGF-ß Trap/IL-15 Protein Complex Elicits
Potent NK Cell and CD8 + T Cell Immunity Against Solid Tumors.
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o
An article in Molecular Therapy which discusses HCW9218 and its ability to
augment anti-tumor activity and reduce side effects of chemotherapy regimens:
Chaturvedi, P et al., Immunotherapeutic HCW9218 Augments Anti-tumor Activity of
Chemotherapy via NK Cell Mediated Reduction of Therapy Induced Senescent Cells,
Trends and Uncertainties - COVID-19 Pandemic
There created significant uncertainty around the breadth and duration of
business disruptions related to COVID-19, as well as its impact on the
The COVID-19 pandemic continues to present a substantial public health and economic challenge around the world. The global COVID-19 pandemic continues to evolve, and we will continue to monitor the COVID-19 situation closely. The extent of the impact of the COVID-19 pandemic on our business, operations and development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the pandemic and its impact on our development activities, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. See "Risk Factors-- Public health crises such as pandemics or similar outbreaks could materially and adversely affect our preclinical and clinical trials, business, financial condition, and results of operations."
For additional information on the various risks posed by the COVID-19 pandemic,
please read section titled "Risk Factors" set forth in Part I, Item 1A of this
Annual Report on Form 10-K and in our other filings with the
Components of Results of Operation
Revenues
To date, we have not generated any revenue from product sales and do not expect to generate revenue from product sales for the foreseeable future. Until that occurs, our sole source of revenue will be derived from out-licenses, collaborative agreements, and co-development deals.
On
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 in connection with third-party contract manufacturing organizations ("CMO"), that 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.
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Expenses incurred in connection with clinical trials.
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Other expenses, such as facilities-related expenses, direct depreciation costs for capitalized laboratory equipment, and an 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 recognized as expenses 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. We expect our research and development expenses will increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our lead product candidates, advance into later stages of development, begin to conduct larger clinical trials, expand our product pipeline, continue to maintain, expand, protect, and enforce our intellectual property portfolio, and establish our own manufacturing capabilities. In particular, we expect our research and development expenses will increase substantially as we progress to Phase 2 and Phase 2/3 clinical trials for our lead product candidates, primarily due to the increased size and duration of later-stage clinical trials.
The duration, costs, and timing of the clinical development of our product candidates are highly uncertain and will depend on a variety of factors, including, but not limited to:
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Number and scope of preclinical and IND-enabling studies;
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Successful and timely patient enrollment in, and completion of, clinical trials;
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Per subject trial costs;
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Number of trials required for regulatory approval;
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Number of sites included in the trials;
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Number of subjects needed for each trial;
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Cost and timing of manufacturing of cGMP materials for clinical trials;
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Receipt of regulatory approvals from applicable regulatory authorities;
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Establishing commercial manufacturing capabilities; and
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Costs to maintain, defend, and enforce our intellectual property rights.
A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the 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.
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We expect that our general and administrative expenses will increase in the foreseeable future as the size of our business grows to support additional research and development activities. We anticipate increased expenses relating to our operations as a public company, including increased costs for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with additional regulations, corporate governance, internal control and similar requirements applicable to public companies, as well as increased costs for insurance.
Interest and Other Income, Net
Interest and other income, net consists of interest earned on our cash, cash
equivalents, unrealized gains and losses related to our investments in
Results of Operations
The following table summarizes our results of operations for the years endedDecember 31, 2020 and 2021: Years Ended December 31, 2020 2021 $ Change % Change Revenues$ 4,099,750 $ -$ (4,099,750 ) * Operating Expenses: Research and development 7,255,227 8,173,624 918,397 11 % General and administrative 2,669,048 5,194,210 2,525,162 49 % Total operating expenses 9,924,275 13,367,834 3,443,559 26 % Loss from operations (5,824,525 ) (13,367,834 ) (7,543,309 ) 56 % Interest and other income, net 22,324 505,366 483,042 * Net loss$ (5,802,201 ) $ (12,862,468 ) $ (7,060,267 ) 55 % * - not meaningful Revenue
In the year ended
On
This is the first time we have entered into an out-license arrangement and the first time the Company has established prices for its goods and services. Accordingly, the standalone selling price of the various performance obligations is uncertain, and we determined that an observable standalone selling price was not available for the identified performance obligations under the Wugen License. Where a standalone selling price is not directly observable, then we estimate the standalone selling price considering marketing conditions, entity-specific factors, and information about the customer that is reasonably available. The process for determining a standalone selling price involves significant judgment and includes consideration of multiple factors, including assumptions related to the market opportunity and the time needed to commercialize a product candidate pursuant to the relevant license, estimated direct expenses, and other costs.
The estimated transaction price for performance obligations that were satisfied
as of
As of
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On
Because a contract did not exist as of
Research and Development Expenses
The following table summarizes our research and development expenses for the
years ended
Year Ended
December 31,
2020 2021 $ Change % Change
Salaries, benefits and related
expenses $ 2,726,046 $ 2,825,303 $ 99,257 4 %
Manufacturing and materials 2,560,350 2,483,687 (76,663 ) -3 %
Preclinical expenses 1,188,018 2,007,264 819,246 69 %
Clinical trials 234,498 249,204 14,706 6 %
Other expenses 546,315 608,166 61,851 11 %
Total research and development
expenses $ 7,255,227 $ 8,173,624 $ 918,397 13 %
Research and development expenses increased by
Salaries, benefits and related expenses increased
Manufacturing and materials expenses decreased
Expenses associated with preclinical activities increased by
Expenses associated with clinical trials including professional fees related to
regulatory filings, increased by
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advance our product candidates through clinical development, we expect our clinical trial expenses to increase significantly, as we conduct larger, later-stage clinical trials and expand the number of indications we advance in clinical development.
Other expenses consist primarily of direct depreciation costs for laboratory
equipment, an allocation for rent expense, repairs and maintenance, as well as
general office furniture and supplies. The increase from the year ended
General and Administrative Expenses
The following table summarizes our general and administrative expense for the
years ended
Year Ended
December 31,
2020 2021 $ Change % Change
Salaries, benefits and related
expenses $ 1,492,382 $ 2,341,807 $ 849,425 57 %
Professional services 447,093 1,263,270 816,177 183 %
Facilities and office expenses 243,241 308,741 65,500 27 %
Depreciation 233,039 218,466 (14,573 ) -6 %
Rent expense 100,972 100,457 (515 ) -1 %
Other expenses 152,321 961,469 809,148 531 %
Total general and administrative
expenses $ 2,669,048 $ 5,194,210 $ 2,525,162 95 %
General and administrative expenses increased by
Salaries, benefits and related expenses increased
We expect to incur increasing general and administrative expenses as a result of
operating as a public company, including expenses for
Interest and Other Income, Net
For the years ended
Liquidity and Capital Resources
Sources of Liquidity
Since inception, we have funded our operations primarily from the issuance of
redeemable preferred stock and our IPO. From our inception in 2018 to
Based on our existing business plan, we believe that our existing cash, cash equivalents and investments will be sufficient to fund our anticipated operating expenses through the end of 2023.
We have based our projections of operation expenses and capital expenditure 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:
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Timing, progress, costs, and results of our ongoing preclinical studies and clinical trials of our immunotherapeutic products;
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Impact of COVID-19 on the timing and progress of our clinical trials and our ability to identify and enroll patients;
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Costs, timing, and outcome of regulatory review of our product candidates;
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Number of trials required for regulatory approval;
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Whether we enter into any collaboration or co-development agreements and the terms of such agreements;
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Effect of competing technology and market developments;
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Cost of maintaining, expanding, and enforcing our intellectual property rights; and
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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.
If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others rights to our drug candidates in certain territories or indications that we would prefer to develop and commercialize ourselves.
Summary of Statements of Cash Flows
The following table summarizes our cash flows for the years endedDecember 31, 2020 and 2021: Years Ended December 31, 2020 2021 Cash used in operating activities$ (10,431,326 ) $ (11,041,749 ) Cash used in investing activities (186,682 ) (34,952,883 )
Cash provided by financing activities 11,718,008 49,269,475
Net increase in cash and cash equivalents
Operating Activities
Net cash used in operating activities was
Cash used in operating activities for the year ended
Cash used in operating activities for the year ended
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Investing Activities
For the year ended
For the year ended
Financing Activities
For the year ended
For the year ended
Contractual Obligations and Commitments
As of
The Company has commitments with a third-party manufacturing organization to
supply us with clinical grade materials. As of
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.
Critical Accounting Policies, Significant Judgements and Use of Estimates
The financial statements are prepared in conformity with accounting principles
generally accepted in
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.
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Revenue Recognition
For the year ended
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:
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Level 1: Observable inputs such as quoted prices in active markets;
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Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
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Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
Fair Value
Under the Wugen License, we received shares of common stock of Wugen on the
effective date of the Wugen License. We estimated that the fair value of the
stock was
Stock-based Compensation
As described in Note 1 and Note 10 to our audited financial statements which appear elsewhere in this Annual Report on Form 10-K, 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.
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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 is 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:
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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 of directors' 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
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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.
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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.
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Risk-free interest rate-The risk-free interest rate is based on the
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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.
Determination of the Fair Value of Our Common Stock
Until
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results of third-party valuations performed in accordance with the guidance
outlined in the
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the prices at which we sold shares of redeemable preferred stock and the superior rights and preferences of the redeemable preferred stock relative to our common stock at the time of each grant;
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the progress of our research and development programs, including the status of preclinical and planned clinical trials for our product candidates;
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our stage of development and commercialization and our business strategy;
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external market conditions affecting the biotechnology industry, and trends within the biotechnology industry;
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our financial position, including cash on hand, and our historical and forecasted performance and operating results;
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the lack of an active public market for our common stock and our redeemable preferred stock;
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the likelihood of achieving a liquidity event, such as an IPO, or a sale of our company considering prevailing market conditions; and
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the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry.
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For financial reporting purposes, it is our policy to perform a contemporaneous valuation when a material number of stock awards or options are granted. As a private company, we relied primarily on the evidence of third-party financings to support valuation of common stock. The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change, and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different.
Now that we have completed our IPO, our board of directors determines the fair value of each share of underlying common stock based on its closing price as reported on the date of grant according to the quoted market price on the primary stock exchange on which our common stock is traded.
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
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 annual financial statements appearing elsewhere in this Annual Report on Form 10-K for more information about recent accounting pronouncements.
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Emerging Growth Company and Smaller 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
We may remain classified as an EGC until the end of the fiscal year until
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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