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 our Annual Report on Form 10-K, elsewhere 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. HCW9218 reached the clinical stage of its development in the first half of 2022, with the initiation of a 12 -------------------------------------------------------------------------------- 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 Company intends to open a Phase 1b clinical trial to evaluate HCW9218 in patients with advanced pancreatic cancer in the third quarter of 2022. We have cleared IRB review and most internal procedures at severalNational Cancer Institute ("NCI") designated Comprehensive Cancer Centers identified as clinical sites. As a result of COVID-related delays due to staffing shortages at clinical sites, we were unable to commence this trial earlier in the year. 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 to HCW9218 and incidence of mucosal bleeding caused by the HCW9218 TGF-? trap. In addition, 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
•
OnMay 19, 2022 , theMasonic Cancer Center ,University of Minnesota , announced that they opened a new Phase 1 solid tumor cancer clinical trial and treated their first patient with HCW9218, an injectable, bifunctional immunotherapeutic, developed byHCW Biologics Inc. This Phase 1, first-in-human clinical trial is enrolling patients that have advanced solid tumors with progressive disease after prior chemotherapies.
•
OnAugust 2, 2022 ,HCW Biologics was grantedU.S. Patent No. 11,401,324 which contains claims for immunotherapeutic compounds comprised of a single-chain chimeric polypeptide with two target-binding domains on a scaffold made of an extracellular domain of human tissue factor. This patent provides protection for the underlying intellectual property on which the Company has based its lead product candidate, HCW9302.HCW Biologics has created an extensive patent portfolio with multiple families of patent applications that are directed to the TOBITM discovery platform technology and its single-chain and multi-chain chimeric polypeptides as well as methods of use of these polypeptides alone and in combination. This is the firstU.S. patent issued of the Company's 72 patent applications filed worldwide.
•
OnAugust 10, 2022 ,HCW Biologics committed to purchase a 36,000 square foot building located inMiramar, Florida for approximately$10.0 million , as the Company's new headquarters. The Company received a commitment for a five-year term facility to finance the purchase, expansion, and improvement of the new location. An initial takedown equal to 65% of the purchase price will be funded on the closing date which is expected to be onAugust 15, 2022 . The term facility may be increased to provide additional funding for expansion and improvements of the property, however, future borrowings are subject to full credit approval and due diligence by the lender.
Trends and Uncertainties - COVID-19 Pandemic
The spread of COVID-19 and its numerous 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. 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. 13 --------------------------------------------------------------------------------
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. Our total revenues to date have been generated principally 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 revenues recognized from for 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:
•
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.
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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. 14 -------------------------------------------------------------------------------- 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," in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC 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. We expect that our general and administrative expenses will be higher in the foreseeable future. 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 (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. Results of Operations Three Months Ended Six Months Ended June 30, June 30, 2021 2022 2021 2022 Revenues: Revenues $ -$ 454,000 $ -$ 3,571,545 Cost of revenues - (287,200 ) - (1,615,276 ) Net revenues - 166,800 - 1,956,269 Operating expenses: Research and development 1,673,163 1,969,882 4,002,976 3,759,558 General and administrative 1,077,830 1,707,995 2,160,190 3,588,597 Total operating expenses 2,750,993 3,677,877 6,163,166 7,348,155 Loss from operations (2,750,993 ) (3,511,077 ) (6,163,166 ) (5,391,886 ) Interest and other income (loss), net 631 516 568,808 (175,882 ) Net loss$ (2,750,362 ) $ (3,510,561 ) $ (5,594,358 ) $ (5,567,768 ) 15
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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 ofJune 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 endedJune 30, 2022 , the Company recognized$454,000 of revenues in the unaudited condensed statement of operation that appears elsewhere in this Quarterly Report. 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$696,625 of short-term deferred revenues as ofJune 30, 2021 . As ofJune 30, 2022 , there were$314,625 of short-term deferred revenues included within Accrued liabilities and other current liabilities on the audited condensed balance sheet that appears elsewhere in this Quarterly Report.
Research and Development Expenses
The following table summarizes our research and development expenses for the
three months ended
Three Months Ended June 30, 2021 2022 $ Change % Change Salaries, benefits and related expenses$ 775,782 $ 802,033 $ 26,251 3 % Manufacturing and materials 313,402 304,329 (9,073 ) (3 )% Preclinical expenses 318,595 599,520 280,925 88 % Clinical trials 107,587 83,939 (23,648 ) (22 )% Other expenses 157,797 180,061 22,264 14 %
Total research and development expenses
18 % Research and development expenses increased$296,719 , or 18%, from$1.7 million for the three months endedJune 30, 2021 to$2.0 million for the three months endedJune 30, 2022 . This increase was primarily due to an increase in preclinical expenses. Salaries, benefits, and related expenses increased by$26,251 , or 3%, from$775,782 for the three months endedJune 30, 2021 to$802,033 for the three months endedJune 30, 2022 . This increase was primarily attributable to an$88,222 increase in salaries and wages , a$29,242 increase in health insurance costs, and a$12,319 increase 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$94,667 greater for the three months endedJune 30, 2022 versus the comparable period in 2021. Manufacturing and materials expense decreased by$9,073 , or 3%, from$313,402 for the three months endedJune 30, 2021 to$304,329 for the three months endedJune 30, 2022 . In the three months endedJune 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 endedJune 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 will complete the 1000L GMP manufacturing run and fill/finish activities for HCW9218 that was initiated in the second quarter of 2022. 16 -------------------------------------------------------------------------------- Expenses associated with preclinical activities increased by$280,925 , or 88%, from$318,595 for the three months endedJune 30, 2021 to$599,520 for the three months endedJune 30, 2022 . In the three months endedJune 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 endedJune 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 decreased by$23,648 , or 22%, from$107,587 for the three months endedJune 30, 2021 to$83,939 for the three months endedJune 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 theMasonic Cancer Center ,University of Minnesota for a dose escalation study of HCW9218 as a monotherapy in 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 pancreatic study, we plan to enroll up to 24 patients in several NCI-designated Comprehensive Cancer Centers, with the primary objectives of the study being to determine safety, maximum tolerated dose, and the recommended Phase 2 dose. We anticipate patient enrollment for this trial to commence in the third quarter of 2022. Due to COVID-related delays at the clinical sites we identified to participate in this trial, we were unable to initiate the pancreatic clinical trials earlier in the year. In both of these studies, we will be gathering additional data to obtain further insights for future phases of clinical trials, such as immune system reaction to HCW9218 and incidence of mucosal bleeding caused by the HCW9218 TGF-? trap. Other expenses, which include overhead allocations, increased by$22,264 , or 14%, from$157,797 for the three months endedJune 30, 2021 to$180,061 for the three months endedJune 30, 2022 . The increase in other expenses were primarily attributable to an increase of$21,248 in travel and travel-related activities to attend scientific conferences.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
three months ended
Three Months EndedJune 30, 2021 2022
$ Change % Change
Salaries, benefits and related expenses
22 % Professional services 274,875 287,199 12,324 4 % Facilities and office expenses 67,691 113,254 45,563 67 % Depreciation 61,083 16,940 (44,143 ) (72 )% Rent expense 24,823 35,298 10,475 42 % Other expenses 38,350 511,462 473,112 NM
Total general and administrative expenses
58 % NM - Not meaningful. General and administrative expenses increased$630,165 , or 58%, from$1.1 million for the three months endedJune 30, 2021 to$1.7 million for the three months endedJune 30, 2022 . This increase was primarily due to an increase of$473,112 in other expenses resulting from increased insurance costs associated with being a public company. There was also an increase of$132,834 in salaries, benefits and related expenses as a result of stock-based compensation expense associated with an equity award to the CEO upon completion of the IPO and an increase for Board compensation under our non-employee director compensation program, which was more than offset by a decrease of$195,750 in performance bonuses for the same period. Facilities and office expenses increased by$45,563 , or 67%, primarily due to an increase in software license fees. Depreciation decreased by$44,143 primarily due to a decrease of$27,382 in amortization for leasehold improvements and a decrease of$14,128 for accretion of issuance costs.
Comparison of the Six Months ended
Revenues
There was no revenue for the six months endedJune 30, 2021 . For the six months endedJune 30, 2022 , the Company recognized$3.6 million of revenues in the unaudited statements of operations included elsewhere in this Quarterly Report. 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. 17 -------------------------------------------------------------------------------- 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$696,625 of short-term deferred revenues as ofJune 30, 2021 , and$314,625 of short-term deferred revenues as ofJune 30, 2022 included within Accrued liabilities and other current liabilities.
Research and Development Expenses
The following table summarizes our research and development expenses for the six
months ended
Six Months Ended June 30, 2021 2022 $ Change % Change Salaries, benefits and related expenses$ 1,472,753 $ 1,574,981 $ 102,228 7 % Manufacturing and materials 1,075,454 521,957 (553,497 ) (51 )% Preclinical expenses 994,937 1,112,637 117,700 12 % Clinical trials 157,552 194,716 37,164 24 % Other expenses 302,280 355,267 52,987 18 %
Total research and development expenses
(6 )% Research and development expenses decreased$243,418 , or 6%, from$4.0 million for the six months endedJune 30, 2021 to$3.8 million for the six months endedJune 30, 2022 . This decrease was primarily due to a$553,497 decrease in manufacturing and materials expenses and offset by a$117,700 increase in preclinical expenses. Salaries, benefits, and related expenses increased by$102,228 , or 7%, from$1.5 million for the six months endedJune 30, 2021 to$1.6 million for the six months endedJune 30, 2022 . This increase was primarily attributable to a$156,035 increase in salaries and wages, a$42,084 increase in health insurance costs, and an increase of$21,556 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$110,000 greater for the six months endedJune 30, 2022 versus the comparable period in 2021. Manufacturing and materials expense decreased by$553,497 , or 51%, from$1.1million for the six months endedJune 30, 2021 to$521,957 for the six months endedJune 30, 2022 . Manufacturing and materials expenses in the six months endedJune 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 six months endedJune 30, 2022 , costs were primarily from HCW9302 technology transfer and development process closeout through finalization of reports and the project initiation. In addition, we initiated a 1000L GMP run for HCW9218. Expenses associated with preclinical activities increased by$117,700 , or 12%, from$1.0 million for the six months endedJune 30, 2021 to$1.1 million for the six months endedJune 30, 2022 . In the six months endedJune 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 six months endedJune 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. 18 -------------------------------------------------------------------------------- Expenses associated with clinical activities increased$37,164 , or 24%, from$157,552 for the six months endedJune 30, 2021 to$194,716 for the six months endedJune 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 theMasonic Cancer Center ,University of Minnesota for a dose escalation study of HCW9218 as a monotherapy in solid tumors, such as breast, ovarian, prostate and colorectal cancers. The trial is designed as a dose escalation study of HCW9218 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. We anticipate patient enrollment for a Company-sponsored Phase 1b clinical trial to evaluate HCW9218 in advanced pancreatic cancer to commence in the third quarter of 2022. For the pancreatic study, we plan to enroll up to 24 patients in several NCI-designated Comprehensive Cancer Centers, with the primary objectives of the study being to determine safety, maximum tolerated dose, and the recommended Phase 2 dose. We anticipate patient enrollment for this trial to commence in the third quarter of 2022. Due to COVID-related delays at the NCI-designated Comprehensive Cancer Centers we identified as clinical sites to participate in this trial, we were unable to initiate the pancreatic clinical trials earlier in the year. In both of these studies, we will be gathering additional data to obtain further insights for future phases of clinical trials, such as immune system reaction to HCW9218 and incidence of mucosal bleeding caused by the HCW9218 TGF-? trap. Other expenses, which include overhead allocations, increased by$52,987 , or 18%, from$302,280 for the six months endedJune 30, 2021 to$355,367 for the six months endedJune 30, 2022 . The increase in other expenses is due primarily attributable to an increase of$28,681 in travel and travel-related activities to attend scientific conferences and an increase of$16,878 in building repairs and maintenance.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
six months ended
Six Months EndedJune 30, 2021 2022
$ Change % Change
Salaries, benefits and related expenses
31 % Professional services 668,501 746,363 77,862 12 % Facilities and office expenses 127,415 213,933 86,518 68 % Depreciation 127,725 52,545 (75,180 ) (59 )% Rent expense 49,818 65,277 15,459 31 % Other expenses 76,501 1,052,351 975,850 NM
Total general and administrative expenses
66 % NM - Not meaningful General and administrative expenses increased$1.4 million , or 66%, from$2.2 million for the six months endedJune 30, 2021 to$3.6 million for the six months endedJune 30, 2022 . The increase was primarily due to an increase of$61,936 in salaries, benefits and related expenses, an increase of$499,909 related to stock-based compensation expense associated with an equity award to the CEO upon completion of the IPO, and an increase of$83,214 for Board compensation under our non-employee director compensation program offset by a reduction in performance bonuses. Professional services increased$77,862 or 12%, from$668,501 for the six months endedJune 30, 2021 to$746,363 for the six months endedJune 30, 2022 , primarily due to a$169,138 increase for corporate legal services, a$117,082 increase in expenses for other professional services, such as auditing, and a$93,156 increase in other consulting services, such as investor relations advisory services. These increases were partially offset by a decrease of$301,514 in fees for legal services related to patent filings. Other expenses increased by$1.0 million , from$76,501 for the six months endedJune 30, 2021 to$1.1 million for the six months endedJune 30, 2022 . The increase is primarily due to an increase in insurance costs associated with being a public company.
Liquidity and Capital Resources
Sources of Liquidity
The Company closed an IPO onJuly 22, 2021 , resulting in net proceeds of approximately$49.2 million , after deducting underwriting discounts and commissions and offering expenses paid by the Company. As ofJune 30, 2022 , we had cash and cash equivalents of$15.4 million , short-term investments inU.S. government-backed securities of$17.0 million , and long-term investments inU.S. government-backed securities of$9.7 million . 19 -------------------------------------------------------------------------------- OnAugust 10, 2022 ,HCW Biologics committed to purchase a 36,000 square foot building located inMiramar, Florida for approximately$10.0 million , as the Company's new headquarters. The Company received a commitment for a five-year term facility for the purchase, expansion, and improvement of the property, secured by the building. An initial takedown equal to 65% of the purchase price will be funded on the closing date which is expected to be onAugust 15, 2022 . 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. The term facility may be increased to provide additional funding for expansion and improvements of the property; however, future borrowings are subject to full credit approval and due diligence by the lender. With our remaining IPO proceeds and the financing commitment for the purchase of the Company's new headquarters, we estimate we have adequate capital to fund operations and complete of the buildout of our new headquarters 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;
•
effect of competing technology and market developments;
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cost of maintaining, expanding, and enforcing our intellectual property rights;
•
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.
Comparison of the Cash Flows for the Six Months Ended
The following table summarizes our cash flows for the six months endedJune 30, 2021 andJune 30, 2022 : Six Months Ended June 30, 2021 2022 Cash used in operating activities$ (2,480,242 ) $ (4,281,998 ) Cash (used in) provided by investing activities (23,279 )
7,963,379
Cash (used in) provided by financing activities (901,462 )
8,273
Net (decrease) increase in cash and cash equivalents
Operating Activities
Net cash used in operating activities were
20 -------------------------------------------------------------------------------- Cash used in operating activities for the six months endedJune 30, 2021 consisted primarily of a net loss of$5.6 million , as well as$567,311 from extinguishment of debt and$563,436 resulting from an increase in prepaid expenses and other assets. These were offset by cash provided from operating activities resulting from a$2.5 million decrease in accounts receivable, a$1.5 million increase in accounts payable, and a noncash adjustment of$323,897 primarily related to 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 reflects the costs related to our IPO. Cash used in operating activities for the six months endedJune 30, 2022 consisted primarily of a net loss of$5.6 million , as well as$1.5 million of cash used in operations, resulting from a$1.3 million decrease in accounts payable and other liabilities and a$213,934 increase in accounts receivable. Cash provided by operations consisted primarily of$1.9 million arising from a decrease in prepaid expenses and other assets and adjustments for noncash charges, including$292,363 for depreciation and amortization and$531,683 for compensation expense related to stock-based compensation.
Investing Activities
Cash used in investing activities for the six months ended
Cash provided by investing activities for the six months endedJune 30, 2022 , consisted of$8.0 million of cash provided when short-term investments reached maturity, offset by$36,461 of cash used to purchase equipment.
Financing Activities
During the six months endedJune 30, 2021 , cash provided by financing activities resulted from the issuance of common stock upon exercise of vested employee stock options, partially offset by offering costs associated with our IPO. During the six months endedJune 30, 2022 , cash provided by financing activities is due to issuance of common stock upon exercise of vested employee stock options.
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.
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 for more information about recent accounting pronouncements. 21
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