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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2024
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number 001-40591
HCW Biologics Inc.
(Exact name of registrant as specified in its Charter)
Delaware |
82-5024477 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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2929 N. Commerce Parkway Miramar, Florida |
33025 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (954) 842–2024
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, par value $0.0001 per share |
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HCWB |
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The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 28, 2024, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $12.8 million based on the closing price of the shares of $0.65 per share as reported on the Nasdaq Global Market on such date. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.
The number of shares of the registrant’s common stock outstanding as of March 25, 2025 was 44,934,120.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) relating to its 2025 Annual Meeting of Stockholders. The Proxy Statement will be filed with the United States Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Table of Contents
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3 |
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Item 1 |
3 |
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Item 1A |
42 |
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Item 1B |
74 |
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Item 1C |
74 |
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Item 2 |
76 |
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Item 3 |
76 |
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Item 4 |
77 |
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77 |
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Item 5 |
77 |
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Item 6 |
79 |
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Item 7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
80 |
Item 7A |
95 |
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Item 8 |
96 |
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Item 9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
127 |
Item 9A |
127 |
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Item 9B |
129 |
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Item 9C |
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections |
132 |
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133 |
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Item 10 |
133 |
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Item 11 |
133 |
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Item 12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
133 |
Item 13 |
Certain Relationships and Related Transactions, and Director Independence |
133 |
Item 14 |
133 |
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134 |
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Item 15 |
134 |
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Item 16 |
137 |
-i-
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (the “Annual Report”) 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 Annual 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 of prospective products, plans and objectives of management for future operations, future capital-raising activities, adequacy of our cash resources and working capital, lingering effects of the COVID-19 pandemic on our research and development activities (including persistent staffing issues at clinical sites, as well as delays and backlog at testing facilities needed to perform IND-enabling activities), 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 Annual Report 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 Part II, Item 1A -“Risk Factors” of this Annual Report and in other filings we make with the Securities and Exchange Commission (the “SEC”) 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.
References in this Annual Report to “we,” “our,” “us,” “HCW Biologics,” “HCWB,” and the “Company” refer to HCW Biologics Inc.
HCW BIOLOGICS INC. and TOBI are trademarks of HCW Biologics Inc. All other brand names or trademarks appearing in this Annual Report are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Annual Report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
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PARTI
Item 1. Business.
Overview
HCW Biologics Inc. (“HCWB” or the “Company”) is a clinical-stage biopharmaceutical company developing proprietary immunotherapies to treat diseases promoted by chronic inflammation, especially age-related and senescence-associated diseases. Our immunotherapeutics represent a new class of drug that we believe has the potential to fundamentally change the treatment of cancer and many other diseases and conditions that are promoted by chronic inflammation — and in doing so, improve patients’ quality of life and possibly extend longevity. While chronic inflammation is possible at any age, it is more common as we age. In this case, the condition is known as inflammaging. 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 immune cells.
Chronic inflammation, including inflammaging, is believed to be a significant contributing factor to the cause for senescence-associated diseases and conditions that diminish health span, including many types of cancer, autoimmune diseases, and neurodegenerative diseases, as well as indications that impact quality-of-life that are not life-threatening. 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 Senescence-Associated Phenotype (“SASP”) proinflammatory factors has been implicated as a major source of chronic sterile inflammation leading to many aging-related pathologies. SASP factors, including proinflammatory cytokines, chemokines, and proteinases, drive an inflammation cycle. Senescence is considered a stress response and can be induced by a wide range of intrinsic and extrinsic insults. Over time, these insults cause normal tissue cells to enter a senescent state of irreversible growth arrest accompanied by the release of SASP factors. The inflammation cycle promoted by SASP factors also activates immune cells. Similar to senescent cells, prolonged activation of immune cells promote the release of highly proinflammatory cytokines. Unresolved activation of immune cells leads to chronic low-grade inflammation, which perpetuates this cycle.
Studies have shown that strategies to reduce or eliminate senescent cells can delay, prevent, and improve age-related dysfunctions, including cancer. Unfortunately, to date, there has been limited clinical success in targeting senescent cell accumulation or aberrant inflammasome activity using small molecule-based approaches. Preclinical research and preliminary results from first-in-human clinical trials indicate that our immunotherapeutic approach may achieve success for cancer indications, and many other age-related diseases and conditions. We believe our lead product candidates represent a novel immunotherapeutic approach and a clinically promising new class of senotherapeutic drugs for the treatment of age-related diseases.
The Company has developed two different drug discovery and development platforms, our legacy TOBI™ (Tissue factOr-Based fusIon) platform and our newly developed targeted platform technology – the T-cell Receptor β Chain constant region (“TRBC”) platform:
As of July 13, 2024, the Company, Dr. Wong, Altor BioScience, LLC, NantCell, Inc. and ImmunityBio, Inc. (collectively, Altor BioScience, LLC, NantCell, Inc. and ImmunityBio Inc. will be referred to herein as “ImmunityBio”), entered into a Settlement Agreement that is described in Part I, Item 3. – “Legal Proceedings” below. The Settlement Agreement eliminated the uncertainty of the outcome of the previously disclosed Arbitration proceedings and provided clarity for the future direction and emphasis of our clinical development strategy. The settlement involved intellectual property the Company developed based on our proprietary TOBITM drug discovery platform and its unique Tissue-Factor scaffold used to create protein-fusion molecules.
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Our clinical development program is based on a few select lead product candidates which will be evaluated in Company-sponsored clinical trials in autoimmune disorders, solid tumors and quality-of-life conditions. We have a large portfolio of non-core programs and assets and, for these, we anticipate that clinical development will be conducted through licensing agreements and other business development transactions.
HCWB has an experienced team led by Dr. Hing C. Wong, our Founder and CEO, who discovered and developed the immunotherapeutic Anktiva® (also known as ALT-803, an IL-15 agonist receptor) through pivotal trials. This blockbuster immunotherapeutic treatment for cancer was sold to ImmunityBio, Inc. in 2017 in a $1.0 billion acquisition. Anktiva® was approved by the U.S. Food and Drug Administration (“FDA”) for a bladder cancer indication in 2024.
Clinical-Stage Compounds
HCW9302: Novel Immunotherapeutics for Treg Expansion
HCW9302 is an injectable, first-in-kind interleukin 2 (“IL-2”) fusion protein complex constructed using the Company’s proprietary TOBI platform technology. Its mechanism of action involves binding to IL-2αβγ receptors predominantly expressed on regulatory T (“Treg”) cells, thereby activating and expanding Treg cells that can suppress unwanted immune and inflammatory responses. The FDA recently cleared us to initiate a Phase 1 clinical study using HCW9302 to treat alopecia areata. Our strategy is to expand to other indications upon successful completion of the Phase 1 study.
HCW9302 is a fusion protein molecule that contains two IL-2 domains linked by an extracellular tissue factor domain. IL-2 signaling is essential for homeostasis of Treg cells. Unfortunately, recombinant IL-2 has an unfavorable pharmacokinetic profile and induces cytokine release syndrome limiting its therapeutic use. HCW9302 provides a potential solution to this problem. It is designed to have the therapeutic advantages of IL-2 while being well tolerated. In our preclinical and non-human primate studies, we found that HCW9302 exhibited a longer serum half-life with an approximately 1,000-fold higher affinity for the IL2Rα than IL-2. In addition, preclinical studies have shown HCW9302 can be administered at a dosing range that expanded and activated Treg cells but not CD4+ effector T cells. CD4+ effector T cells (also known as helper T cells) are crucial for immune responses, but under certain conditions, their excessive activation can lead to negative effects like inflammation, tissue damage, and autoimmune reactions, particularly when they become dysregulated and target self-antigens, contributing to conditions like multiple sclerosis, rheumatoid arthritis, and inflammatory bowel disease.
We believe our preclinical studies in relevant animal models of dermatological conditions, graft rejection, atherosclerosis, diabetes, and neurodegenerative diseases as well as IND-enabling studies conducted in non-human primates support the clinical development of HCW9302 as a potential therapeutic agent for treatment of autoimmune and proinflammatory diseases.
HCW9201 + HCW9206: Novel Immunotherapeutic for Memory-Like Natural Killer Cell
On December 24, 2020, the Company entered into an exclusive worldwide license with Wugen, Inc. (“Wugen”) for ex vivo rights for two of its proprietary molecules. Wugen is evaluating natural killer (“NK”) cell therapy generated using HCW9206 in combination with HCW9201 in clinical trials in cancer indications. HCW9206 has a unique design consisting of a multi-functional compound constructed with three powerful cytokines: IL-7, IL-15, and IL-21. It is designed to stimulate T cell proliferation and activation, enhance NK cell cytotoxicity, and improve overall immune surveillance against pathogens or tumors.
HCW9201 + HCW9206, known as WU-NK-101, is Wugen’s lead memory NK cell therapy product and is comprised of cells optimized for anti-cancer function. WU-NK-101 cells possess a unique cytokine-induced memory-like phenotype that supports enhanced anti-tumor activity, robust trafficking, superior proliferation capacity, and metabolic flexibility, all of which contribute to treatment resilience in the adverse tumor microenvironment. Wugen is currently evaluating WU-NK-101 in a Phase 1 open-label study designed to characterize the safety, tolerability, and preliminary anti-tumor activity of WU-NK-101 in combination with cetuximab in patients with advanced and/or metastatic colorectal cancer (Cohort 1), and in patients with advanced and/or metastatic squamous cell carcinoma of head and neck (Cohort 2). The overall study will be comprised of two phases, a Dose Escalation Phase, and a Cohort Expansion Phase.
The Company retained the in vivo rights to HCW9201 and HCW9206, as well as the manufacturing rights. Wugen obtains clinical supply from the Company under the provisions of a development supply agreement.
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Clinical-Stage Compound Awaiting Completion of Supply Agreement with ImmunityBio
HCW9218: Novel Bifunctional Immunotherapeutic with TGF-β Trap
HCW9218 is a clinical-stage bifunctional molecule that is designed to impact senescence by reducing senescent cells (i.e., senescent-cell-reducing effect) and eliminating the proinflammatory factors they secrete (i.e., senomorphic effect). Subcutaneous administration of HCW9218 activates NK cells, innate lymphoid group-1, and CD8+ T cells, and neutralizes TGF-β.
In the Settlement Agreement reached with ImmunityBio on July 13, 2024, the Company agreed to transfer rights to develop HCW9218 for cancer indications to ImmunityBio. HCW Biologics retained exclusive rights to develop treatments for all other age-related diseases other than cancer using HCW9218. In future clinical development, we will be able to use the HCW9218 Recommended Phase 2 Dose (“RP2D”) and other learnings based on findings in the Phase 1 and Phase 1b cancer studies, which wrapped up at the beginning of 2024. These studies include:
The Company had the non-exclusive rights to develop HCW9218 treatment for ovarian cancer in a neoadjuvant setting, based on a Phase 2 clinical study sponsored by the University of Pittsburgh Medical Center (“UPMC”). Under the terms of the Settlement Agreement, UPMC had until year end of 2024 to launch this study, but failed to do so. Thus, the Company terminated this study.
Under the Settlement Agreement, the Company agreed to transfer the HCW9218 master cell line to ImmunityBio. In turn, ImmunityBio agreed to enter into a supply agreement with the Company by the end of January 2025 to ensure the Company had adequate clinical supply of HCW9218 available to carry on clinical studies. As of the reporting date, a draft of the supply agreement has not been provided by ImmunityBio. Until the supply agreement is in place, any plans for our further development of HCW9218 must be delayed.
Preclinical Compounds
HCW11-006: Multi-Functional Immune Cell Stimulator
This product candidate is the subject of the exclusive worldwide license agreement the Company entered with WY Biotech Co., Ltd. (“WY Biotech”), a China-based company specializing in the early-stage development of recombinant protein drugs and gene/cell therapies, on November 17, 2024 (the “WY Biotech License”). Under the WY Biotech License, WY Biotech has rights to in vivo applications for HCW11-006. The Company retains ex vivo rights. Under the terms of the WY Biotech license agreement, the Company has an “opt-in right” for United States, Canada, Central America, and South America markets for no cost, that may be exercised after the completion of a Phase 1 trial in China. WY Biotech is responsible for all of the costs for the Phase 1 clinical study.
HCW11-006 was constructed using the TRBC drug development platform. It combines several different immune functional domains on our new protein scaffold platform as part of our Class I portfolio. Our preclinical studies demonstrated that this multi-functional product candidate is highly effective at inducing CD8+ T cell and NK cell responses without triggering unwanted side effects in human immune cell and animal models. HCW11-006 also exhibited anti-tumor efficacy in relevant solid tumor animal models. We believe it has the potential to be one of the most potent immunostimulatory agents we have developed during our team members’ 30 years of biotech research. Additional studies are being conducted to verify that HCW11-006 should combine well with other therapies, including immune checkpoint inhibitors, immune cell engagers, therapeutic antibodies, and CAR-T therapies, which the Company is conducting with world leaders in these areas. The Company and collaborators intend to share their findings in a pivotal scientific paper published in a top-tier peer-reviewed journal.
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Other Preclinical Programs
Our future clinical development will focus on our T-cell Receptor β Chain constant region (“TRBC”) drug discovery and development platform. The Company has constructed over 50 compounds using the TRBC platform, which we group into three different classes, as defined by their construction and potential mechanism of action. We are in the process of selecting lead compounds for each program, and then to determine from the compounds selected which ones we will develop on our own and those we will develop with a partner through out-licensing arrangements or other business development transactions.
The table below summarizes our preclinical programs by classes:
Preclinical TRBC-Based Molecules Drug Development Programs
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Description of Programs
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Multi-functional immune cell stimulators •
HCW11-006 is the selected lead product candidate for this class.
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Potent immunostimulatory agent to use in combination with standard-of-care therapy.
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Preclinical studies in human immune cells animal models demonstrate HCW11-006 is highly effective at inducing CD8+ T cell and NK cell responses without triggering unwanted side effects.
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HCW11-006 also exhibits anti-tumor efficacy in relevant solid tumor animal models.
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Prioritized for development through exclusive, worldwide license with WY Biotech.
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Second-generation immune checkpoint inhibitors •
We have a group of compounds in this class and are currently assessing them in order to identify the strongest candidate for clinical development.
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Developing a second-generation Keytruda® for oncology & other senescence associated indications.
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Prioritized for in-house development.
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III |
Multi-specific targeting fusions and immune cell engagers •
Class III TRBC Molecules are second-generation immune-cell engagers capable of targeting tissue factor and other cell-surface antigens associated with diseased cells. These drugs work by recruiting and activating T-cells or NK cells, types of white blood cell, to recognize and attack cancer cells.
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Our first compound in this class is HCW11-018, and we are collaborating with others to develop versions with different targeting capabilities.
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The size and scale of the GLP preclinical and clinical studies required for the development of Class III Molecules is more appropriate for well-capitalized Big Pharma.
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Prioritized for development through licensing with Big Pharma.
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Clinical Development Strategy
Our goal is to develop transformative immunotherapies to lengthen health span by disrupting the link between cellular senescence, chronic inflammation, and age-related diseases and conditions. Based on human-data read-out from clinical studies and extensive preclinical research, we believe that our data point toward the possibility we have created a new class of immunotherapeutics for cancer and other age-related diseases, and beyond therapies that to slow down or reverse the effects of aging itself.
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We have constructed second-generation immunotherapeutics that we believe could represent a new class of drugs with the potential to fundamentally transform the treatment of diseases and conditions promoted by chronic inflammation, especially those related to aging – enhancing health span through the treatment for indications that enhance quality-of-life and extending longevity by developing treatments for indications for which there are no known cures.
The future of the Company’s clinical development will be primarily based on the molecules we have constructed with the TRBC drug development platform. These compounds offer the potential to treat oncology, autoimmune diseases, infectious diseases, and chronic inflammatory conditions, offering broader therapeutic targets and more adaptable solutions compared to the Company’s TOBI platform. The TRBC platform’s flexibility and capacity to bind multiple targets allow for more precise and potentially more effective treatments. By targeting specific cell-surface antigens, these novel therapeutics can improve patient clinical outcomes, offering potential benefits across a wider range of indications. The Company will select molecules for in-house development and those which are strong candidates to be developed with a partner through a licensing agreement.
In settling the Arbitration with ImmunityBio, the Company removed uncertainty regarding our rights to TOBI-based molecules. With this clarity, we forged a new path for our clinical development for molecules created with the TOBI platform. We will continue to develop HCW9302, our lead product candidate, for which the FDA recently cleared us to initiate a Phase 1 clinical study in alopecia areata. Our strategy is to expand to other indications upon successful completion of the Phase 1 study. We are less certain about the path forward for HCW9218, now a Phase 2 compound. We have exclusive rights to develop HCW9218 for non-oncology indications, but due to uncertainty of clinical supply from the sole source, ImmunityBio, it might not be practical for the Company to pursue clinical development of HCW9218. The TOBI platform will not be used to develop any new compounds for future clinical development.
Out-Licensing, Cooperative Agreements and Strategic Collaborations
We continue to pursue our strategy of out-licensing certain rights outside of our focus areas, as further discussed under “—Out-License Programs.” The Company continues to evaluate its portfolio to identify compounds which may be good candidates for licensing or other collaborations, where it will be to our advantage to leverage the expertise and financial strength of a partner in the development of a compound or market.
We signed our first out-license agreement at the end of 2020, when we entered into an exclusive worldwide license (the “Wugen License”) with Wugen, a company that specializes in cell-based therapies for cancer. Wugen licensed limited rights to develop, manufacture, and commercialize cell-based therapy treatments for cancer based on two of our internally-developed, multi-cytokine fusion protein molecules, HCW9201 and HCW9206. Wugen has created an off-the-shelf NK-cell treatment called WU-NK-101 based on the licensed molecules.
On November 17, 2024, HCW Biologics entered into an exclusive worldwide license agreement with WY Biotech for the rights to develop and commercialize in vivo applications of one of HCWB’s preclinical product candidates, HCW11-006. WY Biotech Co., Ltd. is a China-based company specializing in the early-stage development of recombinant protein drugs and gene/cell therapies. HCW Biologics has a payment-free, milestone-free, and royalty-free option to recapture the development and commercialization rights of this molecule for in vivo applications in the United States, Canada, Central America, and South America (“Opt-in Territory”) after the conclusion of the Phase 1 clinical trial. WY Biotech is financially responsible for all costs associated with research and development, manufacturing, clinical development, regulatory approval, and commercialization for the molecule The clinical development progress of our lead immunotherapeutic programs is summarized in the table below:
As reported in the Company’s Form 8-K filed with the SEC on March 19, 2025, on March 18, 2025, the Company and WY Biotech agreed to amend the WY Biotech License Agreement. The Company has now completed extensive preclinical studies that further support our belief in the potential for HCW11-006 for both an in vivo and ex vivo therapy. The in vivo therapy is licensed by WY Biotech, however, the Company retained all rights to the ex vivo therapy and applications as a reagent in cell-based therapy treatments, including cell-based therapies, such as CAR-T therapies. The Company considers WY Biotech License provisions for the Opt-In Right to take over the development of HCW11-006 for the Americas markets to be an important feature of the WY Biotech License. We believe our right to recapture this market is a potentially high value opportunity. Further, we will be able to base our decision to opt-in on the human-data read-out from a Phase 1 clinical trial, which will mitigate our development risks and provide valuable clinical information about the potential for the indications we will use for Phase 2 clinical studies.
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HCW Biologics Clinical Development Pipeline
HCW Biologics Pipeline
HCW9302: Novel Immunotherapeutic for Treg Expansion
On January 28, 2025, the Company obtained clearance of its IND from the FDA to initiate a first-in-human Phase 1 dose escalation clinical trial to evaluate one of its lead drug candidates, HCW9302, in patients with moderate-to-severe alopecia areata, a common autoimmune disease in humans that currently has no curative FDA approved treatments.
This will be a Phase 1, open-label, multi-center Company-sponsored trial with competitive enrollment. The study involves dose escalation to determine the toxicity profile of HCW9302 and to designate a dose level for the Phase 2 expansion phase, or the Recommended Phase 2 Dose (“RP2D”). Up to five dose levels will be evaluated. A stepped-down dose level will be provided in the event that unacceptable toxicity is encountered at the planned initial dose level. In the first stage of the study, HCW9302 will be administered subcutaneously in a single dose. Depending on the results of the single ascending dose stage, a multi-dose study of HCW9302 administered subcutaneously every 28 days for four consecutive treatments will be considered.
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With the start of the first-in-human clinical trial for HCW9302 in alopecia areata, we are one step closer to advancing a potentially transformative immunotherapeutic treatment of autoimmune diseases. This trial is a milestone for our Company, and the beginning of clinical development of treatments for quality-of-life indications. While not life-threatening, alopecia areata has no cure and diminishes the quality of life for those suffering with this disease. Existing treatments may provide some relief of symptoms, but there are often dangerous side effects. If this Phase 1 study is successful, we intend to rapidly expand clinical development of HCW9302 in Phase 2 studies in patients with other autoimmune diseases and serious inflammatory conditions, including other dermatological conditions, graft rejection, and neurodegenerative diseases.
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Our Approach
We believe we have an innovative strategy to treat age-related diseases. Our unique approach is to utilize our internally-developed drug discovery platforms to create novel multi-functional immunotherapeutics to rejuvenate the immune system. With our platform technologies, we have generated product candidates that are designed to direct the immune system against solid tumors, therapy-induced senescence and the adverse side effects triggered by existing standard-of-care treatments for solid tumors and hematological cancers. We have developed product candidates that are designed to direct the immune system against inflammation allowing for the potential to treat a wide variety of autoimmune and proinflammatory diseases. Our approach is to develop immunotherapies that reduce or eliminate the main drivers of chronic inflammation by addressing the underlying development and sustainment of these processes, as depicted in the image below:
The Science of Chronic Inflammation
While inflammation is part of the normal repair response for healing, when it becomes prolonged and persists, it is damaging and destructive. Several common molecular pathways have been identified that are associated with chronic low-grade inflammation, especially common as we age. Our view is that there are two primary underlying processes that drive chronic inflammation: accumulation of senescent cells and persistent activation of immune cells . Both of these processes generate pro-inflammatory factors that drive senescence.
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 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 reduce senescent cells and eliminate the pro-inflammatory factors they secrete systemically through multiple pathways. We believe our novel immunotherapeutic approach has the potential to fundamentally change the treatment of age-related diseases.
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Senescent cells remain metabolically active and can influence tissue hemostasis, disease, and aging through their SASP factors. Senescence is considered to be a physiologic process and is important in promoting wound healing, tissue homeostasis, regeneration, and regulation of fibrosis. Senescence also plays a role in tumor suppression. The accumulation of senescent cells, due to the aging of our immune cells, drives aging and age-related diseases and conditions. The SASP factors can trigger chronic inflammatory responses and consequently augment chronic inflammatory conditions to promote tumor growth. The connection between senescence and aging was initially based on the observation that senescent cells accumulate in aged tissue. The use of transgenic models has enabled the detection of senescent cells systematically in many age-related disorders. Studies have demonstrated that senescent cells play an adverse role in age-related disorders.
By leveraging our immunology expertise, we are developing potentially transformative immunotherapy candidates that use Treg cell expansion and senescent cell reduction to address chronic inflammation linked especially to age-related diseases. Our approach is to develop immunotherapies that reduce or eliminate the main drivers of chronic inflammation by addressing the underlying development and sustainment of these processes.
Using our drug discovery platforms, we have created over 50 molecules, all of which can be administered by subcutaneous injection as well as used in adoptive cell therapy approaches. These modular and tunable technologies have allowed us to generate a novel pipeline of internally developed product candidates we believe are capable of activating and targeting desired immune responses and blocking unwanted immunosuppressive activities.
Chronic Inflammation with Aging: Inflammaging
Inflammaging is a state of chronic inflammation believed to develop with advancing age. Accumulation of senescent cells, along with the SASP factors they secrete, has been implicated as a major source of chronic sterile inflammation leading to many age-related pathologies. Demographically, the world is rapidly growing older and more prone to inflammaging. All countries face major challenges to ensure that their health and social systems are ready to make the most of this demographic shift. According to the World Health Organization, in 2020, the number of people aged 60 years and older outnumbered children younger than 5 years. By 2030, 1 in 6 people in the world will be aged 60 years or over. In 2020, the population aged 60 years and over was estimated to be 1.4 billion people. By 2050, the world’s population of people aged 60 years and older is expected to double to 2.1 billion people.
As we grow older, a series of complex changes ripple through our immune system. Rising levels of inflammatory factors lead to unresolved, degenerative immune responses. Mounting evidence suggests that this inflammation undermines many bodily systems, accelerates biological aging and contributes to age-related diseases, such as cancer, cardiovascular disease, diabetes, and neurodegenerative disease.
Senescence: SASP Factors Secreted by Senescent Cells Trigger Chronic Inflammatory Responses
Cellular senescence is a biological condition resulting from the impact of stressors, such as chemotherapy, radiation, and pollutants, on human cells. These stressors reduce natural human cell cytotoxicity, leading to the accumulation of senescent cells and SASP factors. Considered harmful to neighboring cells, secreted SASP factors also activate a type of protein molecule called inflammasomes that accelerate the increasingly persistent cycle of inflammation. As we age, senescent cells accumulate, and SASP factors increase, leading to low-grade, chronic inflammation and age-related diseases. At HCW Biologics, our proprietary immunotherapy platforms rejuvenate the immune system, allowing it to reduce accumulated senescent cells and silence activated inflammasomes. This disrupts the link between aging and chronic diseases.
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Persistently Activated Immune Cells: Inflammatory Factors They Secreted Trigger Chronic Inflammatory Responses
Immune cells defend against infection or tissue injury. These activated immune cells persist as we age, even in the absence of infection, and regulate the release of pro-inflammatory factors. As inflammatory factor levels increase, this fuels a feedback cycle of inflammasome activation and leads to the persistent, low-grade body-wide inflammation associated with many age-related diseases.
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Our Strategy
Our strategy includes the following key components:
Focus on diseases with no known FDA-approved treatments.
Focus on an autoimmune indication for the initial indication for clinical development for our lead product candidate, HCW9302.
Once RP2D and safety is established in a successful Phase 1 study, expand to other carefully selected indications in Phase 2.
Continue to build our relationships with leading clinical research centers.
Balance clinical development of our proprietary molecules between a few in-house development programs and licensing programs with larger biotech companies and big pharma for other molecules.
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Our Programs
The Company created two novel drug discovery platforms, using two distinctly different scaffolds to anchor the composition of immunotherapeutic fusions. This results in the creation of molecules with different mechanisms of action, which opens up different pathways for treatment of diseases promoted by chronic inflammation.
Our Proprietary T-Cell Receptor β Chain Constant Region Drug Discovery and Development Platform
HCW Biologics invented the TRBC drug discovery and development platform, a second-generation drug discovery technology platform, to create immunotherapeutics that activate immune responses and specifically target cancerous or infected cells. The platform utilizes the TRBC protein as a scaffold to build multi-chain chimeric polypeptides, which include target-binding domains and affinity domains, enabling the targeting of specific antigens. We believe these polypeptides stimulate immune cells, modulating immune functions and signaling pathways.
Molecules created with the TRBC platform integrate multiple protein targets, such as cytokines, single-chain antibodies, and ligands, into a single fusion complex designed to engage immunostimulatory functions and modulate various signaling pathways. This flexible, adaptable platform has facilitated the development of a groundbreaking pipeline of internally developed product candidates.
This versatile scaffold enables the creation of multiple classes of immunotherapeutic compounds:
Class I: |
Multi-Functional Immune Cell Stimulators – Multifunctional, cytokine-based immunotherapeutic compounds.
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Class II: |
Second-Generation Immune Checkpoint Inhibitors – Multifunctional immunotherapeutic fusions which improve the performance of immune checkpoint inhibitors.
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Class III: |
Multi-Specific Targeting Fusions and Enhanced Immune Cell Engagers – Constructs with immune-cell engagers targeting cell-surface antigens associated with diseased cells.
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T-Cell Receptor β Chain Constant Region (“TRBC”) Drug Discovery and Development Platform Our proprietary TOBI™ development platform is a proprietary immunotherapeutic drug design and discovery platform which enables us to construct multi-domain cytokine-based immunotherapeutics using a Tissue-Factor (“TF”) scaffold.
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Our Proprietary Tissue factOr-Based fusIon Development Platform
The domains of TOBI-based molecules are discrete and can be “turned on” and “turned off.” We have evaluated HCW9218, a TOBI-based molecule, in two Phase 1/1b clinical trials and have generated human data that shows that this molecule is capable of achieving the desired immune responses against solid tumors, including ovarian and pancreatic cancer. Based on other research, we believe that other TOBI-based molecules could activate the designed immune responses against other diseases or infected cells by blocking unwanted autoimmune or inflammatory activities.
Based on a TF scaffold that serves as the “backbone” for the construction of fusion molecules, the TOBI platform packs multiple protein targets, including cytokines, single-chain antibodies, and ligands, into a fusion molecule. These molecules are capable of engaging immunostimulatory functions and addressing many signaling pathways simultaneously. Some of these fusion protein complexes have ex vivo as well as in vivo applications. TOBI also provides a scalable approach for generating large-scale current Good Manufacturing Practice (“cGMP”)-grade heteromeric fusion protein complexes to support clinical applications.
The TOBI discovery platform was featured in an article authored by the Company and published in July 2021 in the peer-reviewed journal Cancer Immunology Research, “A ‘Prime and Expand’ Strategy Using the Multifunctional Fusion Proteins to Generate Memory-Like NK cells for Cell Therapy,” Shrestha N, et al., July 2024. The reference to our paper does not constitute incorporation by reference of the information contained in the paper.
For information about the bi-specific TOBI fusion, HCW9302, and its effects on Treg responses in an inflammatory disease, see Frontiers in Immunology, “A Novel Interleukin-2-Based Fusion Molecule, HCW9302, Differentially Promotes Regulatory T Cell Expansion to Treat Atherosclerosis in Mice,” Zhu, X., et al., January 2023. The reference to our paper does not constitute incorporation by reference of the information contained in the paper.
Autoimmune and Proinflammatory Diseases
HCW9302
HCW9302 is our leading clinical-stage drug candidate designed to address chronic inflammatory responses and associated tissue destruction typical of autoimmune disease. Thus, we selected an autoimmune disease as the gateway indication for the clinical development of HCW9302. HCW9302 is designed to activate and expand Treg cells, suppressing the persistently activated immune cells, inflammasome-bearing cells and their inflammatory factors. Preclinical studies show it has a 1,000-fold higher affinity for IL2Rα than IL-2, with a longer serum half-life. It is well tolerated, effectively expanding Treg cells without activating CD4+ effector T cells (“Teff” cells).
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In a dose toxicity study in non-human primates, we established that HCW9302 induced Treg cell proliferation and accumulation at a dose level with no observed adverse events. For this study, HCW9302 was administered monthly via subcutaneous injection for six months. Findings from this IND-enabling study contributed to the development of the clinical strategies for HCW9302 in autoimmune disease indications.
Alopecia Areata
On January 28, 2025, the Company obtained clearance from the FDA to evaluate HCW9302 in a Phase 1 clinical trial in patients with alopecia areata (“alopecia”). In preclinical studies using an alopecia murine model, treatment with HCW9302 protected mice from disease, reducing pathogenic immune cell populations in the skin and skin-draining lymph nodes. HCW9302 treatment also led to a protective shift in Treg : Teff balance, with Treg cells dominating in the skin leading to suppression of unwanted autoimmune activity. These findings suggest HCW9302-induced Treg expansion can alter the course of alopecia areata and promote tolerance, warranting further studies in human patients.
Alopecia is characterized by hair loss in localized areas, the entire scalp, or, in some cases, the whole body. It occurs when the immune system mistakenly attacks hair follicles, leading to hair loss without causing permanent damage to the follicles. Patients often experience recurring episodes of hair loss throughout their lives. While not life threatening, alopecia areata can have a significant negative impact on patients’ quality of life and psychological health. Existing approved treatments may provide some relief of symptoms, but there are often dangerous side effects.
Alopecia is one of the most prevalent autoimmune diseases in the world, affecting approximately 1 in 1,000 people, with a lifetime incidence of 2% worldwide, or 160 million people. According to the National Alopecia Areata Foundation, about 7 million people in the United States have alopecia areata. The condition primarily affects individuals under the age of 30, occurring at similar rates in both males and females.
Many insurance plans may not fully cover alopecia areata treatments, leading to significant out-of-pocket expenses. More extensive hair loss usually requires more intensive treatment, leading to higher costs. Hair transplants are considered among the most expensive treatment options, with costs ranging from $7,400 to $25,000 depending on the procedure and the clinic. Patients report even higher costs due to the need for medications like Janus kinase (“JAK”) inhibitors which can reach upwards of $50,000 annually. JAK inhibitors have boxed warnings in their labeling due to an increased risk of serious heart-related events, cancer, blood clots, and death.
(See StatsPearls, National Library of Medicine of National Institutes of Health, National Alopecia Areata Foundation.)
Potential Phase 2 Expanded Indications
The goals of the Phase 1 clinical trial are to assess whether the safety profile is acceptable to conduct further studies and establish a RP2D that can increase Treg cells activity in patients participating in the study. If we achieve the Phase 1 study objectives, the Company plans to progress the clinical development of HCW9302 in patients with alopecia areata as well as other autoimmune diseases and inflammatory conditions, including other dermatologic diseases, organ transplant rejection and neurodegenerative diseases.
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Organ Transplant Rejection
Through collaborative research, the Company has performed some preclinical research using HCW9302 in organ transplant rejection. According to the United Network for Organ Sharing, in 2023, there were a record-breaking 46,632 organ transplants performed in the United States. This includes both deceased and living donors. Graft rejection in organ transplantation refers to the phenomenon where the recipient's immune system identifies the transplanted organ as foreign tissue and attacks it, leading to damage and potential failure of the transplanted organ, essentially rejecting it from the body. This is a major complication following organ transplantation and occurs due to differences in the recipient's immune system compared to the donor's tissue antigens. Chronic transplant rejection may develop months or years after organ or tissue transplantation. This condition involves chronic inflammation and immune responses against the transplanted graft, leading to complications and symptoms that vary depending on the transplanted organ.
Neurodegenerative Diseases
The Company’s preclinical work in neurodegenerative diseases to date has focused on Alzheimer’s Disease. According to the Alzheimer’s Association, for the United States, health care and long-term care costs for people living with dementia are projected to reach $360 billion in 2024 and nearly $1 trillion in 2050.
Further statistics from the Alzheimer’s Association offer a partial explanation for these staggering costs. Again, these are statistics just for the United States.
Cancer Indications
Class II TRBC Molecules: Second-Generation Immune Checkpoint Inhibitor
The Company is currently conducting preclinical studies in relevant animal models to identify the strongest candidate in the group of TRBC Molecules classified as second-generation immune checkpoint inhibitors.
Several immune checkpoint inhibitors have been approved for the treatment of a limited number of cancer indications. While immune checkpoint inhibitors are considered a breakthrough therapy that has revolutionized the way cancer is treated, the response rates among patients remains stubbornly low in many of the most common cancer indications. There are several clinical studies underway for therapeutics to be used in combination with immune checkpoint inhibitors to broaden the number of indications and improve response rates. Our focused indications are pancreatic and ovarian cancer.
This market is dominated by a few companies, predominantly Merck & Co. and its product, Keytruda®. Leading immune checkpoint inhibitors face a patent cliff in the next few years. The opportunity presented by the patent expiry of approved immune checkpoint inhibitors lies in the potential for increased competition and availability of generic or biosimilar versions of these drugs which may result in a loss of market exclusivity and revenue as competition. It may also incentivize innovation and the development of new formulations, combinations, or delivery methods to maintain market share and competitive advantage.
Pancreatic Cancer
Pancreatic cancer, as one of most fatal malignancies, remains a critical issue in the global burden of disease. This cancer has the highest mortality rate of all major cancers. In the U.S., pancreatic cancer is currently the third leading cause of cancer-related death after lung and colon and expected to become the second leading cause of cancer-related death by 2030. In the U.S. alone, an estimated 66,440 Americans were diagnosed with pancreatic cancer and more than 51,750 died from the disease in 2024.
For all stages combined, the five-year relative survival rate is 13%. For the small percentage (15%) of people diagnosed with local disease, the five-year survival rate is only 44%. Survival is higher when pancreatic cancer is detected early. Early diagnoses is difficult because there are few signs or symptoms before it has spread outside of the pancreas.
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China, the United States, and Japan had the highest number of pancreatic cancer cases in 2022. There were approximately 500,000 new cases and 470,000 deaths in 2022. The table below shows the new cases and the ASR/100,000. Age-standardized rates (“ASR”) are a summary measure of the rate of disease that a population would have if it had a standard age structure.
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Country |
New Cases of Pancreatic Cancer |
ASR/100,000
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World |
510,992 |
4.7 |
China |
118,672 |
4.4 |
United States |
60,127 |
8.6 |
Japan |
47,627 |
9.8 |
(See: World Journal of Gastronomy, American Cancer Society, National Cancer Institute, World Cancer Research Fund.)
Ovarian Cancer
Ovarian cancer is one of the leading causes of cancer deaths among women and the deadliest of gynecologic cancers. Although risk of developing and dying from ovarian cancer is almost twice as high in developed countries, the actual burden (number of cases) is much higher in less developed countries due to population sizes. For example, China has the largest number of diagnoses per year (34,575), followed by India (26,934), then the United States. In the United States, ovarian cancer accounts for 2.5% of cancers in women. In the United States, while ovarian cancer is the 11th most common cancer among women, it is the fifth leading cause of cancer-related death among women. Worldwide, ovarian cancer is the seventh most common cancer in women. It is estimated that by 2035, the incidence of ovarian cancer will increase by 55% to 371,000 worldwide, and deaths will increase by 67% to 254,000 worldwide.
Treatment for ovarian cancer usually involves a combination of surgery and chemotherapy. This cancer mainly develops in older women. About half of the women who are diagnosed with ovarian cancer are aged 63 years or older. The most important risk factor for ovarian cancer other than age is a family history of breast or ovarian cancer. This includes those with inherited gene changes like BRCA1, BRCA2, and Lynch syndrome.
Ovarian cancer survival rates vary widely. The latest five-year survival rates largely fall between 30% and 50% and in general have begun to improve over the last 20 years. In the United States, the relative five-year survival rate for ovarian cancer is 50.8%. Overall, survival rates fall well below that of other cancers.
(See: World Ovarian Cancer Coalition, American Cancer Society and Center for Disease Control and Prevention.)
Class I TRBC Molecules: Multi-Functional Immune Cell Stimulators
Class I TRBC Molecules combine several different immune functional domains on the TRBC scaffold. The Company has conducted preclinical studies that demonstrate that this multi-functional group of molecules is highly effective at inducing CD8+ T cell and NK cell responses without triggering unwanted side effects in human immune cells animal models. HCW11-006 also exhibits anti-tumor efficacy in relevant solid tumor animal models.
In addition to HCW11-006, the Company is investigating various structures with different combinations of cytokines in our quest to identify lead product candidate(s) in this group of molecules. We anticipate the completion of our efficacy assessment in mice and safety profiling in a small study in non-human primates before the end of 2025. Results of these studies are expected to show the optimal construction for lead product candidates.
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Example of Class I TRBC Molecule
Second-Generation Multi-Functional Immune Cell Stimulator
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HCW 11-002 |
HCW11-002 is a Class I TRBC molecule that contains the same immune moieties as HCW9218, and it has demonstrated its promising capabilities in stimulating immune cells in preclinical studies. Based on this potential, the Company is considering accelerating the development of HCW11-002 for senescence-associated indications.
Senescence-Associated Diseases
The Class I TRBC Molecules have potential for the treatment of senescence-associated indications, such as bronchopulmonary dysplasia (“BPD”), chronic deep wrinkles and senile lentigo (age spots) removal. BPD is a form of chronic lung disease that causes long-term breathing problems in premature babies. The condition often results in poor growth and development. An estimated 10,000 to 15,000 babies in the United States develop BPD each year. There is no known cure for BPD, which involves high morality and morbidities.
Aesthetics treatments represent a large and growing market due to the aging population. For example, the global botulinum toxin market was valued at $6.4 billion (USD) in 2022 and growing at a CAGR of 11.50% from 2022 to 2030. The market is expected to reach $15.2 billion (USD) by 2030. (See: Global Growth Report, Fortune Business Insights.)
Class III TRBC Molecules: Immune Cell Engagers
Class III TRBC Molecules are second-generation immune-cell engagers capable of targeting tissue factor and other cell-surface antigens associated with diseased cells. Class III TRBC Molecules are part of a new class of therapeutic treatments based on the development of immune-cell engagers. Among these are T-cell targeted molecules — antibodies engineered to redirect T cells to recognize and kill cancer cells — that are being developed to treat cancer and tackle issues that could potentially lead to treatment that is more effective and safer for cancer patients.
Recent deal activity indicates that the pharmaceutical industry and the biotech industry have recognized the benefits of Enhanced Immune Cell Engagers, in particular T-Cell Engagers. Recent notable deals in the immune cell engager space include AbbVie partnering with Xilio Therapeutics to develop antibody-based immunotherapies, with AbbVie paying a significant upfront payment of $52 million; Candid Therapeutics making multiple collaborations to discover and develop new T-cell engagers, including a deal with Nona Bioscience (“Nona”) where Nona could potentially receive up to $320 million in milestone payments; and GSK acquiring CMG1A46, a clinical-stage dual CD19 and CD20-targeted T-cell engager from Chimagen for $300 million upfront.
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Even though immune-cell engagers have great potential, there are major challenges in the clinical development. The complexity and scale of the GLP preclinical and clinical studies required for the development of Class III Molecules is more appropriate for well-capitalized pharmaceutical companies or a larger biotech company. Companies that undertake this challenge must deal with managing potential severe toxicities, among other obstacles. Further complications arise from potential off-target effects and patient selection for optimal treatment outcomes.
In light of recent transactions coupled with the challenges of clinical development, we plan to take advantage of industry interest in this breakthrough drug strategy. We intend to develop these molecules through corporate partnering and out-licensing arrangements.
Out-License Programs
We have created over 50 immunotherapeutic molecules with our proprietary drug discovery and development platforms. We use out-licensing as a strategy for financing as well as clinical development of selected programs, molecules or markets. We expect out-licensing to provide non-dilutive financing to bolster resources available to fund our core markets and programs and possibly commercialize molecules, with the hope that our licensees achieve success through our licenses.
Wugen Inc.
We established our first out-license arrangement in December 2020, when the Company entered into the Wugen License, an exclusive worldwide license agreement with Wugen for rights to develop cell therapy-based treatments using two of our internally-developed fusion protein molecules and improvements thereto, including clinical-stage and preclinical stage fusion molecules, HCW9201 and HCW9206, respectively. We believe these molecules are capable of generating highly activated cells in a short time frame and large-scale NK cell expansion without relying on feeder cells. Wugen has exercised its right to sublicense their rights for Greater China. As licensor, we have limited information rights to clinical data which we are required to treat as nonpublic confidential information. As licensee, Wugen, a private company, determines when and if clinical data read-outs are disclosed to the public.
We retain manufacturing rights and other rights, including regulatory T cell-based cellular therapy and injectable rights, for licensed molecules under the terms of the Wugen License. On June 18, 2021, we entered into a master services agreement with Wugen for the supply of materials for clinical development of licensed products. Thereafter, each purchase transaction must be accompanied by a statement-of-work. We plan to enter into a commercialization supply agreement when Wugen enters its commercial stage. According to the terms of the Wugen License, Wugen will fund all future clinical development and commercialization activities for any indications utilizing the licensed molecules for cell-based therapy as covered by the Wugen License. In addition to an upfront fee which consisted of a significant equity ownership position in Wugen’s common stock, we have the opportunity to receive additional payments for development and commercialization milestones as well as single-digit royalties.
WY Biotech Co., Ltd.
On November 17, 2024, HCW Biologics entered into an exclusive, worldwide License, Research, and Co-Development Agreement (the “WY Biotech License Agreement”) with WY Biotech Co., Ltd. (the “WY Biotech”) for in vivo applications of one of the Company’s preclinical, proprietary molecules, HCW11-006. Upon the completion of a Phase 1 clinical trial in any jurisdiction, the Company has an “Opt-In Right,” which gives the Company the option to assume all control and responsibility for the development, manufacture and commercialization of HCW11-006 for in vivo applications in the Opt-In Territory. The “Opt-In Territory” is North America, South America, and Central America. Upon the completion of the exercise of the Opt-In Right, the Company would be responsible for all costs associated with research and development, manufacturing, clinical development, regulatory approval, and commercialization for the licensed molecule in the Opt-In Territory.
As reported in the Company’s Form 8-K filed with the SEC on March 19, 2025, on March 18, 2025, the Company and WY Biotech agreed to amend the WY Biotech License Agreement. The Company has now completed extensive preclinical studies that further support our belief in the potential for HCW11-006 for both an in vivo and ex vivo therapy. The in vivo therapy is licensed by WY Biotech, however, the Company retained all rights to the ex vivo therapy and applications as a reagent in cell-based therapy treatments, including cell-based therapies, such as CAR-T therapies. The Company considers WY Biotech License provisions for the Opt-In Right to take over the development of HCW11-006 for the Americas markets to be an important feature of the WY Biotech License. We believe our right to recapture this market is a potentially high value opportunity. Further, we will be able to base our decision to opt-in on the human-data read-out from a Phase 1 clinical trial, which will mitigate our development risks and provide valuable clinical information about the potential for the indications we will use for Phase 2 clinical studies.
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Manufacturing
For TOBI Molecules, we have established internally developed large scale manufacturing processes for producing these fusion molecules from Chinese hamster ovary (“CHO”) cells in a cGMP-compliant setting.
We have a long-standing relationship with a contract manufacturing organization, EirGenix, Inc. (“EirGenix”), a third-party global contract development and cGMP manufacturer of biologics, for the manufacture of our internally-developed molecules. By the end of 2019, we successfully launched cGMP production with manufacturing runs of clinical grade materials adequate for support of our clinical trials. As of December 31, 2024, we have successfully completed cGMP production of five of our molecules (HCW9101, HCW9201, HCW9206, HCW9218, and HCW9302). The production campaigns include the sufficient quantities of clinical grade materials required to complete the Phase 1 / 2 clinical trials we have planned during 2025 and 2026 for HCW9302.
We currently rely on EirGenix and other third-party manufacturers for the cGMP production of sufficient quantities of our drug product candidates for our clinical trials. Our management team and other internal personnel have extensive cGMP manufacturing experience which allows for seamless technology transfer of our proprietary manufacturing methods, as well as the ability to manage the manufacturing and development processes conducted by third-party manufacturers. Our agreements with third-party manufacturers include confidentiality and intellectual property provisions as well as routine quality audits. However, we currently obtain our products from these manufacturers on a per project basis and do not have long-term supply arrangements in place. Should any of these manufacturers become unavailable to us for any reason, we believe that there are a number of potential alternative contract manufacturers available to us on commercially reasonable terms to meet our future production requirements, although we may incur some delay and cost in qualifying and re-establishing the manufacturing processes at an alternative facility. We endeavor to mitigate this risk by maintaining an inventory of clinical material that is adequate to complete the clinical trials we expect to initiate in the next 12 months.
On August 15, 2022, we purchased a 36,000 square foot building located in Miramar, Florida that is intended to serve as our new headquarters. After refitting this building, we expect to have the capabilities for cGMP clinical drug manufacturing, storage, distribution, and quality testing. We expect to relocate to this building and complete validation of the facility in the first half of 2026. We have the flexibility to complete the buildout of the manufacturing facility on a longer schedule, should we choose to delay completion. In the meantime, we will continue to manufacture clinical-grade material with third-party manufacturers. Our staff has expertise in building and running cGMP manufacturing facilities for immunotherapeutics. In addition, our manufacturing process is wholly-owned and developed by us, so we do not expect to be reliant on a third-party for manufacturing expertise or processes.
Intellectual Property
Overview
We strive to protect and enhance internally-developed technology, inventions, and improvements that are commercially important to the development of our business, including seeking, maintaining, and defending patent rights, for our internally-developed molecules and manufacturing processes. We also rely on trade secrets relating to our technology platform and on know-how, continuing technological innovation to develop, strengthen, and maintain our proprietary position in the field of inflammaging and the diseases it promotes that may be important for the development of our business.
As with other biotechnology and pharmaceutical companies, our ability to secure and maintain intellectual property protection for our product candidates, future products, and other internally-developed technologies will depend on our success in obtaining effective patent coverage and enforcing those patents if granted. However, we cannot guarantee that our pending patent applications, and any patent applications that we may in the future file, will result in the issuance of patents, or that any issued patents we have obtained or may obtain will provide sufficient proprietary protection from competitors. Any issued patents that we obtain may be challenged, invalidated, or circumvented by third parties.
In addition to patents, we also rely on trade secrets, know-how and continuing technological innovation to develop and maintain our competitive position. We seek to protect our internally-developed technology, in part, through confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and potential collaborators. We also rely on trade secrets relating to our manufacturing process and on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen, and maintain our proprietary position in the field of inflammaging that may be important for the development of our business. We additionally may rely on regulatory protection afforded through data exclusivity, market exclusivity, and patent term extensions, where available.
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Internally-Developed Intellectual Property
TOBI Platform and TOBI-Based Molecules
As of December 31, 2024, the United States Patent and Trademark Office (the “USPTO”) has granted ten patents, including fundamental patents that protect the underlying technology for our two lead product candidates, HCW9218 and HCW9302, as well as patents that protect the underlying technology and use of the molecule HCW9206, which is licensed to Wugen, conveying rights to develop cell-based therapies for cancer. In respect of Wugen, we retain all other rights to HCW9206, including manufacturing rights. As part of a confidential Settlement Agreement with ImmunityBio, Inc. in 2024, the Company assigned certain patents and patent applications to ImmunityBio, Inc., yet the Company retained a world-wide exclusive license in respect of the use of TOBI molecules outside of oncology indications. Licensed patents that protect the underlying technology for proprietary molecules include:
As of December 31, 2024, in addition to a license to ten issued U.S. patents, we have a license to four issued Japanese patents, two issued Australian patents, one issued Singaporean patent, one issued Taiwanese patent, and 124 pending patent applications worldwide, including 20 pending U.S. utility patent applications, one pending provisional U.S. patent application, three pending Patent Cooperation Treaty (“PCT”) applications, nine Hong Kong applications, and 91 total pending non-U.S. national phase patent applications and Taiwanese patent applications. HCW Biologics owns 13 pending patent applications worldwide including one pending U.S. utility patent application, two pending provisional U.S. patent applications, one Hong Kong application, and nine total pending non-U.S. national phase patent applications and Taiwanese patent applications. Our policy is to file patent applications to protect technology, inventions and improvements to inventions that are commercially important to the development of our business. We seek United States and foreign patent protection for a variety of technologies, including: our internally-developed platform, specific chimeric polypeptides developed using our platform, methods of using the chimeric polypeptides both in vivo and in cellular therapy to treat various conditions, methods for treating diseases of interest, and methods for manufacturing our products. We also intend to seek patent protection or rely upon trade secret rights to protect other technologies that may be used in combination with our products in the development of novel products or methods of use. We seek protection, in part, through confidentiality and proprietary information agreements.
Our intellectual property portfolio is continually evolving during prosecution of our applications. We own or license multiple families of patent applications that are directed to our TOBI platform technology and our single-chain and multi-chain chimeric polypeptides and methods of use of these polypeptides alone and in combination.
Single-Chain Chimeric Polypeptides Licensed Patent Family
This family includes licensed patents and patent applications with claims directed to compositions of various single-chain chimeric polypeptides created using the TOBI platform. These licensed applications also include methods of use and manufacture thereof and methods of promoting the activation and proliferation of NK cells or T cells using our single-chain chimeric polypeptides. As of December 31, 2024, this family, which includes HCW9302, includes U.S. Patent Nos. 11,401,324, 11,987,619, and 12,018,071, one pending U.S. utility patent application, one issued Japanese patent, and 13 pending patent applications filed in Europe, Australia, Canada, Israel, New Zealand, Japan, South Korea, China, Singapore, Hong Kong and Taiwan. The earliest predicted expiration date of any patent issuing from a patent application in this family is 2039.
Multi-Chain Chimeric Polypeptides Licensed Patent Family
This family includes licensed patents and patent applications with claims directed to compositions of various multi-chain chimeric polypeptides created using the TOBI platform. These licensed applications also include methods of use and manufacture thereof and methods of promoting the activation and proliferation of NK cells or T cells using our multi-chain chimeric polypeptides. As of December 31, 2024, this family, which includes claims encompassing HCW9218, HCW9201, HCW9206, HCW9228, HCW9207, and HCW9212, includes U.S. Patent Nos. 11,518,792 and 11,884,712, six pending U.S. utility patent applications, one issued Japanese patent, one issued Australian patent, one issued Singaporean patent, one issued Taiwanese patent, and 12 pending patent applications filed in Europe, Australia, Canada, Israel, Japan, New Zealand, South Korea, China, Singapore, Hong Kong and Taiwan. The earliest predicted expiration date of any patent issuing from a patent application in this family is 2039.
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With respect to HCW9218, as of December 31, 2024, the composition is claimed in U.S. Patent No. 11,518,792, four patents issued in Australia, Singapore, Japan and Taiwan, and eight pending patent applications filed in Europe, Canada, Israel, Japan, New Zealand, South Korea, China, and Hong Kong.
With respect to HCW9201, December 31, 2024, the composition is claimed in one allowed U.S. utility patent application, one issued Singaporean patent, one issued Japanese patent and ten pending patent applications filed in Europe, Canada, Israel, Japan, New Zealand, South Korea, China, Singapore, Hong Kong and Taiwan. Wugen has obtained an exclusive license to these patent applications limited to use of the licensed chimeric polypeptides in manufacturing certain cellular therapy products.
With respect to HCW9206, December 31, 2024, the composition is claimed in U.S. Patent No. 11,884,712 , one issued Singaporean patent, one issued Japanese patent and 11 pending patent applications filed in Europe, Australia, Canada, Israel, Japan, New Zealand, South Korea, China, Singapore, Hong Kong and Taiwan. Wugen has obtained an exclusive license to these patent applications limited to use of the licensed polypeptides in manufacturing certain cellular therapy products.
Methods of Culturing and Methods of Expansion and Proliferation
These two families include licensed patents and patent applications with claims directed to methods of promoting the activation and proliferation of NK cells through the use of our single-chain or multi-chain chimeric polypeptides for ex vivo cell therapy use. As of December 2024, these two families, which include methods of using HCW9201 and HCW9206, include U.S. Patent No. 11,730,762, U.S. Patent No. 11,738,052, two pending U.S. utility patent applications, one issued Australian patent, one issued Japanese patent, and 16 pending patent applications filed in Europe, Australia, Canada, Israel, Japan, South Korea, Singapore, Hong Kong and China. The earliest predicted expiration date of any patent issuing from a patent application in the first of these two families is 2039. The earliest predicted expiration date of any patent issuing from a patent application in the second of these two families is 2040. Wugen has obtained an exclusive license to these two patent families limited to use in manufacturing certain cellular therapy products.
Treating Age Related Disorders
These four families include licensed patent and patent applications with claims directed to methods of killing or reducing the number of senescent cells in a subject using our single-chain or multi-chain chimeric polypeptides. As of December 2024, these four families, which include methods of using HCW9218, HCW9228 and HCW9302, include U.S. Patent Nos. 11,672,826, 12,024,545, and 12,115,191, four pending U.S. utility patent applications, one issued Japanese patent, and 33 pending patent applications filed in Europe, Australia, Canada, Israel, Japan, Hong Kong, South Korea, New Zealand, Singapore, and China. The earliest predicted expiration date of any patent issuing from a patent application in the first of these three families is 2039. The earliest predicted expiration date of any patent issuing from a patent application in the second of these families is 2041. The earliest predicted expiration date of any patent issuing from a patent application in the third of these families is 2040. The earliest predicted expiration date of any patent issuing from a patent application in the fourth of these families is 2042.
Methods of Activating Regulatory T Cells
This family includes patent applications with claims directed to methods of promoting the activation and proliferation of Regulatory T cells through the use of our single-chain or multi-chain chimeric polypeptides for ex vivo cell therapy use. As of December 2024, this family, which includes methods of using HCW9213 and HCW9302, includes one pending U.S. utility patent application and 10 pending patent applications filed in Australia, New Zealand, Singapore, Israel, Europe, Canada, Japan, China, Hong Kong, and South Korea. The earliest predicted expiration date of any patent issuing from a patent application in this family of applications is 2041.
Antibodies
This family includes patent applications with claims directed to anti-CD26 scFv antibodies. As of December 2024, this family, which includes composition claims for HCW9106, includes one pending U.S. utility patent application and six pending patent applications filed in Australia, Canada, Europe, China, Hong Kong, and Japan. The earliest predicted expiration date of any patent issuing from a patent application in this family of applications is 2041.
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The various methods of use of our chimeric polypeptides covered in our portfolio include: ex vivo cellular therapy use; in vivo or injectable use; methods of inducing differentiation of an immune cell into a memory or memory-like immune cell (in vitro or in vivo); methods of stimulating an immune cell (in vitro or in vivo); and methods of inducing or increasing proliferation of an immune cell (in vitro or in vivo). Indications covered in the portfolio broadly include cancers, including solid tumors and hematological cancers; age-related diseases; and infectious diseases. We are also pursuing innovative combinations of use with our chimeric polypeptides and antibodies, which include both known and internally-developed antibodies. Patents that may issue from these HCW Biologics Inc. owned or licensed applications are generally expected to expire between the years 2039 to 2041, subject to possible patent term adjustment and/or extension.
The term of individual future patents may vary based on the countries in which they are obtained. Generally, patents issued from applications filed in the United States are effective for 20 years from the earliest effective non-provisional filing date. In certain cases, a patent term can be extended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of a U.S. patent, though the total patent term, including any extension, must not exceed 14 years following FDA approval. A U.S. patent can only be extended once, such that, if a single patent is applicable to multiple products, it can only be extended based on one product.
The term of patents outside of the United States varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective national filing date. Similar patent term extension provisions are available in Europe and other foreign jurisdictions to extend the term of a patent covering an approved drug. When possible, we expect to apply for patent term extensions for future patents covering our product candidates and their methods of use.
New Chimeric Polypeptide Platform
As of December 31, 2024, HCW Biologics has filed two provisional patent applications related to a new chimeric polypeptide platform. The new chimeric polypeptide platform will be useful in the generation of polypeptides with therapeutic potential (e.g., useful in the field of inflammaging).
Trademarks
We have two registered U.S. trademarks and two pending U.S. trademark applications for our corporate name and corporate logo. We have an International Registration for the mark HCW BIOLOGICS for pharmaceutical research and development services, among other related services, in Class 42 and four national trademark applications pending therefrom with two registrations issued in the European Union and Japan. In the future, we intend to file applications for trademark registrations in connection with our Company, our product candidates, and other technologies in various jurisdictions, including the United States as the products are further developed.
Trade Secret Protection
Finally, we may rely, in some circumstances, on trade secrets to protect our technology. We seek to protect our internally-developed technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems.
In addition to the above, we have established expertise and development capabilities focused in the areas of preclinical research and development, manufacturing and manufacturing process development, quality control, quality assurance, regulatory affairs, and clinical trial design and implementation. We believe that our focus and expertise will help us develop products based on our internally-developed intellectual property.
Contracts and Agreements
Wugen Exclusive Worldwide License Agreement
In December 2020, we entered into an exclusive worldwide license agreement with Wugen, for rights to use certain HCWB fusion protein molecules to develop, manufacture, and commercialize their cellular therapy products. The term of the agreement will expire on a product-by-product and country-by-country basis, upon the later of (i) the expiration of the last-to-expire valid patent claim or (ii) ten (10) years from the first commercial sale of such product.
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As consideration for the Wugen License, HCWB received shares of Wugen’s common stock, which was equivalent to a 5.6% ownership interest in Wugen as of December 31, 2024. We may receive additional payments in the future, based upon the occurrence of certain development milestones. We will be eligible to receive additional payments for commercialization milestones as well as single-digit royalties for commercial sales once product sales commence.
We retained all other rights and use of the licensed molecules outside of Wugen’s right to use the molecules to develop, manufacture, and commercialize cellular therapy products. Wugen’s rights are limited to use of the licensed molecules in cellular therapy products, which are pharmaceutical or biological products, processes or therapies that contain or comprise cells (including without limitation, CIML NK cells or T cells) that have been engineered, modified, or otherwise manipulated ex vivo, but excludes regulatory T cell-based cellular therapy products. Our retained rights include use of the molecules for injectable therapy product, regulatory T cell-based cellular therapy products, and manufacturing rights to the licensed molecules. We oversee manufacturing and supply of these licensed molecules to Wugen, utilizing our internally-developed manufacturing process, under supply agreements with Wugen that have industry-standard terms. Wugen funds all future clinical development and commercialization activities for the cellular therapy treatments developed by Wugen using the licensed molecules.
WY Biotech Exclusive Worldwide License Agreement
On November 17, 2024, HCW Biologics entered into an exclusive, worldwide License, Research, and Co-Development Agreement (the “WY Biotech License Agreement”) with WY Biotech Co., Ltd. (the “WY Biotech”) for one of the Company’s preclinical, proprietary molecules.
As reported in the Company’s Form 8-K filed with the SEC on March 19, 2025, on March 18, 2025, the Company and WY Biotech agreed to amend the WY Biotech License Agreement. The Company has now completed extensive preclinical studies that further support our belief in the potential for HCW11-006 for both an in vivo and ex vivo therapy. The in vivo therapy is licensed by WY Biotech, however, the Company retained all rights to the ex vivo therapy and applications as a reagent in cell-based therapy treatments, including cell-based therapies, such as CAR-T therapies. The Company considers WY Biotech License Agreement provisions for the Opt-In Right to take over the development of HCW11-006 for the Americas markets to be an important feature of the WY Biotech License. We believe our right to recapture this market is a potentially high value opportunity. Further, we will be able to base our decision to opt-in on the human-data read-out from a Phase 1 clinical trial, which will mitigate our development risks and provide valuable clinical information about the potential for the indications we will use for Phase 2 clinical studies.
Upon the completion of a Phase 1 clinical trial in any jurisdiction, the Company has an “Opt-In Right,” which gives the Company the option to assume all control and responsibility for the development, manufacture and commercialization of the molecule licensed to WY Biotech in the Opt-In Territory. The “Opt-In Territory” is North America, South America, and Central America. Upon the completion of the exercise of the Opt-In Right, the Company will be responsible for all costs associated with research and development, manufacturing, clinical development, regulatory approval, and commercialization for the licensed molecule in the Opt-In Territory.
WY Biotech will pay the Company milestone payments as the licensed molecule advances through clinical trials and the first marketing approval is granted for the first territory in which the WY Biotech retains exclusive rights. Upon commercialization, the Company will receive double-digit royalties on a product-by-product basis in each jurisdiction in which the WY Biotech retains exclusive rights, subject to adjustment in the event the Company exercises the Opt-In Right. In addition, the Company will share a substantial portion of the net proceeds from any future transactions entered into by the WY Biotech, involving an exclusive license for the licensed molecule, an assignment of the WY Biotech License Agreement or the sale of the WY Biotech’s business that would permit the buyer to assume exclusive rights under the WY Biotech License Agreement, excluding transactions in the Greater China market. The Company and WY Biotech have expressed their intent to work cooperatively with respect to the licensed molecule in the development stage, with a global focus for clinical development and partnering. The WY Biotech License Agreement contains various representations, warranties, affirmative and negative covenants, events of default and related remedies as well as other customary provisions.
Contract Research Agreements
We have certain contract research agreements with contractors that were entered during the two years ended December 31, 2024 for the (i) hybridoma development, (ii) cell line improvement for higher manufacturing productivity, and (iii) research to support pre-clinical studies. In respect of the hybridoma development and cell line improvement agreements, we own all rights to the resulting intellectual property, including the antibodies, sequences, and data. To date, we have received several sequences and hybridomas from the contractors. For certain contractors, we are obligated to pay one future milestone payment upon filing and acceptance of an IND for each respective human antibody or protein from cell line; however, no additional future development or financial obligations are due under these contract research agreements.
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For certain research collaborations agreements, the resulting research intellectual property may be jointly owned or ownership may be based upon inventorship. In those circumstances, the Company has obtained the exclusive option to an exclusive license for the research intellectual property
Competition
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition, and a strong emphasis on internally-developed products. We believe that our immunotherapeutic approach, internally-developed technology, expertise, scientific knowledge, track record in successfully developing drugs from bench to commercialization and intellectual property provide us with competitive advantages. We face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions, governmental agencies, and public and private research institutions. Any product candidates that we successfully develop and commercialize may compete with existing therapies and new therapies that may become available in the future.
Many of the companies we are competing against, or which we may compete against in the future, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals, and marketing approved products than we do. In addition, we face a constantly changing competitive landscape because of numerous mergers and acquisitions in the pharmaceutical and biotechnology industry, which will concentrate resources among a smaller number of large pharmaceutical companies. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements and co-development deals with large and established companies. These competitors also compete with us in establishing clinical trial sites and patient registration for clinical trials necessary to advance the clinical development of our product candidates.
Although we believe our novel approaches are different from most other existing or investigational therapies across the disease areas where we are focusing our development, we will need to compete (or be combined) with currently approved therapies, and potentially those currently in development if they are approved. We are aware of several marketed and investigational products in our leading disease areas, including but not limited to the products and competitors discussed below.
We compete in the segments of the pharmaceutical, biotechnology, and other related markets that develop cancer therapies. There are many other companies that have commercialized or are developing cancer therapies, including large pharmaceutical and biotechnology companies, such as Amgen, AstraZeneca/MedImmune, Bristol Myers Squibb Company, Merck & Co., Novartis Pharmaceuticals, Pfizer, and Genentech, a member of The Roche Group. We face significant competition from pharmaceutical and biotechnology companies that target specific tumor-associated antigens using immune cells or other cytotoxic modalities. These generally include immune cell redirecting therapeutics (e.g., T-cell engagers), adoptive cellular therapies (e.g., CAR-Ts), antibody drug conjugates, targeted radiopharmaceuticals, targeted immunotoxins, and targeted cancer vaccines.
Aging-related diseases are becoming a major focus in biopharma, as researchers and companies work to develop treatments for conditions like Alzheimer's. Biotech innovators like Altos Labs and Unity Biotechnology are at the forefront, exploring ways to target aging itself by removing senescent cells and modifying metabolic pathways. In oncology, there's growing interest in using senescence removal to improve the effectiveness of cancer treatments. Big names in pharma like Pfizer, Johnson & Johnson, and Roche are investing heavily in aging research, seeing not only its potential for regenerative therapies but also its enormous market potential. As the global population ages, this field is rapidly advancing and becoming a critical area of growth in healthcare.
With respect to our other lead product candidate, HCW9302, there is a growing momentum behind modulating Treg cells as a potential treatment for autoimmune diseases. We are not aware of other competing clinical-stage companies with a first-in-class immunotherapeutic compound for deactivation of persistently activated immune cells, inflammasomes and reduction of inflammatory cytokines they release through the activation of Treg cells.
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Autoimmune diseases, including alopecia areata, atopic dermatitis, and neurodegenerative disorders, are gaining increasing attention in biopharma. We are initiating clinical development in this area using HCW9302, which recently received IND clearance from FDA for a Phase 1 clinical study for alopecia areata. We are aware of several other companies developing programs that utilize IL-2 for the selective expansion of Treg cells, including Amgen, Coya Therapeutics, Nektar Therapeutics, Genentech, a member of The Roche Group, Merck & Co., Bristol Myers Squibb Company, and Celgene, a subsidiary of Bristol Myers Squibb Company. We are also aware of other companies with research or preclinical-stage programs in this area, including Synthorx, Moderna, and Xencor. We are also aware of other companies with PD-1 or CTLA-4 agonist programs for the treatment of autoimmune diseases and transplant, including Coya Therapeutics, AnaptysBio, Celgene, a subsidiary of Bristol Myers Squibb Company, and Eli Lilly & Company. Additionally, preclinical studies are underway to explore HCW9302’s potential in targeting neurodegenerative diseases. Collaborations are ongoing with various institutions to better understand the biology of HCW9302 in both transplant models and alopecia. Several small and large pharmaceutical companies are currently working on low-dose IL-2 treatments for autoimmune diseases. Moreover, numerous mid- to large-sized biotech companies are seeking partnership opportunities to further explore the potential of HCW9302 in autoimmune diseases. HCW9302 is suitable for both in vivo subcutaneous injection strategies and Treg cell therapy. In addition to alopecia areata, future plans include testing this molecule in transplant models, expanding its potential therapeutic applications.
Numerous companies, including Kite Pharma, Novartis, Bluebird Bio, and Autolus Therapeutics, renowned for their CAR-T cell therapies in oncology, are expanding their research to explore the potential of CAR-T therapies in autoimmune diseases. For instance, Kite Pharma and Novartis are investigating CAR-T treatments for autoimmune conditions like multiple sclerosis (MS) and systemic lupus erythematosus. Similarly, Bluebird Bio is exploring CAR-T cell therapy for diseases such as sickle cell disease and beta-thalassemia, which involve autoimmune components. Autolus Therapeutics is also targeting both cancer and autoimmune diseases like multiple myeloma, acute lymphoblastic leukemia, multiple sclerosis, and systemic sclerosis with CAR-T therapies. This trend underscores a burgeoning interest in utilizing CAR-T cell therapy beyond oncology to tackle autoimmune disorders.
We could see a reduction or elimination of our commercial opportunity if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we or our collaborators may develop. Our competitors also may obtain FDA or foreign regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we or our collaborators are able to enter the market. Key product features that would affect our ability to effectively compete with other therapeutics include the efficacy, safety, and convenience of our therapeutics, the ease of use and effectiveness of any complementary diagnostics and/or companion diagnostics, and price and levels of reimbursement.
We have a novel approach to the treatment of senescence-associated diseases. Bronchopulmonary dysplasia (“BPD”) presents unmet needs, particularly in addressing long-term lung damage and inflammation in premature infants. With growing pharma competition, treatments targeting senescent cell removal from the lungs are emerging as a promising approach to improve lung function and reduce BPD-related complications.
Several immune checkpoint inhibitors have been approved for the treatment of a limited number of cancer indications. There are several clinical studies underway for therapeutics to be used in combination with immune checkpoint inhibitors to broaden the number of indications and improve response rates. This market is dominated by a few companies, predominantly Merck & Co. and its product, Keytruda®. Recently, several pharmaceutical companies have been licensing various versions of PD-1 from Greater China and other small biotech firms, further reflecting the growing interest in innovative immune-modulating therapies. The opportunity presented by the patent expiry of approved immune checkpoint inhibitors lies in the potential for increased competition and availability of generic or biosimilar versions of these drugs which may result in a loss of market exclusivity and revenue as competition. It may also incentivize innovation and the development of new formulations, combinations, or delivery methods to maintain market share and competitive advantage. The following list summarizes key immune checkpoint inhibitors along the companies that own these drugs and their patent expiration dates:
Product |
Associated Company |
Key Patent Expiration Date |
Pembrolizumab (Keytruda®) |
Merck & Co |
2028 |
Nivolumab (Opdivo) |
Bristol Myers Squibb |
2028 |
Atezolizumab (Tecentriq) |
Genentech (Roche) |
2024 |
Durvalumab (Imfinzi) |
AstraZeneca |
2034 |
Cemiplimab (Libtayo) |
Regeneron Pharmaceuticals and Sanofi |
2035 |
Avelumab (Bavencio) |
Merck KGaA and Pfizer |
2024 |
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Government Regulation
Government authorities in the United States, at the federal, state, and local level, and in other countries and jurisdictions, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products. The processes for obtaining regulatory approvals in the United States and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.
FDA Approval Process
In the United States, biological products are subject to extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act (the “FDC Act”), and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Biological products used for the prevention, treatment, or cure of a disease or condition of a human being are subject to regulation under the FDC Act, with the exception that the section of the FDC Act which governs the approval of drugs via New Drug Applications (“NDAs”), does not apply to the approval of biologics. In contrast, biologics are approved for marketing under provisions of the Public Health Service Act (“PHSA”), via a Biologics License Application (“BLA”). However, the application process and requirements for approval of BLAs are very similar to those for NDAs. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as clinical hold, FDA refusal to approve pending BLAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.
Biological product development for a new product in the United States typically involves preclinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug or biologic for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product or disease.
Preclinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements, including Good Laboratory Practices. The results of preclinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long-term preclinical tests, such as tests of reproductive toxicity and carcinogenicity in animals, may continue after the IND is submitted. A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin. Clinical trials involve the administration of the investigational drug or biologic to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations; (ii) in compliance with Good Clinical Practice (“GCP”), an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as well as (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
The FDA may order the temporary or permanent discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA regulations or presents an unacceptable risk to the clinical trial patients. Imposition of a clinical hold may be full or partial. The study protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board (“IRB”), for approval. The IRB will also monitor the clinical trial until completed. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether a trial may move forward at designated checkpoints based on access to certain data from the trial.
Clinical trials to support BLAs for marketing approval are typically conducted in three sequential phases. In Phase 1, the initial introduction of the drug or biologic into patients, the product is tested to assess safety, dosage tolerance, metabolism, pharmacokinetics, pharmacological actions, side effects associated with drug or biologic exposure, and to obtain early evidence of a treatment effect if possible.
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Phase 2 usually involves trials in a limited patient population to determine the effectiveness of the biologic for a particular indication, determine optimal dose and regimen, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain additional information about clinical effects and confirm efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the biologic and to provide adequate information for the labeling of the product.
In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the safety and efficacy of the biologic. In rare instances, a single Phase 3 trial may be sufficient when either (1) the trial is a large, multicenter trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible or (2) the single trial is supported by confirmatory evidence. Approval on the basis of a single trial may be subject to a requirement for additional post-approval studies.
These phases may overlap or be combined. For example, a Phase 1/2 clinical trial may contain both a dose-escalation stage and a dose-expansion stage, the latter of which may confirm tolerability at the recommended dose for expansion in future clinical trials (as in traditional Phase 1 clinical trials) and provide insight into the anti-tumor effects of the investigational therapy in selected subpopulation(s). Typically, during the development of oncology therapies, all subjects enrolled in Phase 1 clinical trials are disease-affected patients and, as a result, considerably more information on clinical activity may be collected during such trials than during Phase 1 clinical trials for non-oncology therapies.
In addition, the manufacturer of an investigational biologic in a Phase 2 or Phase 3 clinical trial for a serious or life-threatening disease is required to make available, such as by posting on its website, its policy on evaluating and responding to requests for expanding access to such investigational drug or biologic.
After completion of the required clinical testing, a BLA is prepared and submitted to the FDA. FDA approval of the BLA is required before marketing and distribution of the product may begin in the United States. The BLA must include the results of all preclinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting a BLA is substantial. The submission of most BLAs is additionally subject to a substantial application user fee. Under an approved BLA, the applicant is also subject to an annual program fee. These fees typically increase annually. A BLA for a biologic that has been designated as an orphan drug is not subject to an application fee, unless the BLA includes an indication for other than a rare disease or condition. The FDA has 60 days from its receipt of a BLA to determine whether the application will be filed based on the FDA’s determination that it is adequately organized and sufficiently complete to permit substantive review. Once the submission is filed, the FDA begins an in-depth review. The FDA has agreed to certain performance goals to complete the review of BLAs. Most applications are classified as Standard Review products that are reviewed within ten months of the date the FDA files the BLA; applications classified as Priority Review are reviewed within six months of the date the FDA files the BLA. A BLA can be classified for Priority Review when the FDA determines the biologic has the potential to treat a serious or life-threatening condition and, if approved, would be a significant improvement in safety or effectiveness compared to available therapies. The review process for both standard and priority reviews may be extended by the FDA for three or more additional months to consider certain late-submitted information, or information intended to clarify information already provided in the BLA submission.
The FDA may also refer applications for novel biologic products, as well as biologic products that present difficult questions of safety or efficacy, to be reviewed by an advisory committee—typically a panel that includes clinicians, statisticians and other experts—for review, evaluation, and a recommendation as to whether the BLA should be approved. The FDA is not bound by the recommendation of an advisory committee, but generally follows such recommendations. Before approving a BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the biologic product is manufactured. The FDA will not approve the product unless compliance with cGMP is satisfactory and the BLA contains data that provide substantial evidence that the drug is safe and effective, or the biologic is safe, pure, potent, and effective, in the respective claimed indication.
After the FDA evaluates the BLA and completes any clinical and manufacturing site inspections, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the BLA submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application for approval. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the BLA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. An approval letter authorizes commercial marketing and distribution of the biologic with specific prescribing information for specific indications. As a condition of BLA approval, the FDA may require a risk evaluation and mitigation strategy (“REMS”), to help ensure that the benefits of the biologic outweigh the potential risks to patients.
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A REMS can include medication guides, communication plans for healthcare professionals, and elements to assure a product’s safe use (“ETASU”). An ETASU can include, but is not limited to, special training or certification for prescribing or dispensing the product, dispensing the product only under certain circumstances, special monitoring, and the use of patient-specific registries. The requirement for a REMS can materially affect the potential market and profitability of the product. Moreover, the FDA may require substantial post-approval testing and surveillance to monitor the product’s safety or efficacy.
Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing. Changes to some of the conditions established in an approved BLA, including changes in indications, product labeling, manufacturing processes or facilities, require submission and FDA approval of a new BLA, or supplement to an approved BLA, before the change can be implemented. A BLA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing BLA supplements as it does in reviewing original BLAs.
Disclosure of Clinical Trial Information
Sponsors of clinical trials of FDA regulated products, including biologics, are required to register and disclose certain clinical trial information on the website www.clinicaltrials.gov. Information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed in certain circumstances for up to two years after the date of completion of the trial. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs as well as clinical trial design.
Expedited Development and Review Programs
Fast Track Designation and Priority Review
The FDA is required to facilitate the development, and expedite the review, of drugs or biologic products that are intended for the treatment of a serious or life-threatening disease or condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition. Fast track designation may be granted for a product that is intended to treat a serious or life-threatening disease or condition for which there is no effective treatment and preclinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to both the product and the specific indication for which it is being studied.
The sponsor of an investigational biological product may request that the FDA designate the product candidate for a specific indication as a fast track product concurrent with, or after, the submission of the IND for the product candidate. FDA must determine if the product candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request. For fast-track products, sponsors may have more frequent interactions with the FDA and the FDA may initiate review of sections of a fast-track product’s BLA before the application is complete. This “rolling review” is available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a fast-track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule for the submission of the remaining information and the sponsor must pay applicable user fees. Fast track designation may be withdrawn if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Priority review may be granted for products that are intended to treat a serious or life-threatening condition and, if approved, would provide a significant improvement in safety and effectiveness compared to available therapies. The FDA determines at the time of filing the BLA whether the proposed product would be a significant improvement and therefore receive a priority review designation. The FDA will attempt to direct additional resources to the evaluation of an application designated for priority review in an effort to facilitate the review.
Breakthrough Therapy Designation
The FDA is also required to expedite the development and review of applications for approval of biologics that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the biologic may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new product candidate may request that the FDA designate the product candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the product candidate. The FDA must determine if the product candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request.
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The FDA may take certain actions with respect to breakthrough therapies, including holding meetings with the sponsor throughout the development process, providing timely advice to the product sponsor regarding development and approval, involving more senior staff in the review process, assigning a cross-disciplinary project lead for the review team and taking other steps to design the clinical studies in an efficient manner.
Accelerated Approval
Accelerated approval may be granted for a product that is intended to treat a serious or life-threatening condition and that generally provides a meaningful therapeutic advantage to patients over existing treatments. A product eligible for accelerated approval may be approved on the basis of either a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. The accelerated approval pathway is most often used in settings in which the course of a disease is long, and an extended period of time is required to measure the intended clinical benefit of a product, even if the effect on the surrogate or intermediate clinical endpoint occurs rapidly. Thus, accelerated approval has been used extensively in the development and approval of products for treatment of a variety of cancers in which the goal of therapy is generally to improve survival or decrease morbidity and the duration of the typical disease course requires lengthy and sometimes large studies to demonstrate a clinical or survival benefit. The accelerated approval pathway is contingent on a sponsor’s agreement to conduct additional post-approval confirmatory studies to verify and describe the product’s clinical benefit. These confirmatory trials must be completed with due diligence and, in some cases, the FDA may require that the trial be designed, initiated, and/or fully enrolled prior to approval. Failure to conduct required post-approval studies, or to confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the product from the market on an expedited basis. All promotional materials for product candidates approved under accelerated regulations are subject to prior review by the FDA.
The Food and Drug Omnibus Reform Act (“FDORA”) was enacted, which includes provisions related to the accelerated approval pathway. Pursuant to FDORA, the FDA is authorized to require a post-approval study to be underway prior to approval or within a specified time period following approval. FDORA also requires the FDA to specify conditions of any required post-approval study, which may include milestones such as a target date of study completion and requires sponsors to submit progress reports for required post-approval studies and any conditions required by the FDA not later than 180 days following approval and not less frequently than every 180 days thereafter until completion or termination of the study. FDORA enables the FDA to initiate enforcement action for the failure to conduct with due diligence a required post-approval study, including a failure to meet any required conditions specified by the FDA or to submit timely reports.
Regenerative Medicine Advanced Therapy Designation
The Regenerative Medicine Advanced Therapy (“RMAT”) designation is an expedited program for the advancement and approval of regenerative medicine products that are intended to treat, modify, reverse, or cure a serious condition and where preliminary clinical evidence indicates the potential to address unmet medical needs for life-threatening diseases or conditions. Similar to Breakthrough Therapy designation, the RMAT allows companies developing regenerative medicine therapies to work earlier, more closely, and frequently with the FDA, and RMAT-designated products may be eligible for priority review and accelerated approval. Regenerative medicine therapies include cell therapies, therapeutic tissue engineering products, human cell and tissue products, and combination products using any such therapies or products, except for those regulated solely under section 361 of the PHSA and Title 21 of the Code of Federal Regulations Part 1271. For product candidates that have received a RMAT designation, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens.
Pediatric Information
Under the Pediatric Research Equity Act (“PREA”), BLAs or supplements to BLAs must contain data to assess the safety and effectiveness of the biological product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the biological product is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, the PREA does not apply to any biological product for an indication for which orphan designation has been granted except that PREA will apply to an original BLA for a new active ingredient that is orphan-designated if the drug is a molecularly targeted cancer product intended for the treatment of an adult cancer and is directed at a molecular target that the FDA determines to be substantially relevant to the growth or progression of a pediatric cancer.
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The Best Pharmaceuticals for Children Act (“BPCA”) provides a six-month extension of any non-patent exclusivity for a biologic if certain conditions are met. Conditions for exclusivity include the FDA’s determination that information relating to the use of a new biologic in the pediatric population may produce health benefits in that population, FDA making a written request for pediatric studies, and the applicant agreeing to perform, and reporting on, the requested studies within the statutory timeframe. Applications under the BPCA are treated as priority applications.
Additional Controls for Biologics
To help reduce the increased risk of the introduction of adventitious agents, the PHSA emphasizes the importance of manufacturing controls for products whose attributes cannot be precisely defined. The PHSA also provides authority to the FDA to immediately suspend biologics licenses in situations where there exists a danger to public health, to prepare or procure products in the event of shortages and critical public health needs, and to authorize the creation and enforcement of regulations to prevent the introduction or spread of communicable diseases within the United States.
After a BLA is approved, the product may also be subject to official lot release as a condition of approval. As part of the manufacturing process, the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA together with a release protocol showing a summary of the lot manufacturing history and the results of all of the manufacturer’s tests performed on the lot. The FDA may also perform certain confirmatory tests on lots of some products, such as viral vaccines, before allowing the manufacturer to release the lots for distribution. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, and effectiveness of biological products. After approval of a BLA, biologics manufacturers must address any safety issues that arise, are subject to recalls or a halt in manufacturing, and are subject to periodic inspection after approval.
Post-Approval Requirements
Once a BLA is approved, a product will be subject to certain post-approval requirements. For instance, the FDA closely regulates the post-approval marketing and promotion of biologics, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving the internet. Biologics may be marketed only for the approved indications and in a manner consistent with the approved labeling.
Adverse event reporting and submission of periodic reports are required following the FDA approval of a BLA. The FDA also may require post-marketing testing, known as Phase 4 testing, REMS, and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product. In addition, quality control, biological product manufacture, packaging, and labeling procedures must continue to conform to cGMP after approval. Biologics manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort in the areas of production and quality control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.
Biosimilars
The Biologics Price Competition and Innovation Act of 2009 (“BPCIA”) creates an abbreviated approval pathway for biological products shown to be highly similar to or interchangeable with an FDA-licensed reference biological product. Biosimilars are licensed based on the FDA’s findings of safety, purity and potency for a previously-FDA-licensed product called a reference product. There must be no differences in route of administration, dosage form, and strength, and there must be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency in at least one or more conditions of use for which the reference product is approved. Biosimilarity must be shown through analytical trials, animal trials, and a clinical trial or trials, unless the Secretary of U.S. Department of Health and Human Services (“HHS”) waives a required element. A biosimilar product may also meet the higher hurdle of interchangeability such that it can be substituted for a reference product without the intervention of the prescribing health care provider if the sponsor can demonstrate that the biosimilar product can be expected to produce the same clinical results as the reference product and, for products administered multiple times, the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. The first biosimilar was approved in 2015, and the first interchangeable product was approved in 2021. Complexities associated with the larger, and often more complex, structures of biological products, as well as the process by which such products are manufactured, pose significant hurdles to biosimilar product implementation, which are still being evaluated by the FDA.
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A reference product is granted 12 years of exclusivity from the time of first licensure, or BLA approval, of the reference product, and during that 12 years of data exclusivity, no application for a biosimilar relying on the reference product can be submitted for four years. The first biologic product submitted under the biosimilar abbreviated approval pathway that is determined to be interchangeable with the reference product has exclusivity against a finding of interchangeability for other biologics for the same condition of use for the lesser of (i) one year after first commercial marketing of the first interchangeable biosimilar, (ii) 18 months after the first interchangeable biosimilar is approved if there is no patent challenge, (iii) 18 months after resolution of a lawsuit over the patents of the reference biologic in favor of the first interchangeable biosimilar applicant, or (iv) 42 months after the first interchangeable biosimilar is approved if a patent lawsuit is ongoing within the 42-month period.
Other Healthcare Laws
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain general business and marketing practices in the pharmaceutical industry. These laws include anti-kickback, false claims, transparency and health information privacy laws, and other healthcare laws and regulations.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid, or other federally financed healthcare programs. The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, collectively, the ACA, amended the intent element of the federal Anti-Kickback Statute so that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to commit a violation. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers, among others, on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Additionally, the ACA amended the federal Anti-Kickback Statute such that a violation of that statute can serve as a basis for liability under the federal civil False Claims Act.
Federal civil and criminal false claims laws, including the federal civil False Claims Act, prohibit any person or entity from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. This includes claims made to programs where the federal government reimburses, such as Medicare and Medicaid, as well as programs where the federal government is a direct purchaser, such as when it purchases off the Federal Supply Schedule. Pharmaceutical and other healthcare companies have been prosecuted under these laws for, among other things, allegedly inflating drug prices they report to pricing services, which in turn are used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. Most states also have statutes or regulations similar to the federal Anti-Kickback Statute and civil False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
Other federal statutes pertaining to healthcare fraud and abuse include the civil monetary penalties statute, which prohibits, among other things, the offer or payment of remuneration to a Medicaid or Medicare beneficiary that the offeror or payor knows or should know is likely to influence the beneficiary to order or receive a reimbursable item or service from a particular supplier, and the additional federal criminal statutes created by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud any healthcare benefit program or obtain by means of false or fraudulent pretenses, representations or promises any money or property owned by or under the control of any healthcare benefit program in connection with the delivery of or payment for healthcare benefits, items or services.
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In addition, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) and their respective implementing regulations, including the Final Omnibus Rule published on January 25, 2013, impose obligations on certain healthcare providers, health plans, and healthcare clearinghouses, known as covered entities, as well as their business associates and their subcontractors that perform certain services involving the storage, use or disclosure of individually identifiable health information, including mandatory contractual terms, with respect to safeguarding the privacy, security, and transmission of individually identifiable health information, and require notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information. HITECH increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, and often are not preempted by HIPAA.
Further, pursuant to the federal Physician Payments Sunshine Act, enacted as part of the ACA, the Centers for Medicare & Medicaid Services (“CMS”), issued a final rule that requires certain manufacturers of approved prescription drugs that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program, with certain exceptions, to collect and annually report information on certain payments or transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), physician assistants, certain types of advance practice nurses and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. The reported data is made available in searchable form on a public website on an annual basis. Failure to submit required information may result in civil monetary penalties.
We may also be subject to analogous state and foreign anti-kickback and false claims laws that may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, or that apply regardless of payor. In addition, several states now require prescription drug companies to report certain expenses relating to the marketing and promotion of drug products and to report gifts and payments to individual healthcare practitioners in these states. Other states prohibit various marketing-related activities, such as the provision of certain kinds of gifts or meals.
Further, certain states require the posting of information relating to clinical studies and their outcomes. A growing number of states require the reporting of certain drug pricing information, including information pertaining to and justifying price increases and the price set for newly launched drugs, or to prohibit prescription drug price gouging. In addition, certain states require pharmaceutical companies to implement compliance programs and/or marketing codes. Several additional states are considering similar proposals. Certain states and local jurisdictions also require the registration of pharmaceutical sales representatives. Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties.
Efforts to ensure that business arrangements with third parties comply with applicable state, federal, and foreign healthcare laws and regulations involve substantial costs. If a drug company’s operations are found to be in violation of any such requirements, it may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, the curtailment or restructuring of its operations, loss of eligibility to obtain approvals from the FDA, exclusion from participation in government contracting, healthcare reimbursement or other federal or state government healthcare programs, including Medicare and Medicaid, integrity oversight and reporting obligations, imprisonment, and reputational harm. Although effective compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, these risks cannot be entirely eliminated. Any action for an alleged or suspected violation can cause a drug company to incur significant legal expenses and divert management’s attention from the operation of the business, even if such action is successfully defended.
Data Privacy and Security
Numerous state, federal and foreign laws, govern the collection, dissemination, use, access to, confidentiality, and security of personal information, including health-related information. In the United States, numerous federal and state laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws and regulations that govern the collection, use, disclosure, and protection of health-related and other personal information could apply to our operations or the operations of our partners. For example, HIPAA, as amended by HITECH, and their respective implementing regulations, imposes privacy, security and breach notification obligations on certain health care providers, health plans, and health care clearinghouses, known as covered entities, as well as their business associates that perform certain services that involve creating, receiving, maintaining or transmitting individually identifiable health information for or on behalf of such covered entities. Entities that are found to be in violation of HIPAA may be subject to significant civil, criminal and administrative fines and penalties, and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance. Further, entities that knowingly obtain, use, or disclose individually identifiable health information maintained by a HIPAA covered entity in a manner that is not authorized or permitted by HIPAA may be subject to criminal penalties.
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Even when HIPAA does not apply, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act.
In addition, certain state and non-U.S. laws, such as the General Data Protection Regulation (the “GDPR”) govern the privacy and security of personal information, including health-related information, in certain circumstances. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. For example, the California Consumer Privacy Act (“CCPA”), which went into effect on January 1, 2020, creates new data privacy obligations for covered companies and provides new privacy rights to California residents. On January 1, 2023, the California Privacy Rights Act (“CPRA”), which substantially amends the CCPA, went into effect. The CCPA and CPRA provide for unlimited civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Virginia’s Consumer Data Protection Act, which took effect on January 1, 2023, requires businesses subject to the legislation to conduct data protection assessments in certain circumstances and requires opt-in consent from consumers to acquire and process their sensitive personal information, which includes information revealing a consumer’s physical and mental health diagnosis and genetic and biometric information that can identify a consumer. Colorado enacted the Colorado Privacy Act, and Connecticut enacted the Connecticut Data Privacy Act, each of which took effect on July 1, 2023, and Utah enacted the Consumer Privacy Act, which became effective on December 31, 2023, and each of these laws may increase the complexity, variation in requirements, restrictions, and potential legal risks, and could require increased compliance costs and changes in business practices and policies. Other states have also enacted, proposed, or are considering proposing, data privacy laws, which could further complicate compliance efforts, increase our potential liability and adversely affect our business. In Europe, the GDPR went into effect in May 2018 and introduces strict requirements for processing the personal data of individuals within the European Economic Area (“EEA”). Further, recent legal developments in Europe have created complexity and compliance uncertainty regarding certain transfers of personal data from the EEA. For example, on July 16, 2020, the Court of Justice of the European Union invalidated the EU-U.S. Privacy Shield Framework (the “Privacy Shield”) under which personal data could be transferred from the EEA to United States entities who had self-certified under the Privacy Shield scheme. Moreover, it is uncertain whether the standard contractual clauses will also be invalidated by the European courts or legislature.
Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Additionally, following the United Kingdom’s withdrawal from the European Union and the EEA, companies have to comply with the GDPR and the GDPR as incorporated into United Kingdom national law, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of global turnover. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, for example around how data can lawfully be transferred between each jurisdiction.
Coverage and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any pharmaceutical or biological product for which we obtain regulatory approval. Sales of any product, if approved, depend in part on the extent to which such product will be covered by third-party payors, such as federal, state, and foreign government healthcare programs, commercial insurance, and managed healthcare organizations, and the level of reimbursement, if any, for such product by third-party payors. Decisions regarding whether to cover any of our product candidates, if approved, the extent of coverage and amount of reimbursement to be provided are made on a plan-by-plan basis. Further, no uniform policy for coverage and reimbursement exists in the United States, and coverage and reimbursement can differ significantly from payor to payor. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.
For products administered under the supervision of a physician, obtaining coverage and adequate reimbursement may be particularly difficult because of the higher prices often associated with such drugs. Additionally, separate reimbursement for the product itself or the treatment or procedure in which the product is used may not be available, which may impact physician utilization. In addition, companion diagnostic tests require coverage and reimbursement separate and apart from the coverage and reimbursement for their companion pharmaceutical or biological products. Similar challenges to obtaining coverage and reimbursement, applicable to pharmaceutical or biological products, will apply to companion diagnostics.
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In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on coverage and reimbursement, and requirements for substitution of generic products. Third-party payors are increasingly challenging the prices charged for medical products and services, examining the medical necessity and reviewing the cost effectiveness of pharmaceutical or biological products, medical devices, and medical services, in addition to questioning safety and efficacy. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit sales of any product that receives approval. Decreases in third-party reimbursement for any product or a decision by a third-party not to cover a product could reduce physician usage and patient demand for the product.
United States Healthcare Reform
Healthcare reforms that have been adopted, and that may be adopted in the future, could result in further reductions in coverage and levels of reimbursement for pharmaceutical products, increases in rebates payable under U.S. government rebate programs and additional downward pressure on pharmaceutical product prices. Several healthcare reform proposals recently culminated in the enactment of the Inflation Reduction Act (“IRA”) in August 2022, which, among other things, allows HHS to directly negotiate the selling price of a statutorily specified number of drugs and biologics each year that CMS reimburses under Medicare Part B and Part D. The negotiated price may not exceed a statutory ceiling price. Only high-expenditure single-source biologics that have been approved for at least 11 years (7 years for drugs) can be selected by CMS for negotiation, with the negotiated price taking effect two years after the selection year. For 2026, the first year in which negotiated prices become effective, CMS selected 10 high-cost Medicare Part D products in 2023, negotiations began in 2024, and the negotiated maximum fair price for each product has been announced. CMS has selected 15 additional Medicare Part D drugs for negotiated maximum fair pricing in 2027. For 2028, an additional 15 drugs, which may be covered under either Medicare Part B or Part D, will be selected, and for 2029 and subsequent years, 20 Part B or Part D drugs will be selected. A drug or biological product that has an orphan drug designation for only one rare disease or condition will be excluded from the IRA’s price negotiation requirements, but will lose that exclusion if it receives designations for more than one rare disease or condition, or if is approved for an indication that is not within that single designated rare disease or condition, unless such additional designation or such disqualifying approvals are withdrawn by the time CMS evaluates the drug for selection for negotiation. The IRA also imposes rebates on Medicare Part B and Part D drugs whose prices have increased at a rate greater than the rate of inflation, and in November 2024, CMS finalized regulations for these inflation rebates. The IRA also extends enhanced subsidies for individuals purchasing health insurance coverage in ACA marketplaces through plan year 2025. The IRA permits the Secretary of HHS to implement many of these provisions through guidance, as opposed to regulation, for the initial years. Manufacturers that fail to comply with the IRA may be subject to various penalties, including significant civil monetary penalties. These provisions have been and may continue to be subject to legal challenges. For example, the provisions related to the negotiation of selling prices of high-expenditure single-source drugs and biologics have been challenged in multiple lawsuits brought by pharmaceutical manufacturers. Thus, while it is unclear how the IRA will be implemented, it will likely have a significant impact on the biopharmaceutical industry and the pricing of prescription drug products.
At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access, and marketing cost disclosure and transparency measures, and in some cases, designed to encourage importation from other countries and bulk purchasing.
We expect that additional state and federal healthcare reform measures could be adopted in the future.
Other Government Regulation Outside of the United States
In addition to regulations in the United States, we are subject to a variety of regulations in other jurisdictions governing, among other things, research and development, clinical trials, testing, manufacturing, safety, efficacy, quality control, labeling, packaging, storage, record keeping, distribution, reporting, export and import, advertising, marketing, and other promotional practices involving biological products as well as authorization, approval as well as post-approval monitoring and reporting of our products. Because biologically sourced raw materials are subject to unique contamination risks, their use may be restricted in some countries.
Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application (a “CTA”), much like the IND prior to the commencement of human clinical trials.
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The requirements and process governing the conduct of clinical trials, including requirements to conduct additional clinical trials, product licensing, safety reporting, post-authorization requirements, marketing and promotion, interactions with healthcare professionals, pricing, and reimbursement may vary widely from country to country. No action can be taken to market any product in a country until an appropriate approval application has been approved by the regulatory authorities in that country. The current approval process varies from country to country, and the time spent in gaining approval varies from that required for FDA approval. In certain countries, the sales price of a product must also be approved. The pricing review period often begins after market approval is granted. Even if a product is approved by a regulatory authority, satisfactory prices may not be approved for such product, which would make launch of such products commercially unfeasible in such countries.
Regulation in the European Union
Drug and Biologic Development Process
The conduct of clinical trials is currently governed by the EU Clinical Trials Directive 2001/20/EC (“Clinical Trials Directive”), and will be replaced by the EU Clinical Trials Regulation (EU) No. 536/2014 (“Clinical Trials Regulation”), once the latter comes into effect. The Clinical Trials Regulation introduces a complete overhaul of the existing regulation of clinical trials for medicinal products in the EU. Currently it is not expected to come into force before December 2021.
Under the current regime, before a clinical trial can be initiated, it must be approved in each EU Member State where there is a site at which the trial is to be conducted. The approval must be obtained from two separate entities: the National Competent Authority (“NCA”), and one or more Ethics Committees. The NCA of the EU Member States in which the clinical trial will be conducted must authorize the conduct of the trial, and the independent Ethics Committee must grant a positive opinion in relation to the conduct of the clinical trial in the relevant EU Member State before the commencement of the trial. Any substantial changes to the trial protocol or other information submitted with the clinical trial applications must be submitted to or approved by the relevant NCA and Ethics Committees. Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur during the clinical trial must be reported to the NCA and to the Ethics Committees of the EU Member State where they occur.
A more unified procedure will apply under the new Clinical Trials Regulation. A sponsor will be able to submit a single application for approval of a clinical trial through a centralized EU clinical trials portal. One national regulatory authority (the reporting EU Member State proposed by the applicant) will take the lead in validating and evaluating the application and the other regulatory authorities will have limited involvement. If an application is rejected, it may be amended and resubmitted through the EU clinical trials portal. If an approval is issued, the sponsor may start the clinical trial in all concerned Member States. However, a concerned EU Member State may in limited circumstances declare an “opt-out” from an approval and prevent the clinical trial form being conducted in such Member State. The Clinical Trials Regulation also aims to streamline and simplify the rules on safety reporting and introduces enhanced transparency requirements such as mandatory submission of a summary of the clinical trial results to the EU Database.
Under both the current regime and the new Clinical Trials Regulation, national laws, regulations, and the applicable Good Clinical Practice and Good Laboratory Practice standards must also be respected during the conduct of the trials, including the International Council for Harmonization of Technical Requirements for Pharmaceuticals for Human Use (“ICH”), guidelines on Good Clinical Practice (“GCP”), and the ethical principles that have their origin in the Declaration of Helsinki.
During the development of a medicinal product, the European Medicines Agency (“EMA”), and national regulators within the EU provide the opportunity for dialogue and guidance on the development program, usually in the form of scientific advice. A fee is incurred with each scientific advice procedure. Advice from the EMA is typically provided based on questions concerning, for example, quality (chemistry, manufacturing, and controls testing), nonclinical testing and clinical studies, and pharmacovigilance plans and risk-management programs.
Drug Marketing Authorization
In the European Union, medicinal products, including advanced therapy medicinal products (“ATMPs”), are subject to extensive pre- and post-market regulation by regulatory authorities at both the European Union and national levels. ATMPs comprise gene therapy products, somatic cell therapy products, and tissue engineered products, which are genes, cells, or tissues that have undergone substantial manipulation and that are administered to human beings in order to cure, diagnose or prevent diseases or regenerate, repair or replace a human tissue. Pursuant to the ATMP Regulation, the Committee on Advanced Therapies (“CAT”), is responsible in conjunction with the Committee for Medicinal Products for Human Use (“CHMP”) for the evaluation of ATMPs. The CHMP and CAT are also responsible for providing guidelines on ATMPs. These guidelines provide additional guidance on the factors that the EMA will consider in relation to the development and evaluation of ATMPs and include, among other things, the preclinical studies required to characterize ATMPs; the manufacturing and control information that should be submitted in a marketing authorization application; and post-approval measures required to monitor patients and evaluate the long-term efficacy and potential adverse reactions of ATMPs.
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Although such guidelines are not legally binding, compliance with them is often necessary to gain and maintain approval for product candidates.
In the European Union and in Iceland, Norway, and Liechtenstein (together the EEA), after completion of all required clinical testing, medicinal products may only be placed on the market after a related Marketing Authorization (“MA”), has been granted. MAs can be obtained through, amongst others, a centralized procedure, which is compulsory for certain medicinal products such as ATMPs. The centralized procedure provides for the grant of a single MA by the European Commission (“EC”), that is valid for all 27 EU Member States and, after respective national implementing decisions, in the three additional EEA Member States (Iceland, Norway, and Liechtenstein). The centralized procedure is compulsory for certain medicinal products, including medicinal products derived from biotechnological processes, orphan medicinal products, ATMPs, and products with a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, autoimmune diseases, and viral diseases. It is optional for medicinal products containing a new active substance not yet authorized in the EEA before May 20, 2004, that constitute significant therapeutic, scientific or technical innovations, or for which the grant of a MA through the centralized procedure would be in the interest of public health at the EU level. The timeframe for the evaluation of an application under the centralized procedure is 210 days, excluding clock stops. Typically, the overall process takes a year or more unless the application is eligible for an accelerated assessment.
All new marketing authorization applications must include a Risk Management Plan (“RMP”), describing the risk management system that the company will put in place and documenting measures to prevent or minimize the risks associated with the product. The regulatory authorities may also impose specific obligations as a condition of the MA. RMPs and Periodic Safety Update Reports (“PSURs”) are routinely available to third parties requesting access, subject to limited redactions.
Additionally, the holder of a marketing authorization for an ATMP must put in place and maintain a system to ensure that each individual product and its starting and raw materials, including all substances coming into contact with the cells or tissues it may contain, can be traced through the sourcing, manufacturing, packaging, storage, transport, and delivery to the relevant healthcare institution where the product is used.
MAs have an initial duration of five years. The authorization may subsequently be renewed for an unlimited period unless the European Commission or the national competent authority grants only a five-year renewal.
Data and Market Exclusivity
As in the United States, the European Union also provides opportunities for market and/or data exclusivity. For example, New Chemical Entities (“NCE”), approved in the European Union generally qualify for eight years of data exclusivity and ten years of market exclusivity. Data exclusivity is the period during which another applicant cannot rely on the MA holder’s pharmacological, toxicological, and clinical data in support of another MA for the purposes of submitting an application, obtaining marketing authorization or placing the product on the market. But after eight years, a generic or biosimilar product application may be submitted and generic companies may rely on the MA holder’s data.
However, even if a generic or biosimilar product is authorized it cannot be placed on the market in the European Union until the expiration of the 10-year market exclusivity period. An additional non-cumulative one-year period of marketing exclusivity is possible if during the data exclusivity period (the first eight years of the 10‑year marketing exclusivity period), the MA holder obtains an authorization for one or more new therapeutic indications that are deemed to bring a significant clinical benefit compared to existing therapies.
Products may not be granted data exclusivity since there is no guarantee that a product will be considered by the European Union’s regulatory authorities to include an NCE. Even if a compound is considered to be an NCE and the MA applicant is able to gain the prescribed period of data exclusivity, another company nevertheless could also market another version of the medicinal product if such a company can complete a full marketing authorization application with their own complete database of pharmaceutical tests, preclinical studies, and clinical trials and obtain MA for its product.
Post-Approval Regulation
Similar to the United States, both MA holders and manufacturers of medicinal products are subject to comprehensive regulatory oversight by the EMA, the European Commission, and/or the competent regulatory authorities of the EU Member States. This oversight applies both before and after grant of manufacturing licenses and marketing authorizations.
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It includes control of compliance with EU good manufacturing practices rules, manufacturing authorizations, pharmacovigilance rules, and requirements governing advertising, promotion, sale, and distribution, recordkeeping, importing, and exporting of medicinal products.
Failure by us or by any of our third-party partners, including suppliers, manufacturers, and distributors to comply with EU laws and the related national laws of individual EU Member States governing the conduct of clinical trials, manufacturing approval, marketing authorization of medicinal products, and marketing of such products, both before and after grant of marketing authorization, statutory health insurance, bribery and anti-corruption, or other applicable regulatory requirements may result in administrative, civil, or criminal penalties.
These penalties could include delays or refusal to authorize the conduct of clinical trials or to grant marketing authorization, product withdrawals and recalls, product seizures, suspension, withdrawal or variation of the marketing authorization, total or partial suspension of production, distribution, manufacturing or clinical trials, operating restrictions, injunctions, suspension of licenses, fines, and criminal penalties.
The holder of a marketing authorization for a medicinal product must also comply with EU pharmacovigilance legislation and its related regulations and guidelines, which entail many requirements for conducting pharmacovigilance, or the assessment and monitoring of the safety of medicinal products. These pharmacovigilance rules can impose on holders of MAs the obligation to conduct a labor intensive collection of data regarding the risks and benefits of marketed medicinal products and to engage in ongoing assessments of those risks and benefits, including the possible requirement to conduct additional clinical studies or post-authorization safety studies to obtain further information on a medicine’s safety, or to measure the effectiveness of risk-management measures, which may be time consuming and expensive and could impact our profitability. MA holders must establish and maintain a pharmacovigilance system and appoint an individual qualified person for pharmacovigilance, who is responsible for oversight of that system. Key obligations include expedited reporting of suspected serious adverse reactions and submission of PSURs in relation to medicinal products for which they hold MAs. The EMA reviews PSURs for medicinal products authorized through the centralized procedure. If the EMA has concerns that the risk benefit profile of a product has varied, it can adopt an opinion advising that the existing MA for the product be suspended, withdrawn or varied. The agency can advise that the MA holder be obliged to conduct post-authorization Phase IV safety studies. If the EC agrees with the opinion, it can adopt a decision varying the existing MA. Failure by the marketing authorization holder to fulfill the obligations for which the EC’s decision provides can undermine the ongoing validity of the MA.
More generally, non-compliance with pharmacovigilance obligations can lead to the variation, suspension or withdrawal of the MA for the product or imposition of financial penalties or other enforcement measures.
Sales and Marketing Regulations
The advertising and promotion of our products is also subject to EU laws concerning promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices. In addition, other national legislation of individual EU Member States may apply to the advertising and promotion of medicinal products and may differ from one country to another. These laws require that promotional materials and advertising in relation to medicinal products comply with the product’s Summary of Product Characteristics (“SmPC”) as approved by the competent regulatory authorities.
The SmPC is the document that provides information to physicians concerning the safe and effective use of the medicinal product. It forms an intrinsic and integral part of the marketing authorization granted for the medicinal product. Promotion of a medicinal product that does not comply with the SmPC is considered to constitute off-label promotion. All advertising and promotional activities for the product must be consistent with the approved SmPC and therefore all off-label promotion is prohibited. Direct-to-consumer advertising of prescription-only medicines is also prohibited in the European Union. Violations of the rules governing the promotion of medicinal products in the European Union could be penalized by administrative measures, fines, and imprisonment. These laws may further limit or restrict the advertising and promotion of our products to the general public and may also impose limitations on its promotional activities with healthcare professionals.
Anti-Corruption Legislation
In the EU, interactions between pharmaceutical companies and physicians are also governed by strict laws, regulations, industry self-regulation codes of conduct and physicians’ codes of professional conduct both at the EU level and in the individual EU Member States. The provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is prohibited in the European Union. The provision of benefits or advantages to physicians is also governed by the national anti-bribery laws of the EU Member States. Violation of these laws could result in substantial fines and imprisonment.
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Payments made to physicians in certain EU Member States also must be publicly disclosed. Moreover, agreements with physicians must often be the subject of prior notification and approval by the physician’s employer, his/her regulatory professional organization, and/or the competent authorities of the individual EU Member States. These requirements are provided in the national laws, industry codes, or professional codes of conduct, applicable in the individual EU Member States. Failure to comply with these requirements could result in reputational risk, public reprimands, administrative penalties, fines or imprisonment.
Other Markets
Following the UK’s formal departure from the EU on January 31, 2020, the UK entered a transition period to last until December 31, 2020, during which time EU medicines laws will remain applicable to the UK. After the transition period however, changes may be forthcoming as the terms of the UK and EU’s future relationship are negotiated. The UK Medicines and Healthcare Products Regulatory Agency has proposed that, subject to being approved by the UK Parliament, a centralized MA will automatically convert into a UK MA. However, the draft of the “Medicines and Medical Devices Bill 2019-21” currently discussed in the UK House of Lords does not contain such a provision, but would only authorize the UK government to become active in the field of legislation concerning market authorizations in relation to human medicines.
For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary from country to country. In all cases, again, the clinical trials must be conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension of clinical trials, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, and criminal prosecution.
Human Capital Management
Our approach to human capital resource management starts with our mission to discover and develop novel immunotherapies to lengthen health span by disrupting the link between chronic, low-grade inflammation and age-related diseases. Our industry exists in a complex regulatory environment. The unique demands of our industry, together with the challenges of running an enterprise focused on the discovery, development, manufacture and commercialization of innovative medicines, require talent that is highly educated and/or has significant industry experience. Additionally, for certain key functions, we require specific scientific expertise to oversee and conduct R&D activities and the complex manufacturing requirements for biopharmaceutical products.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. We recognize that attracting, motivating and retaining talent at all levels is vital to our continued success. Our employees are a significant asset and we aim to create an equitable, inclusive and empowering environment in which our employees can grow and advance their careers, with the overall goal of developing, expanding and retaining our workforce to support our current pipeline and future business goals. By focusing on employee retention and engagement, we also improve our ability to support our clinical trials, our pipeline, our platform technologies, business and operations, and also protect the long-term interests of our stockholders. Our success also depends on our ability to attract, engage and retain a diverse group of employees.
Our base pay program aims to compensate management and staff members relative to the value of the contributions of their role, which takes into account the skills, knowledge and abilities required to perform each position, as well as the experience brought to the job. We also provide annual incentive programs to reward our management team and staff members in alignment with achievement of Company-wide goals that are established annually and designed to drive aspects of our strategic priorities that support and advance our strategy across our Company. Our management team and staff members are eligible for the grant of equity awards under our long-term incentive program that are designed to align the experience of these staff with that of our stockholders. All management team and staff members also participate in a regular performance measurement process that aligns pay to performance and through which they receive performance and development feedback.
Our benefit programs are also generally broad-based, promote health and overall well-being and emphasize saving for retirement. All management team and regular staff members are eligible to participate in the same core health and welfare and retirement savings plans. Other employee benefits include medical plans, health savings plan, dental plans, vacation and sick-pay plans, employee assistance programs, life and accident insurance and short and long-term disability benefits.
Our Compensation Committee provides oversight of our compensation plans, policies and programs.
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As of December 31, 2024, we had 36 full-time employees, 26 of whom were engaged in research, clinical development, manufacturing, and quality control activities, and 10 of whom were engaged in administrative activities. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.
Corporate Information
We are located in Miramar, Florida and were incorporated in the state of Delaware in April 2018.
Available Information
We make available, free of charge, on or through our website (http://www.hcwbiologics.com), our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Sections 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC. References to website addresses in this report are intended to be inactive textual references only, and none of the information contained on our website is part of this report or incorporated in this report by reference.
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Item 1A Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including those described below that could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock. It is not possible to predict or identify all such risks; our operations could also be affected by factors, events or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations. Therefore, while you should carefully consider the following risks, together with all of the other information in this Annual Report, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and the related notes thereto, you should not consider the following risks to be a complete statement of all the potential risks or uncertainties we could face.
Summary of Key Risk Factors
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Risks Related to our Financial Position and Need for Additional Capital
We have incurred significant losses since our inception and we expect to incur losses for the foreseeable future. We have no products approved for commercial sale and may never achieve or maintain profitability.
Since our inception, we have devoted most of our financial resources and all of our efforts to research and development, including preclinical studies and our clinical trials, and have incurred significant operating losses. In addition, the Company and Dr. Wong, our Founder and Chief Executive Officer, were parties in an extended Arbitration, which was ongoing for over a year, during which time the Company incurred legal fees of nearly $28.4 million for its own defense and the defense of Dr. Wong. For the years ended December 31, 2023 and 2024, we reported a net loss of $25.0 million and $30.3 million, respectively. These losses are inclusive of reserve for credit losses and other expenses of $5.3 million and $1.3 million for the years ended December 31, 2023 and 2024, respectively. As of December 31, 2024, we had $4.7 million in cash and cash equivalents, in the balance sheet of our audited financial statements included elsewhere in this Annual Report. From inception to December 31, 2024, we incurred cumulative net losses of $98.1 million. To date, we have financed our operations primarily through the sale of our redeemable preferred stock (all of which converted to common stock upon the effective date of our initial public offering, or IPO); payments received under our Wugen License for certain rights to two of our internally-developed molecules; proceeds from our IPO; a first lien mortgage of $6.5 million; proceeds from a Paycheck Protection Program (“PPP”) loan obtained through the Coronavirus Aid, Relief and Economic Security Act (which was forgiven); issuance of senior secured notes; and sale of common stock and warrants in private placements and direct registered offerings. Based on our current operating plans, we believe that our cash and cash equivalents as of December 31, 2024 will not be sufficient for the Company to continue as a going concern for at least one year from the issuance date of the financial statements appearing elsewhere in this Annual Report.
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Our losses have resulted principally from expenses incurred in the research and development of our product candidates and from management and administrative costs and other expenses that we have incurred while building our business infrastructure, as well as from the significant expenses we have incurred defending ourselves in current disputes with Altor/NantCell and advancing legal expenses of Dr. Wong, each as described further below. We expect to continue to incur significant operating losses for the foreseeable future. The only revenue we have generated to date relates to our Wugen License and the clinical material supply agreement. We have not generated any revenues from product sales. We anticipate that our expenses will increase substantially as we initiate preclinical and clinical studies, scale up our manufacturing process and capabilities to support our clinical studies and grow to scale.
We have no products for which we have obtained marketing approval and have not generated any revenue from product sales. Even if we obtain marketing approval for, and are successful in commercializing, one or more of our product candidates, we expect to incur substantial additional research and development and other expenditures to develop and market additional product candidates or to expand the approved indications of any marketed product. We may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue.
To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, discovering and developing additional product candidates, obtaining regulatory approval for any product candidates that successfully complete clinical trials, accessing manufacturing capacity, establishing marketing capabilities, and ultimately selling any products. We may never succeed in these activities and, even if we do, we may never generate revenue that is sufficient to achieve profitability.
There is substantial doubt about our ability to continue as a going concern. We will need to raise additional funding, which may not be available on acceptable terms, if at all to continue as a going concern and advance our product candidates. Failure to obtain capital when needed may force us to delay, limit or terminate our product development efforts or other operations. Raising additional capital may dilute our existing shareholders, restrict our operations or cause us to relinquish valuable rights.
There is substantial doubt regarding our ability to continue as a going concern based only on the cash and cash equivalents as of December 31, 2024. We continuously evaluate whether there are conditions and events, considered in the aggregate, which raise substantial doubt about our ability to continue as a going concern within one year after the date that financial statements are issued. When substantial doubt exists based on this analysis, management evaluates whether the mitigating effect of our plans to raise capital or reduce costs sufficiently alleviates substantial doubt about our ability to continue as a going concern.
We are at the clinical development stage of our Company with no commercial revenues from the products we are developing, and it is possible we will never generate revenue or profit from product sales. As of December 31, 2024, we had cash and cash equivalents of $4.7 million and there was substantial doubt about our ability to continue as a going concern for at least 12 months from the issuance date of the financial statements included elsewhere in this Annual Report, whether or not we curtail efforts with respect to certain of our current and future product candidates. We will require significant additional funding to advance any of our product candidates beyond the short term and to sustain our operations.
We may also seek to raise such capital through public or private equity, royalty financing or debt financing. Raising funds in the current economic environment may be challenging, and such financing may not be available in sufficient amounts or on acceptable terms, if at all. The terms of any financing may harm existing stockholders. The issuance of additional securities, whether equity or debt, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities may dilute the ownership of existing stockholders. Incurring debt would result in increased fixed payment obligations, and we may agree to restrictive covenants, such as limitations on our ability to incur additional debt or limitations on our ability to acquire, sell or license intellectual property rights that could impede our ability to conduct our business.
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Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
Since our inception in 2018, we have devoted a significant portion of our resources to identifying and developing our product candidates emerging from our internally-developed immunotherapy platform technology, our other research and development efforts, building our intellectual property portfolio, raising capital, and providing general and administrative support for these operations. We have not yet demonstrated our ability to successfully complete clinical trials, obtain regulatory approvals, manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Additionally, we expect our financial condition and operating results to continue to fluctuate significantly from period to period due to a variety of factors, many of which are beyond our control. Consequently, any predictions you may make about our future success or viability may not be as accurate as they could be if we had a longer operating history.
We have identified certain material weaknesses in our internal control over financial reporting and if our remediation of such material weaknesses is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired, which may cause investors to lose confidence in our reported financial information and may lead to a decline in the market price of our common stock.
Two of the material weaknesses were identified and reported in the Annual Report on Form 10-K for the year ended December 31, 2023. As the Company reported in a Current Report on Form 8-K filed with the SEC on May 1, 2024, we were a victim of a criminal scheme involving the impersonation of a purchaser of Secured Notes. The scheme resulted in the misdirection of approximately $1.3 million held in Company accounts to a fraudulent account controlled by a third party and a default on a legally binding commitment to purchase Secured Notes. As a result of the default and the related misdirection of funds, management re-evaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of December 31, 2023. Based on this assessment, management identified material weaknesses in two areas, including the methods used to review, evaluate and accept financing proposals from investors and lenders and the process used to enter unusual significant transactions. As a result of the material weakness to protect the Company’s assets from fraud committed by third parties, there was a $1.3 million loss recognized on the Company’s audited financial statements.
As of September 30, 2024, the Company identified two additional material weaknesses in internal controls over financing reporting related to the classification of the Cogent Loan and accounting for the Secured Notes. On August 15, 2022, the Company entered into the 2022 Loan Agreement with Cogent Bank, pursuant to which we received $6.5 million in proceeds to purchase a building. The loan is secured by a first priority lien on the building. As of September 30, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction and improvements on the building. The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements. The Company did not identify and account for the loan as Short-term debt, net, to reflect that the lender has the right to accelerate the loan under a discretionary default provision as of September 30, 2024.
The second material weakness identified as of September 30, 2024 related to accounting for complex transactions. This involved appropriately accounting for the Secured Notes and disclosing the amended terms that were executed during the third quarter of 2024. The Secured Notes were deemed to be a hybrid instrument, consisting of a debt host with embedded derivatives requiring bifurcation and accounting for separately. Prior to correcting the initial accounting treatment for the Secured Notes, as amended, the Company neglected to identify and account for the embedded derivatives. In addition, the disclosures for the Secured Notes would not have identified the embedded derivatives. The aggregation of these factors could have resulted in a material misstatement in the Company’s financial statements. For the reporting period ended September 30, 2024 and December 31, 2024, there was no impact to the financial statements related to correcting the accounting treatment for embedded derivatives. Another amended term for the Secured Notes is a fixed bonus payment that holders will receive if the Secured Notes are repaid on the Maturity Date. The Company determined that the fixed bonus payment should be accreted to the principal owed to holders over the term. As of and for the three and nine months ended September 30, 2024, the Company did not accrete the fixed bonus payment. Accretion during the reporting period ended September 30, 2024 did not materially misstate the amount owed to the holders. Accretion was reported in the year ended December 31, 2024 and reported within Depreciation expense. If the Company did not correct the accounting treatment for the accretion of the fixed bonus payment at maturity, we would understate our obligations. Over the term, this could have resulted in a material misstatement in the Company’s financial statements.
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In the year ended December 31, 2024, the Company implemented various steps to remediated these material weaknesses. In the second quarter of 2024, a remediation plan was adopted to strengthen controls and procedures used by the Company to review and accept financial proposals, particularly where there are upfront payments and other forms of payments made by the Company to third parties. These efforts include development of a process for assessment and communication, as well as involvement of additional key stakeholders, such as members of our Board of Directors. In the fourth quarter of 2024, the Company enhanced its controls to evaluate triggering events in debt and other financial instruments, to ensure the appropriate classification of obligations as current or noncurrent in the correct period. In addition, the Company strengthened controls to ensure timeliness in the determination of proper accounting and reporting for complex transactions by engaging consultants with technical accounting expertise to support the Company in our accounting analysis and conclusions for complex transactions. Also, the fourth quarter of 2024, the Company engaged advisors to support and assist in the review and augmentation of design and effectiveness of controls over financial reporting.
As of December 31, 2024, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2024, our disclosure controls and procedures were effective at a reasonable assurance level. However, we cannot assure you that any such actions we have or will take will prevent or avoid potential future material weaknesses. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our operating results or cause us to fail to meet our reporting obligations.
The remediation efforts are intended both to address the identified material weakness and to enhance our overall financial control environment. This material weakness and any other failure to maintain effective internal control over financial reporting could result in a loss of confidence in the reliability of our financial statements which could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result.
We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses.
As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies or determine to modify remediation measures. We cannot assure you that the measures we have taken to date, and may take in the future, will be sufficient to remediate the control deficiencies that led to the material weakness in internal control over financial reporting or that we will prevent or avoid potential future material weaknesses. Effective internal controls are necessary for us to provide reliable financial reports. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will ultimately have the intended effects.
We will require additional funding in order to complete development of our product candidates and commercialize our products, if approved. However, this additional financing may not be available on acceptable terms, or at all. If we are unable to raise capital when needed, we could be forced to delay, reduce, or eliminate our product development programs or commercialization efforts.
Our operations have consumed significant amounts of cash since inception. As of December 31, 2024, we held $4.7 million of cash and cash equivalents and there was substantial doubt about our ability to continue as a going concern for at least 12 months from the issuance date of the financial statements included elsewhere in this Annual Report. We expect our expenses to increase in connections with our ongoing clinical development activities, particularly as we continue to initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we will need to obtain substantial additional funding for our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forced to:
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Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.
We expect our expenses to increase in connection with our planned operations. Unless and until we can generate a substantial amount of revenue from our technologies or product candidates, we will seek to finance our future cash needs through equity offerings, royalty-based or debt financings, collaborations, licensing arrangements or other sources, or any combination of the foregoing. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans.
To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, stockholders’ interests may be diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect our stockholders’ rights. In addition, new debt financing, if available, may result in fixed payment obligations and may involve agreements that include restrictive covenants that further limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming stock or declaring dividends, which could adversely impact our ability to conduct our business. In addition, securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect their ability to oversee the development and potential future commercialization of our product candidates.
If we raise additional funds through collaborations or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us.
On March 3, 2025, the Nasdaq Hearings Panel accepted our plan to regain compliance with all applicable continued listing rules of The Nasdaq Stock Market LLC (“Nasdaq”). There can be no assurance that the Company will be able to comply within the period of time granted by the Panel. If the Company does not execute our compliance plan or is delayed in doing so, the result could be the delisting of our Common Stock from Nasdaq.
On March 3, 2025, the Company was granted an extension through April 28, 2025, to comply with the Bid Price Rule and through June 15, 2025 to comply with all Exchange Listing Rules by the Nasdaq Hearings Panel (the “Panel”). The Nasdaq Listing and Hearing Review Council may, on its own motion, determine to review any Panel decision within 45 calendar days after issuance of the written decision. If the Listing Council determines to review this Decision, it may affirm, modify, reverse, dismiss or remand the decision to the Panel. The Company will be immediately notified in the event the Listing Council determines that this matter will be called for review.
As previously disclosed, the Company is currently out of compliance because the Company’s market value of listed securities (“MVLS”) closed below the $50,000,000 MVLS threshold required for continued listing on the Nasdaq Global Market under Nasdaq Listing Rule 5450(b)(3)(A) (the “MVLS Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(C), the Company was provided a compliance period of 180 calendar days in which to regain compliance with the MVLS continued listing requirement, or until December 16, 2024 (the “Compliance Date”). The Company did not regain compliance with the MVLS Rule by the given deadline and, accordingly, the Listing Qualifications Staff (“Staff”) notified the Company that its securities were subject to delisting from Nasdaq unless the Company timely requested a hearing before the Panel (which we did). Additionally, on August 12, 2024, the Company received written notices from the Staff of Nasdaq which notified the Company that, for the 30 consecutive business days ended August 6, 2024, the Company’s security did not maintain a minimum bid price of $1 per share, in accordance with Nasdaq Listing Rule 5810(c)(3)(A) (“Bid Price Rule”). Also on August 12, 2024, the Company received written notification from the Staff that for the 30 consecutive business days ended August 8, 2024, the Company’s market value of publicly held securities (“MVPHS”) closed below the $15,000,000 MVPHS threshold required for continued listing on the Nasdaq Global Market under Nasdaq Listing Rule 5450(b)(2)(C) (the “MVPHS Rule”). The Company was granted a compliance period of 180 calendar days from the date of the notice (“Compliance Period”) for these delinquencies, in accordance with Nasdaq Listing Rule 5810(c)(3)(A) for the Bid Price Rule and Nasdaq Listing Rule 5450(b)(2)C) for the MVPHS Rule. The Company did not regain compliance with the Bid Price Rule by February 3, 2025 or the MVPHS Rule by February 4, 2025. Accordingly, by letter dated February 5, 2025, the Staff notified the Company that its securities were subject to delisting from Nasdaq unless the Company timely requested a hearing.
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The Company timely requested and received a hearing at which time it outlined its compliance plan before the Panel. The Panel accepted our compliance plan and granted us the above-referenced extensions.
During the extension periods, the Company intends to implement its compliance plan and continue to actively monitor MVLS, the Bid Price and MVPHS while it considers all options available to it and to take other action, if necessary and as deemed appropriate by the Company’s Board, to remedy the deficiency, including potentially effecting a reverse stock split, entering into a $20.0 million equity life of credit and converting at least $6.6 million in senior secured notes to equity. On February 21, 2025, the Company filed its Definitive Proxy for a Special Meeting to obtain the requisite stockholder approvals to ensure it has the ability to take the certain of the actions that are part of its compliance plan. There can be no assurance that the Company will be able to comply within the period of time granted by the Panel.
The Company’s balance sheet has liabilities that will require payment, and use of funds for this purpose will make less funding available for operations and clinical development.
Included in the Company’s balance sheet in the accompanying audited financial statements are $17.8 million of obligations included in accounts payable that represent amounts past due. These include $13.5 million due for legal fees incurred as a result of mounting a defense for the Company and our Chief Executive Officer in a long-running arbitration proceeding that was settled on July 13, 2024. After year end, we received a $2.0 million insurance payment which was used to offset obligations for legal fees for our Chief Executive Officer. Also included in outstanding obligations is $4.3 million of obligations included in accounts payable for amounts owed for construction of a manufacturing facility that the Company is building at a property it owns in Miramar, Florida (the “Property”). As of December 31, 2024, certain subcontractors had filed mechanics liens related to unpaid invoices issued in connection with the facility. On December 16, 2024, BE&K Building Group, the prime contractor on the project, sent the Company a draft, unfiled lawsuit and requested the parties discuss payment. On January 22, 2025, the Company entered into a forbearance agreement with BE&K to allow the Company until March 31, 2025 to continue efforts to find the financing required to complete the construction and renovation of the Property. Pursuant to the forbearance agreement, the Company made an initial payment of $1.0 million in partial satisfaction of amounts owing to BE&K and its subcontractors. The Company has continued to pursue financing alternatives to provide the funding needed to come current in past amounts due and complete the construction and renovation of the Property
Risks Related to our Business
If we or any collaborators we work with in the future are unable to successfully develop and commercialize our product candidates, or experience significant delays in doing so, our business, financial condition, and results of operations will be materially adversely affected.
Our ability to generate product and royalty revenues, which we do not expect will occur for at least the next several years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates, which may never occur. We currently generate no revenue from sales of any products, and we may never be able to develop or commercialize a marketable product. Each of our product candidates and any future product candidates we develop will require significant clinical development, management of clinical, preclinical, and manufacturing activities, regulatory approval in multiple jurisdictions, establishing manufacturing supply, including commercial manufacturing supply, and require us to build a commercial organization and make substantial investment and significant marketing efforts before we generate any revenue from product sales. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates.
If we do not successfully execute or address these matters in a timely manner or at all, we could experience significant delays or an inability to successfully develop and commercialize our product candidates, which would materially adversely affect our business, financial condition, and results of operations.
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A key element of our strategy is to enter into out-licensing arrangements for certain rights to internally-developed molecules that we do not intend to develop into lead product candidates on our own or together with co-development partners. We may not be able to identify licensees, which could lower any return on our investments and increase our need for external funding.
Since we have already generated over 50 immunotherapeutic molecules, and plan to develop additional molecules, through our immunotherapy platform technology, our strategy includes funding operations in part through revenues derived from out-licensing molecules that are outside our oncological and anti-aging focus to third parties. Despite our efforts, we may be unable to enter into such licensing agreements. Supporting diligence activities conducted by potential licensors and negotiating the financial and other terms of a license agreement are long and complex processes with uncertain results, and we may fail to derive any revenues from these activities. If we fail to successfully out-license to third parties internally-developed molecules that are not part of the Company’s in-house clinical development programs, our revenues and return on our research and development activities would be negatively affected and we could be required to seek additional funding.
The success of our business development efforts, including license agreements, depends on our ability to realize the anticipate benefits of these transactions and is subject to numerous risks and uncertainties, many of which are outside of our control.
Our potential licensors intend to develop alternative products or pursue alternative technologies either on their own or in collaboration with others, potentially resulting in our receiving no future milestone or royalty payments under any such licenses. We enter exclusive worldwide license arrangements pursuant to which licensors will develop certain immunotherapy products under which we may earn upfront license fees, additional milestone or royalty payments, but there can be no assurance that licensors will perform as required under the terms of the license agreements or will be successful in commercializing any products related to this license or that any such payments will ever be earned.
We view our business development activities as an enabler of our strategy for clinical development activities and seek to generate growth by pursuing selected opportunities that have the potential to strengthen our clinical development program and provide a source of capital for our operations, including in-house development programs. The success of our business development activities is dependent on the availability of licensing partners, as well as being provided sufficient information that will enable us to accurately evaluate an opportunity.
The success of our business development transactions also depends on our ability to realize the anticipated benefits of these transactions and is subject to numerous risks and uncertainties, many of which are outside of our control. Unsuccessful clinical trials, regulatory hurdles, new information and commercialization challenges, inability to raise the capital necessary to execute the clinical development program, among other factors, may adversely impact revenue and income contribution from business development transactions and may lead to an adverse impact on our business. While we seek to mitigate risks and liabilities through, among other things, due diligence, we may be exposed to risks and liabilities as a result of business development transactions. There is no assurance that we will be able to enter into strategic business relationships on favorable terms with desired positive outcomes that are accretive to our business.
We expect to continue to expand our capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
As of December 31, 2024, we had 36 full-time employees. We expect to experience continued growth in the number of our employees and the scope of our operations, particularly in the areas of drug development and regulatory affairs. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational, and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a public company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
In addition, future growth imposes significant added responsibilities on members of management, including: identifying, recruiting, integrating, maintaining, and motivating additional employees; managing our internal development efforts effectively, including the clinical and FDA review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and improving our operational, financial and management controls, reporting systems, and procedures.
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We currently rely on certain independent organizations, advisors, and consultants to provide certain services, including strategic, financial, business development services, as well as certain aspects of regulatory approval, clinical management, manufacturing, and preparation for a potential commercial launch. There can be no assurance that the services of independent organizations, advisors, and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants or contract manufacturing organizations is compromised for any reason, our clinical trials may be extended, delayed, or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.
Our business and operations are subject to risks related to climate change.
The long-term effects of global climate change present risks to our business. Extreme weather or other conditions caused by climate change could adversely impact our supply chain and the operation of our business, which is geographically subject to higher incidents of climate events (such as hurricanes and other aggressive weather patterns). Such conditions could result in physical damage to our Miramar headquarters, clinical trial materials, clinical sites, or the facilities of our third-party manufacturing partners. These events could adversely affect our operations and our financial performance. The potential impacts of climate change may also include increased operating costs associated with additional regulatory requirements and investments in reducing energy, water use and greenhouse gas emissions.
Risks Related to the Development and Clinical Testing of Our Product Candidates
Our clinical trials may fail to demonstrate the safety and efficacy of our product candidates or any future product candidates, which would prevent or delay or limit the scope of regulatory approval and commercialization.
To obtain the requisite regulatory approvals to market and sell any product candidates, we must demonstrate through extensive preclinical studies and clinical trials that our investigational drug products are safe and effective for use in each targeted indication. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical development process. Most product candidates that begin clinical trials are never approved by regulatory authorities for commercialization. We may be unable to establish clinical endpoints that applicable regulatory authorities would consider clinically meaningful, and a clinical trial can fail at any stage of testing.
Further, the process of obtaining regulatory approval is expensive, often takes many years following the commencement of clinical trials, and can vary substantially based upon the type, complexity, and novelty of the product candidates involved, as well as the target indications, patient population, and regulatory agency. Prior to obtaining approval to commercialize our product candidates and any future product candidates in the United States or abroad, we, our collaborators or our potential future collaborators must demonstrate with evidence from adequate and well-controlled clinical trials and to the satisfaction of the FDA or comparable foreign regulatory authorities, that such product candidates are safe and effective for their intended uses.
Clinical trials that we conduct may not demonstrate the efficacy and safety necessary to obtain regulatory approval to market our product candidates. In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the clinical trial protocols, and the rate of dropout among clinical trial participants. If the results of our clinical trials are inconclusive with respect to the efficacy of our product candidates, if we do not meet the clinical endpoints with statistical and clinically meaningful significance, or if there are safety concerns associated with our product candidates, we may be delayed in obtaining marketing approval, if at all. Additionally, any safety concerns observed in any one of our clinical trials, including adverse safety events in later trials that were not observed in prior trials, could limit the prospects for regulatory approval of that product candidate or other product candidates in any indications.
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Even if the trials are completed and successful, clinical data are often susceptible to varying interpretations and analyses, and we cannot guarantee that the FDA or comparable foreign regulatory authorities will interpret the results as we do, and more trials could be required before we submit our product candidates for approval. We cannot guarantee that the FDA or comparable foreign regulatory authorities will view our product candidates as demonstrating substantial evidence of efficacy even if positive results are observed in clinical trials or having a positive benefit-risk profile. Moreover, results acceptable to support approval in one jurisdiction may be deemed inadequate by another regulatory authority to support regulatory approval in that other jurisdiction. To the extent that the results of the trials are not satisfactory to the FDA or comparable foreign regulatory authorities for support of a marketing application, approval of our product candidates and any future product candidates may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval of our product candidates. Even if regulatory approval is secured for a product candidate, the terms of such approval may limit the scope and use of the specific product candidate, which may also limit its commercial potential.
Preliminary, topline or interim data from our clinical trials that we announce or publish from time to time may change as more patient data becomes available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publicly disclose preliminary or topline data from our preclinical studies and clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. We also make assumptions, estimations, calculations, and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, topline data should be viewed with caution until the final data are available. Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions, or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product, and our company in general.
From time to time, we may also disclose data from planned interim analyses of our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available and could result in volatility in the price of our common stock. Adverse differences between interim data and final data could significantly harm our business, operating results, prospects, or financial condition.
Clinical drug development is a lengthy and expensive process with uncertain timelines and uncertain outcomes. If clinical trials of our product candidates are prolonged or delayed, we or any collaborators may be unable to obtain required regulatory approvals, and therefore be unable to commercialize our product candidates on a timely basis or at all.
Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. Product candidates in later stages of clinical trials may fail to produce the same results or to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. Our future clinical trial results may not be successful.
To date, we have not completed any clinical trials required for the approval of our product candidates. We may experience delays in our clinical trials, and we do not know whether planned clinical trials will begin on time, need to be redesigned, enroll patients on time, or be completed on schedule, if at all. These clinical trials can be delayed, suspended, or terminated for a variety of reasons, including but not limited to delays in or failure to obtain regulatory authorization to commence a trial and IRB approval at each site, to reach agreement on acceptable terms with prospective clinical trial sites, or to recruit and enroll suitable patients to participate in a trial. In addition, the results of preclinical and early clinical trials of our product candidates may not be predictive of the results of our later-stage clinical trials. For example, while we may believe certain results in patients, such as stable disease, suggest encouraging clinical activity, stable disease is not considered a response for regulatory purposes in an endpoint assessing objective response rate. In addition, even if the regulatory authorities agree with the design and implementation of the clinical trials set forth in an IND or similar application, we cannot guarantee that such regulatory authorities will not change their requirements in the future. These considerations also apply to new clinical trials we may submit as amendments to existing INDs.
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Clinical trials must be conducted in accordance with the FDA’s and other applicable regulatory authorities’ legal requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and IRBs or Ethics Committees at the medical institutions where the clinical trials are conducted. We could encounter delays if a clinical trial is put on hold by the FDA or other regulatory authorities, suspended or terminated by us, by the IRBs or Ethics Committees of the institutions in which such trials are being conducted or by the Data Review Committee or Data Safety Monitoring Board for such trial. For example, in November 2024, the FDA placed a full clinical hold on the Phase 1 study of HCW9302 due to insufficient information regarding chemistry, manufacturing and controls, which prevented us from initiating the study until the FDA lifted the clinical hold in January 2025 after finding our complete response to be satisfactory. If we experience further delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process, and jeopardize our ability to commence product sales and generate revenues. Significant clinical trial delays could also allow our competitors to bring products to market before we do or shorten any periods during which we have the exclusive right to commercialize our product candidates and impair our ability to commercialize our product candidates and may harm our business and results of operations.
In addition, clinical trials must be conducted with supplies of our product candidates produced under cGMP requirements and other regulations. Furthermore, we rely on clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. We depend on our collaborators and on medical institutions to conduct our clinical trials in compliance with GCP requirements. To the extent our collaborators fail to enroll participants for our clinical trials, fail to conduct the study in accordance with GCP, or are delayed for a significant time in the execution of trials, including achieving full enrollment, we may be affected by increased costs, program delays, or both, which may harm our business. In addition, clinical trials that are conducted in countries outside the United States may subject us to further delays and expenses as a result of increased shipment costs, and additional regulatory requirements, as well as expose us to risks associated with clinical investigators who are unknown to the FDA, and different standards of diagnosis, screening, and medical care.
Our lead product candidate, HCW9302, has been cleared by the FDA to initiate a first-in-human Phase 1 dose escalation clinical trial to evaluate HCW9302 in patients with moderate-to-severe alopecia areata, a common autoimmune disease in humans that currently has no curative FDA-approved treatments. Our ability to advance development of HCW9302 depends on timely completion of current clinical studies, successfully meeting those studies’ objectives, including dose finding and/or optimization for the Phase 2 evaluation, and obtaining FDA authorization to proceed to Phase 2 trials. If the FDA does not allow our Phase 2 clinical trials to proceed, we may be required to undertake additional IND-enabling activities or dose finding activities, which would result in further delay and additional costs. If we experience delays in the progression and completion of our clinical trials for HCW9302, or if we terminate a clinical trial prior to completion, the commercial prospects of such product candidate could be harmed, and our ability to generate revenues from the product candidate may be delayed. In addition, any delays in our clinical trials would require us to store material which could expose us to inventory risk, increased costs, slow down in development and approval process, as well as jeopardize our ability to commence product sales and generate revenues. Significant delays in commencing clinical trials could also allow our competitors to bring products to market before we do or shorten any periods during which we have the exclusive right to commercialize our product candidates. Any of these occurrences may harm our business, financial condition and results of operations. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates, and may harm our business and results of operations.
We may become exposed to costly and damaging product liability claims, either when testing our product candidates in the clinic or at the commercial stage, and our product liability insurance may not cover all damages from such claims.
We are exposed to potential product liability and professional indemnity risks that are inherent in the research, development, manufacturing, marketing, and use of pharmaceutical products. While we currently have no products that have been approved for commercial sale, the current and future use of product candidates by us and our partners in clinical trials, and the sale of any approved products in the future, may expose us to liability claims. These claims might be made by patients that use the product, healthcare providers, pharmaceutical companies, our partners, or others selling such products. Any claims against us, regardless of their merit, could be difficult and costly to defend and could materially adversely affect the market for our product candidates or any prospects for commercialization of our product candidates.
Although the clinical trial process is designed to identify and assess potential side effects, it is always possible that a drug, even after regulatory approval, may exhibit unforeseen side effects. If any of our product candidates were to cause adverse side effects during clinical trials or after approval of the product candidate, we may be exposed to substantial liabilities. Physicians and patients may not comply with any warnings that identify known potential adverse effects and patients who should not use our product candidates.
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Even successful defense against product liability claims would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in: decreased demand for our product candidates; injury to our reputation; withdrawal of clinical trial participants; initiation of investigations by regulators; costs to defend the related litigation; a diversion of management’s time and our resources; substantial monetary awards to trial participants or patients; product recalls, withdrawals or labeling, marketing or promotional restrictions; loss of revenue; exhaustion of any available insurance and our capital resources; the inability to commercialize any product candidate; and a decline in our share price.
Although we maintain adequate product liability insurance for our product candidates, it is possible that our liabilities could exceed our insurance coverage. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any of our product candidates. However, we may be unable to maintain insurance coverage at a reasonable cost or obtain insurance coverage that will be adequate to satisfy any liability that may arise. If a successful product liability claim or series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may not be sufficient to cover such claims, and our business operations could be impaired.
Risks Related to Our Regulatory Environment
The development and commercialization of biopharmaceutical products is subject to extensive regulation, and the regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time-consuming, and inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates on a timely basis if at all, our business will be substantially harmed.
The clinical development, manufacturing, labeling, packaging, storage, recordkeeping, advertising, promotion, export, import, marketing, distribution, adverse event reporting, including the submission of safety and other post-marketing information and reports, and other possible activities relating to our product candidates are subject to extensive regulation. In the United States, marketing approval of a biologic requires the submission of a BLA to the FDA, and we are not permitted to market any product candidate in the United States until we obtain approval from the FDA of the BLA for that product candidate. A BLA must be supported by extensive clinical and preclinical data, as well as extensive information regarding pharmacology, chemistry, manufacturing, and controls. Outside the United States, many comparable foreign regulatory authorities employ similar approval processes.
We have not previously submitted a BLA to the FDA or similar regulatory approval filings to comparable foreign authorities for any product candidate, and we cannot be certain that any of our product candidates will receive regulatory approval. Obtaining approval of a BLA can be a lengthy, expensive, and uncertain process, and as a company we have no experience with the preparation of a BLA submission or any other application for marketing approval. In addition, the FDA has the authority to require a REMS as part of a BLA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved biologic, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry. We also would not be permitted to market our product candidates in countries outside of the United States until we receive marketing approval from applicable regulatory authorities in those countries.
Our product candidates could fail to receive regulatory approval for many reasons including but not limited to flaws in trial design, dose selection, patient enrollment criteria and failure to demonstrate an acceptable risk:benefit profile. In addition, data obtained from clinical trials is susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may further delay, limit or prevent marketing approval. The lengthy approval process, as well as the unpredictability of future clinical trial results, may result in our failing to obtain regulatory approval to market any of our product candidates, which would significantly harm our business, results of operations, and prospects. The FDA and other regulatory authorities have substantial discretion in the approval process, and determining when or whether regulatory approval will be obtained for any of our product candidates. As a result, we may be required to conduct additional preclinical studies, alter our proposed clinical trial designs, or conduct additional clinical trials to satisfy the regulatory authorities in each of the jurisdictions in which we hope to conduct clinical trials and develop and market our products, if approved. Further, even if we believe the data collected from clinical trials of our product candidates are promising, such data may not be sufficient to support approval by the FDA or any other regulatory authority.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
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If we decide to pursue accelerated approval for any of our product candidates, it may not lead to a faster development or regulatory review or approval process and does not increase the likelihood that it will receive marketing approval. If we are unable to obtain approval under an accelerated pathway, we may be required to conduct additional clinical trials beyond those that we contemplate, which could increase the expense of obtaining, reduce the likelihood of obtaining and/or delay the timing of obtaining, necessary marketing approvals.
In the future, we may decide to pursue accelerated approval for one or more of our product candidates. Under the FDA’s accelerated approval program, the FDA may approve a drug or biologic for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. Many cancer therapies rely on accelerated approval, and the treatment landscape can change quickly as the FDA converts accelerated approvals to full approvals on the basis of successful confirmatory trials.
For drugs or biologics granted accelerated approval, post-marketing confirmatory trials are required to describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. These confirmatory trials must be completed with due diligence and, in some cases, the FDA may require that the trial be designed, initiated and/or fully enrolled prior to approval.
Moreover, the FDA may withdraw approval of any product candidate approved under the accelerated approval pathway if, for example:
In addition, the FDA may terminate the accelerated approval program or change the standards under which accelerated approvals are considered and granted in response to public pressure or other concerns regarding the accelerated approval program. Changes to or termination of the accelerated approval program could prevent or limit our ability to obtain accelerated approval of any of our clinical development programs. Recently, the accelerated approval pathway has come under scrutiny within the FDA and by Congress. The FDA has put increased focus on ensuring that confirmatory studies are conducted with diligence and, ultimately, that such studies confirm the benefit. For example, the FDA has convened its Oncologic Drugs Advisory Committee to review what the FDA has called dangling or delinquent accelerated approvals where confirmatory studies have not been completed or where results did not confirm benefit. In addition, the Oncology Center of Excellence has announced Project Confirm, which is an initiative to promote the transparency of outcomes related to accelerated approvals for oncology indications and provide a framework to foster discussion, research and innovation in approval and post-marketing processes, with the goal to enhance the balance of access and verification of benefit for therapies available to patients with cancer and hematologic malignancies.
The recent enactment of FDORA included provisions related to the accelerated approval pathway. Pursuant to FDORA, the FDA is authorized to require a post-approval study to be underway prior to approval or within a specified time period following approval. FDORA also requires the FDA to specify conditions of any required post-approval study and requires sponsors to submit progress reports for required post-approval studies and any conditions required by the FDA. FDORA enables the FDA to initiate enforcement action for the failure to conduct with due diligence a required post-approval study, including a failure to meet any required conditions specified by the FDA or to submit timely reports.
There is substantial uncertainty regarding the new Administration’s initiatives and how these might impact the FDA, its implementation of laws, regulations, policies and guidance and its personnel. Similar initiatives may also be directed toward other government agencies. These initiatives could prevent, limit or delay development and regulatory approval, and/or impact commercialization, of our product candidates, which would impact our business.
FDA-regulated industries, such as ours, face substantial uncertainty regarding the regulatory environment we will face as we proceed with research and development, and possibly in future commercialization, efforts following the inauguration of President Trump in January 2025 (the “Administration”). Some of these efforts have manifested to date in the form of personnel measures that could impact the FDA’s ability to hire and retain key personnel, which could result in delays in or limitations on our ability to obtain guidance from the FDA on our product candidates in development and obtain the requisite regulatory approvals in the future.
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Moreover, the new Administration has proposed action to freeze or reduce the budget of the National Institutes of Health (“NIH”) as related to its funding for medical research, which could decrease the ability of facilities that rely on NIH funding to enroll and conduct clinical trials or increase the costs to us of conducting clinical trials. There remains general uncertainty regarding future activities. The new Administration could issue or promulgate executive orders, regulations, policies or guidance that adversely affect us or create a more challenging or costly environment to pursue the development and sale of new therapeutic products. For example, on January 20, 2025, President Trump announced an executive order establishing the Department of Government Efficiency to maximize government efficiency and productivity. Pressures on and uncertainty surrounding the U.S. federal government’s budget and potential changes in budgetary priorities could adversely affect the funding for existing programs and grants and increase the costs to us of conducting clinical trials. Alternatively, state governments may attempt to address or react to changes at the federal level with changes to their own regulatory frameworks in a manner that is adverse to our operations. If we or our collaborators become negatively impacted by future governmental orders, regulations, policies or guidance as a result of the new Administration, there could be a material adverse effect on us and our business.
Even if our product candidates obtain regulatory approval, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.
If the FDA or a comparable foreign regulatory authority approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, import, export, adverse event reporting, storage, advertising, promotion, and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with cGMP and GCP for any clinical trials that we conduct post-approval, all of which may result in significant expense and limit our ability to commercialize such products. In addition, any regulatory approvals that we receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate.
Manufacturers and manufacturers’ facilities are required to comply with extensive FDA and comparable foreign regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to cGMP regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any approved marketing application. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control.
If there are changes in the application of legislation or regulatory policies, or if problems are discovered with a product or our manufacture of a product, or if we or one of our distributors, licensees or co-marketers fails to comply with regulatory requirements, the regulators could take various actions. These include issuing warning letters or untitled letters, imposing fines on us, imposing restrictions on the product or its manufacture, and requiring us to recall or remove the product from the market. The regulators could also suspend or withdraw our marketing authorizations, requiring us to conduct additional clinical trials, change our product labeling, or submit additional applications for marketing authorization. If any of these events occurs, our ability to sell such product may be impaired, and we may incur substantial additional expense to comply with regulatory requirements, which could materially adversely affect our business, financial condition, and results of operations.
In addition, if we have any product candidate approved, our product labeling, advertising, and promotion will be subject to regulatory requirements and continuing regulatory review. In the United States, the FDA and the Federal Trade Commission (“FTC”), strictly regulate the promotional claims that may be made about pharmaceutical products to ensure that any claims about such products are consistent with regulatory approvals, not misleading or false in any particular way, and adequately substantiated by clinical data. The promotion of a drug product in a manner that is false, misleading, unsubstantiated, or for unapproved (or off-label) uses may result in enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA or the FTC. In particular, a product may not be promoted for uses that are not consistent with the uses approved by the FDA as reflected in the product’s approved labeling. If we receive marketing approval for a product candidate, physicians may nevertheless prescribe it to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions and may result in false claims litigation under federal and state statutes, which can lead to consent decrees, civil monetary penalties, restitution, criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid, and other federal and state healthcare programs. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
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If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenue from our products, if approved. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected.
Moreover, the policies of the FDA and of other regulatory authorities may change and additional government regulations may be enacted that could prevent, limit, or delay regulatory approval of our product candidates. The standards that the FDA and its foreign counterparts use when regulating us require judgment and can change, which makes it difficult to predict with certainty their application. We may also encounter unexpected delays or increased costs due to new government regulations, for example, from future legislation or administrative action, or from changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. It is impossible to predict whether legislative changes will be enacted, or whether FDA or foreign regulations, guidance or interpretations will be changed, or the impact of such changes, if any. For example, the Oncology Center of Excellence within the FDA has advanced Project Optimus, which is an initiative to reform the dose optimization and dose selection paradigm in oncology drug development to emphasize selection of an optimal dose, which is a dose or doses that maximizes not only the efficacy of a drug but the safety and tolerability as well. This shift from the prior approach, which generally determined the maximum tolerated dose, may require sponsors to spend additional time and resources to further explore a product candidate’s dose-response relationship to facilitate optimum dose selection in a target population. Other recent Oncology Center of Excellence initiatives have included Project FrontRunner, a new initiative with a goal of developing a framework for identifying candidate drugs for initial clinical development in the earlier advanced setting rather than for treatment of patients who have received numerous prior lines of therapies or have exhausted available treatment options; Project Confirm, which is an initiative to promote the transparency of outcomes related to accelerated approvals for oncology indications and provide a framework to foster discussion, research and innovation in approval and post-marketing processes, with the goal to enhance the balance of access and verification of benefit for therapies available to patients with cancer and hematologic malignancies; and Project Equity, which is an initiative to ensure that the data submitted to the FDA for approval of oncology medical products adequately reflects the demographic representation of patients for whom the medical products are intended. More recently, as part of FDORA, sponsors will be required to submit Diversity Action Plans (“DAPs”) for Phase 3 studies or other pivotal studies of new drugs. DAPs must include the sponsor’s goals for enrollment for such studies, disaggregated by age group, sex, and racial and ethnic demographic characteristics of clinically relevant study populations; the sponsor’s rationale for such goals; and an explanation of how the sponsor intends to meet such goals. Actions taken in the early days of the new presidential administration have created significant uncertainty as to whether Project Equity will continue and whether the statutory requirements related to DAPs will be implemented by FDA in the near future. We are considering these and other policy changes as they relate to our programs.
Our employees, independent contractors, principal investigators, consultants, commercial partners, and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk of employee fraud or other misconduct. We cannot ensure that our compliance controls, policies, and procedures will in every instance protect us from acts committed by our employees, agents, contractors, or collaborators that would violate the laws or regulations of the jurisdictions in which we operate, including, without limitation, employment, foreign corrupt practices, trade restrictions and sanctions, environmental, competition, theft of trade secrets as well as patient privacy and other privacy laws and regulations. Misconduct by employees could include failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we may establish, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately, or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, labeling, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.
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If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a material and adverse effect on our business, financial condition, results of operations, and prospects, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, individual imprisonment, disgorgement of profits, possible exclusion from participation in Medicare, Medicaid, and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of noncompliance with the law, and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and pursue our strategy. Further, defending against any such actions can be costly, time-consuming, and may require significant personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.
Our current and future relationships with customers and third-party payors may be subject to applicable anti-kickback, fraud and abuse, transparency, health privacy, and other healthcare laws and regulations, which could expose us to significant penalties, including criminal, civil, and administrative penalties, contractual damages, reputational harm and diminished profits and future earnings.
Healthcare providers, including physicians, and third-party payors will play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our current and future arrangements with healthcare providers, third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we research, as well as, market, sell and distribute any products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations that may be applicable to our business include the following:
Efforts to ensure that our internal business processes and business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional integrity reporting and oversight obligations, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to significant criminal, civil and administrative sanctions, including exclusions from government funded healthcare programs, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
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Current and future legislation may increase the difficulty and cost for us and any future collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.
Existing regulatory policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may not obtain or may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements. Furthermore, government shutdowns could also impact the ability of regulatory authorities and government agencies to function normally and support our operations. For example, the U.S. federal government has shut down repeatedly since 1980, including for a period of 35 days beginning on December 22, 2018. During a shutdown, certain regulatory authorities and agencies, such as the FDA, have had to furlough key personnel and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
In addition, in the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. The pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. Previously, in March 2010, the ACA was enacted, which was intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms.
Healthcare reform initiatives culminated in the enactment of the IRA in August 2022, which, among other things, allows HHS to directly negotiate the selling price of a statutorily specified number of drugs and biologics each year that CMS reimburses under Medicare Part B and Part D. The negotiated price may not exceed a statutory ceiling price. Only high-expenditure single-source drugs that have been approved for at least 11 years for single-source biologics (7 years for single-source drugs) are eligible to be selected by CMS for negotiation, with the negotiated price taking effect two years after the selection year. For 2026, the first year in which negotiated prices become effective, CMS selected 10 high-cost Medicare Part D products in 2023, negotiations began in 2024, and the negotiated maximum fair price for each product has been announced. These negotiations resulted in significant price reductions for the products from their 2023 list prices, ranging from 38 to 79 percent, with an average price reduction of 59.4 percent. CMS has selected 15 additional Medicare Part D drugs for negotiated maximum fair pricing in 2027. For 2028, an additional 15 drugs, which may be covered under either Medicare Part B or Part D, will be selected, and for 2029 and subsequent years, 20 Part B or Part D drugs will be selected. A drug or biological product that has an orphan drug designation for only one rare disease or condition will be excluded from the IRA’s price negotiation requirements, but will lose that exclusion if it receives designations for more than one rare disease or condition, or if is approved for an indication that is not within that single designated rare disease or condition, unless such additional designation or such disqualifying approvals are withdrawn by the time CMS evaluates the drug for selection for negotiation. The negotiated prices have represented, and will continue to represent, a significant discount from average prices to wholesalers and direct purchasers. The law also imposes rebates on Medicare Part D and Part B drugs whose prices have increased at a rate greater than the rate of inflation, and in November 2024, CMS finalized regulations for these inflation rebates. The IRA also extends enhanced subsidies for individuals purchasing health insurance coverage in ACA marketplaces through plan year 2025. The IRA permits the Secretary of HHS to implement many of these provisions through guidance, as opposed to regulation, for the initial years. Manufacturers that fail to comply with the IRA may be subject to various penalties, including civil monetary penalties. These provisions may be subject to legal challenges. For example, the provisions related to the negotiation of selling prices of high-expenditure single-source drugs and biologics have been challenged in multiple lawsuits brought by pharmaceutical manufacturers. Thus, while it is unclear how the IRA will be implemented, it will likely have a significant impact on the pharmaceutical industry.
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At the state level in the United States, legislatures are increasingly enacting laws and implementing regulations designed to control pharmaceutical and biologic product pricing, including price constraints, restrictions on certain product access, reporting on price increases and the introduction of high-cost drugs. In some states, laws have been enacted to encourage importation of lower cost drugs from other countries and bulk purchasing. For example, the FDA released a final rule in September 2020 providing guidance for states to build and submit plans for importing drugs from Canada, and FDA authorized the first such plan in Florida in January 2024, which has been extended until July 2025. It is unclear how this program will be implemented, including which drugs will be chosen, and whether it will be subject to legal challenges in the United States or Canada. Other states have also submitted proposals that are pending review by the FDA. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce the ultimate demand for our drug products that we successfully commercialize or put pressure on our product pricing.
We expect that the ACA, the IRA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product candidates.
Risks Related to Commercialization of Our Product Candidates
We operate in highly competitive and rapidly changing industries, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.
The biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. Our success is highly dependent on our ability to discover, develop, and obtain marketing approval for new and innovative products on a cost-effective basis and to market them successfully. In doing so, we face and will continue to face intense competition from a variety of businesses, including large pharmaceutical and biotechnology companies, academic institutions, government agencies, and other public and private research organizations. These organizations may have significantly greater resources than we do and conduct similar research, seek patent protection, and establish collaborative arrangements for research, development, manufacturing, and marketing of products that compete with our product candidates. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries.
With the proliferation of new oncology drugs and therapies, we expect to face increasingly intense competition as new technologies become available. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future. The highly competitive nature of and rapid technological changes in the biotechnology and pharmaceutical industries could render our product candidates or our technology obsolete, less competitive or uneconomical, which could adversely impact our business, financial condition, or results of operations.
Failure to successfully identify, develop, and commercialize additional product candidates could impair our ability to grow.
Although a substantial amount of our efforts will focus on the continued preclinical and clinical testing and potential approval of our product candidates in our current pipeline, we expect to continue to innovate and potentially expand our portfolio. Because we have limited financial and managerial resources, research programs to identify product candidates may require substantial additional technical, financial and human resources, whether or not any new potential product candidates are ultimately identified. Our success may depend in part upon our ability to identify, select, and develop promising product candidates and therapeutics. We may expend resources and ultimately fail to discover and generate additional product candidates suitable for further development. All product candidates are prone to risks of failure typical of biotechnology product development, including the possibility that a product candidate may not be suitable for clinical development as a result of its harmful side effects, limited efficacy or other characteristics indicating that it is unlikely to receive approval by the FDA, the EMA, and other comparable foreign regulatory authorities and achieve market acceptance. If we do not successfully develop and commercialize new product candidates we have identified and explored, our business, prospects, financial condition, and results of operations could be adversely affected.
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Even if approved, our products may not gain market acceptance, in which case we may not be able to generate product revenues, which will materially adversely affect our business, financial condition, and results of operations.
Even if the FDA or any other regulatory authority approves the marketing of any product candidates that we develop on our own or with a collaborator, physicians, healthcare providers, patients, or the medical community may not accept or use them. Additionally, the product candidates that we are developing are based on our internally-developed immunotherapy platform technology, which is a new technology. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues or any profits from operations. The degree of market acceptance of any of our product candidates will depend on a variety of factors including but not limited to the terms of any approvals and the countries in which approvals are obtained, the number and clinical profile of competing products, and the availability of coverage and adequate reimbursement from insurers for our product candidates. If our product candidates fail to gain market acceptance, our ability to generate revenues to provide a satisfactory, or any, return on our investments may be materially and adversely impacted. Even if some product candidates achieve market acceptance, the market may prove not to be large enough to allow us to generate significant revenues.
We currently have no marketing, sales, or distribution infrastructure and we intend to either establish a sales and marketing infrastructure or outsource this function to a third party. Either of these commercialization strategies carries substantial risks to us.
We currently have no marketing, sales, and distribution capabilities because all of our product candidates are still in clinical or preclinical development. If any of our product candidates are approved, we intend to either establish a sales and marketing organization with technical expertise and supporting distribution capabilities to commercialize our product candidates in a legally compliant manner, or to outsource this function to a third party. There are risks involved if we decide to establish our own sales and marketing capabilities or enter into arrangements with third parties to perform these services. To the extent that we enter into collaboration agreements with respect to marketing, sales or distribution, our product revenue may be lower than if we were to directly market or sell any approved products. Such collaborative arrangements with partners may place the commercialization of our products outside of our control and would make us subject to a number of risks including that we may not be able to control the amount or timing of resources that our collaborative partner devotes to our products or that our collaborator’s willingness or ability to complete its obligations, and our obligations under our arrangements may be adversely affected by business combinations or significant changes in our collaborator’s business strategy.
If we are unable to enter into these arrangements on acceptable terms or at all, we may not be able to successfully commercialize any approved products. If we are not successful in commercializing any approved products, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we may incur significant additional losses, which would have a material adverse effect on our business, financial condition, and results of operations.
Risks Related to Our Dependence on Third Parties
We rely on third parties to manufacture our product candidates. Any failure by a third-party manufacturer to produce acceptable drug substance for us or to obtain authorization from the FDA or comparable regulatory authorities may delay or impair our ability to initiate or complete our clinical trials, obtain regulatory approvals or commercialize approved products.
We do not currently own or operate any cGMP manufacturing facilities nor do we have any in-house cGMP manufacturing capabilities. We rely on third-party contract manufacturers to produce sufficient quantities of materials required for the manufacture of our product candidates for preclinical testing and clinical trials, in compliance with applicable regulatory and quality standards, and intend to do so for the commercial manufacture of our products, if approved. If we are unable to arrange for such third-party manufacturing sources, or fail to do so on commercially reasonable terms, we may not be able to successfully produce sufficient supply of product candidate or we may be delayed in doing so. Such failure or substantial delay could materially harm our business.
We rely on third parties for biological materials that are used in our discovery and development programs. These materials can be difficult to produce and occasionally have variability from the product specifications. Any disruption in the supply of these biological materials consistent with our product specifications could materially adversely affect our business. Although we have control processes and screening procedures, biological materials are susceptible to damage and contamination and may contain active pathogens. We may also have lower yields in manufacturing batches, which can increase our costs and slow our development timelines. Improper storage of these materials, by us or any third-party suppliers, may require us to destroy some of our biological raw materials or product candidates.
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Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates ourselves, including reliance on the third party for regulatory compliance and quality control and assurance, volume production, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control (including a failure to synthesize and manufacture our product candidates in accordance with our product specifications), and the possibility of termination or nonrenewal of the agreement by the third party at a time that is costly or damaging to us.
In addition, the FDA and other regulatory authorities require that our product candidates be manufactured according to cGMP and similar foreign standards relating to methods, facilities, and controls used in the manufacturing, processing, and packing of the product, which are intended to ensure that biological products are safe and that they consistently meet applicable requirements and specifications.
If the FDA or a comparable foreign regulatory authority does not approve the manufacture of our product candidates at any of our proposed contract manufacturer’s facilities, or if any contract manufacturer fails to maintain a compliance status acceptable to the FDA or a comparable foreign authority, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for, or market our product candidates, if approved. Any discovery of problems with a product, or a manufacturing facility used by us, may result in restrictions on the product or on the manufacturing facility, including marketed product recall, suspension of manufacturing, product seizure, or a voluntary withdrawal of the drug from the market. We may have little to no control regarding the occurrence of third-party manufacturer incidents.
If we were unable to find an adequate replacement or another acceptable solution in time, our clinical trials could be delayed, or our commercial activities could be harmed. In addition, the fact that we are dependent on our collaborators, our suppliers, and other third parties for the manufacture, filling, storage, and distribution of our product candidates means that we are subject to the risk that the products may have manufacturing defects that we have limited ability to prevent or control. The sale of products containing such defects could adversely affect our business, financial condition, and results of operations. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes, including any failure to deliver sufficient quantities of product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of any of our product candidates.
Pharmaceutical manufacturers are also subject to extensive post-marketing oversight by the FDA and comparable regulatory authorities in the jurisdictions where the product is marketed, which include periodic unannounced and announced inspections by the FDA to assess compliance with cGMP requirements. If an FDA inspection of a manufacturer’s facilities reveals conditions that the FDA determines not to comply with applicable regulatory requirements, the FDA may issue observations through a Notice of Inspectional Observations, commonly referred to as a “Form FDA 483”. If observations in the Form FDA 483 are not addressed in a timely manner and to the FDA’s satisfaction, the FDA may issue a warning letter or pursue other forms of enforcement action. Any failure by one of our contract manufacturers to comply with cGMP or to provide adequate and timely corrective actions in response to deficiencies identified in a regulatory inspection could result in enforcement action that could lead to a shortage of products and harm our business, including withdrawal of approvals previously granted, seizure, injunction or other civil or criminal penalties. The failure of a manufacturer to address any concerns raised by the FDA or foreign regulators or to maintain a compliance status acceptable to the FDA or foreign regulators could also lead to the delay or withholding of product approval by the FDA or by foreign regulators or could lead to plant shutdown. Certain countries may impose additional requirements on the manufacturing of drug products or drug substances, and on manufacturers, as part of the regulatory approval process for products in such countries. The failure by our third-party manufacturers to satisfy such requirements could impact our ability to obtain or maintain approval of our products in such countries.
Supply sources could be interrupted from time to time and, if interrupted, there is no guarantee that supplies could be resumed within a reasonable time frame and at an acceptable cost or at all.
We rely on our manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our clinical trials. The manufacturing capabilities of our suppliers have been impacted as a result of ongoing supply chain delays, and it may not be possible for us to timely manufacture our product candidates at desired levels. Reduced supply may also lead to increased costs for materials, which can adversely impact our business and results of operations There are a limited number of suppliers for raw materials that we use to manufacture our product candidates, and there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our product candidates for our clinical trials, and if approved, ultimately for commercial sale. Reductions or interruptions in any of our third-party manufacturing processes as a result of supply chain delays caused global conflicts, public health emergencies (including a resurgence of a variant of the COVID-19 pandemic or future pandemic) or other reasons could have a material adverse effect on our business, results of operations, financial condition and cash flows.
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We do not have any control over the process or timing of the acquisition of the raw materials we need to produce our product candidates by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these raw materials. We cannot be sure that these suppliers will remain in business, or that they will not be purchased by one of our competitors or another company that is not interested in continuing to produce these materials for our intended purpose. In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event a new supplier must be used. The time and effort to qualify a new supplier could result in additional costs, diversion of resources, or reduced manufacturing yields, any of which would negatively impact our operating results. Although we will not begin a clinical trial unless we believe we have a sufficient supply of a product candidate to complete the clinical trial, any significant delay in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a third-party manufacturer could considerably delay completion of our clinical trials, product testing, and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply, which would impair our ability to generate revenues from the sale of our product candidates.
We currently rely on, and expect to continue to rely on, third parties, including independent clinical investigators, to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties, comply with applicable regulatory requirements, or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
We currently rely, and expect to continue to rely on, third parties, including independent clinical investigators, to conduct our preclinical studies and clinical trials and to monitor and manage data for our preclinical and clinical programs. We will rely on these parties for execution of our preclinical studies and clinical trials, and control only certain aspects of their activities. Nevertheless, our reliance on these third parties will not relieve us of our regulatory responsibilities, and we are responsible for ensuring that each of our studies and trials is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards, including GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for all of our products candidates in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, principal investigators, and trial sites. If we fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with products produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.
Further, these investigators are not our employees and we will not be able to control, other than by contract, the amount of resources, including time, which they devote to our product candidates and clinical trials. If independent investigators fail to devote sufficient resources to the development of our product candidates, or if their performance is substandard, it may delay or compromise the prospects for approval and commercialization of any product candidates that we develop. In addition, the use of third-party service providers may require us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated.
There is a limited number of third-party service providers that specialize or have the expertise required to achieve our business objectives. If any of our relationships with these third-party laboratories, or clinical investigators terminate, we may not be able to enter into arrangements with alternative laboratories, or investigators or to do so in a timely manner or on commercially reasonable terms. If laboratories, or clinical investigators do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our preclinical or clinical protocols, regulatory requirements or for other reasons, our preclinical or clinical trials may be extended, delayed, or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenues could be delayed. Switching or adding additional laboratories or investigators involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new laboratory commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.
In addition, clinical investigators may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA concludes that the financial relationship may have affected the interpretation of the preclinical study or clinical trial, the integrity of the data generated at the applicable preclinical study or clinical trial site may be questioned and the utility of the preclinical study or clinical trial itself may be jeopardized, which could result in the delay or rejection by the FDA.
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Any such delay or rejection could prevent us from commercializing our clinical-stage product candidate or any future product candidates.
We may not realize the benefits of any existing or future co-development or out-licensing arrangement, and if we fail to enter into new strategic relationships, our business, financial condition, commercialization prospects, and results of operations may be materially adversely affected.
Our product development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. Therefore, for some of our product candidates, we may decide to enter into collaborations with pharmaceutical or biopharmaceutical companies for the development and potential commercialization of those product candidates.
We face significant competition in seeking appropriate collaborators. Collaborations are complex and time-consuming to negotiate and document. We may not be able to negotiate collaborations on acceptable terms, or at all. If our strategic collaborations do not result in the successful development and commercialization of product candidates, or if one of our collaborators terminates its agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. In instances where we do enter into collaborations, we could be subject to a number of risks which may materially harm our business, commercialization prospects, and financial condition. For example, we may not be able to control the amount and timing of resources that is required of us to complete our development obligations or that the collaboration partner devotes to the product development or marketing programs, the collaboration partner may experience financial difficulties, or we may be required to relinquish important rights such as marketing, distribution, and intellectual property rights.
If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the results, revenue, or specific net income that justifies such transaction.
To date, we have relied on one third-party manufacturer for the cGMP production of our drug product candidates. The loss of this third-party manufacturer could negatively impact our ability to develop our product candidates and adversely affect our business.
We do not currently own any facility that may be used as our clinical-scale manufacturing and processing facility and currently rely on a single third-party vendor to manufacture supplies and process our product candidates. We have not yet caused our product candidates to be manufactured or processed on a commercial scale and may not be able to do so for any of our product candidates.
Although in the future we intend to develop our own manufacturing facility, we also intend to use third parties as part of our manufacturing process and may, in any event, never be successful in developing our own manufacturing facility.
Manufacturers of biologic products often encounter difficulties in production, particularly in scaling up or out, validating the production process, and assuring high reliability of the manufacturing process (including the absence of contamination). These problems include logistics and shipping, difficulties with production costs and yields, quality control, including stability of the product, product testing, operator error, availability of qualified personnel, as well as compliance with strictly enforced federal, state, and foreign regulations. Furthermore, if contaminants are discovered in our supply of our product candidates or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination.
The lead time needed to establish relationships with new manufacturers can be lengthy, and we may experience delays in meeting demand in the event we must switch to a new manufacturer. The time and effort to qualify a new manufacturer could result in additional costs, diversion of resources, or reduced manufacturing yields, any of which would negatively impact our operating results.
Moreover, to meet anticipated demand, our third-party manufacturer may need to increase manufacturing capacity, which could involve significant challenges. This may require us and our vendor to invest substantial additional funds and hire and retain the technical personnel who have the necessary experience. Neither we nor our third-party manufacturer may successfully complete any required increase to existing manufacturing capacity in a timely manner, or at all.
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Risks Related to Intellectual Property
We expect to rely on patents and other intellectual property rights to protect our technology, including product candidates and our immunotherapy platform technology, the prosecution, enforcement, defense, and maintenance of which may be challenging and costly. Failure to protect or enforce these rights adequately could harm our ability to compete and impair our business.
Our commercial success depends in part on obtaining and maintaining patents and other forms of intellectual property rights for technology related to our product candidates, including, but not limited to, our immunotherapy platform technology, product candidates, methods used to manufacture those product candidates, formulations thereof, and the methods for treating patients using those product candidates. Given that the development of our technology and product candidates is at an early stage, our intellectual
property portfolio with respect to certain aspects of our technology and product candidates is also at an early stage. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel platform technology and product candidates that are important to our business. The patent prosecution process is expensive and time-consuming, and we may not be able to prepare, file, and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. In addition, during the patent prosecution process, we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections.
The issuance, scope, validity, enforceability, and commercial value of our current or future patent rights are highly uncertain. It is possible that we will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Our pending and future patent applications may not result in the issuance of patents that protect our technology or product candidates, in whole or in part, or that effectively prevent others from commercializing competitive technologies and product candidates. The patent examination process may require us to narrow the scope of the claims of our pending and future patent applications, which may limit the scope of patent protection that may be obtained. Further, even if we obtain patents with sufficient scope to protect our technology or product candidates in their present forms, future technical changes to our technology or product candidates may render the patent coverage inadequate.
We cannot assure you that all of the potentially relevant prior art relating to our patents and patent applications has been found. If such prior art exists, it can invalidate or narrow the scope of a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue and even if such patents cover our product candidates, third parties have initiated or may initiate opposition, interference, re-examination, post-grant review, inter partes review, nullification, or derivation actions in court or before patent offices, or similar proceedings challenging the validity, ownership, enforceability, or scope of such patents, which may result in the patent claims being narrowed, invalidated, or held unenforceable or circumvented. Because patent applications in the United States and other jurisdictions are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file any patent applications related to such inventions. Our patent applications cannot be enforced against third parties practicing the technology claimed in such applications unless and until a patent is issued from such applications, and then only to the extent the issued claims cover the technology. Furthermore, even where we have a valid and enforceable patent, we may not be able to exclude others from practicing our invention where the other party can show that it used the invention in commerce before our filing date or that the other party benefits from a compulsory license. Additionally, our competitors or other third parties may be able to evade our patent rights by developing new biologics, biosimilars, or alternative technologies or products in a non-infringing manner.
In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our intellectual property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. Moreover, some of our owned patent applications may in the future be co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of our owned patents in order to enforce such patents against third parties, and such cooperation may not be provided to us or our licensors. Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects.
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The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other provisions during the patent application process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case. The standards applied by the USPTO, foreign patent offices, and patent courts or other authorities in granting patents and ruling on claim scope and validity are not always applied uniformly or predictably. Patent positions of life sciences companies can be uncertain and involve complex factual, scientific, and legal questions. Changes in either patent laws or their interpretation in any jurisdiction where we seek patent protection may diminish our ability to protect our inventions, maintain and enforce our intellectual property rights, and more generally may affect the value of our intellectual property, including the narrowing of the scope of our patents and any that we may license.
Failure to protect or to obtain, maintain or extend adequate patent and other intellectual property rights could materially adversely affect our ability to develop and market our product candidates.
We may become involved in lawsuits to protect or enforce our issued patents relating to one or more of our product candidates or our internally-developed platform, which could ultimately render our patents invalid or unenforceable and adversely affect our competitive position. Intellectual property litigation or other legal proceedings could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Competitors may infringe our patents or other intellectual property that relate to our immunotherapy platform technology and product candidates, their respective methods of use, manufacture, and formulations thereof. Third parties may in the future claim that our operations infringe their intellectual property rights. To defend against such claims, protect our competitive position and counter infringement or unauthorized use, we may from time to time need to resort to litigation to enforce or defend any patents or other intellectual property rights owned or licensed by us by filing infringement claims. We may be subject to further litigation in the future, involving claims that we have misappropriated or misused other parties’ trade secrets or information. To the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to the biopharmaceutical industry.
As enforcement of intellectual property rights is difficult, unpredictable, time-consuming, and expensive, we may fail in enforcing our rights, in which case our competitors may be permitted to use our technology without being required to pay us any license fees. In addition, litigation involving our patents carries the risk that one or more of our patents will be held invalid (in whole, in part, or on a claim-by-claim basis) or held unenforceable. Such an adverse court ruling could allow third parties to commercialize our product candidates or methods, or our immunotherapy platform technology, and then compete directly with us, without payment to us.
Even if resolved in our favor, such litigation and other legal proceedings may cause us to incur significant expenses and would be likely to divert significant resources from our core business, including distracting our technical and management personnel from their normal responsibilities, and may impact our reputation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
Intellectual property rights of third parties could adversely affect our ability to develop or commercialize our product candidates, such that we could be required to litigate or obtain licenses from third parties in order to develop or market our product candidates.
Our commercial success depends, in part, on our ability to develop, manufacture, market, and sell our product candidates or any products, if approved, without infringing or otherwise violating the intellectual property and other proprietary rights of third parties. Our competitive position may suffer if patents issued to third parties or other third-party intellectual property rights cover our methods or product candidates or elements thereof, our manufacture or uses relevant to our development plans, our product candidates or other attributes of our product candidates, or our immunotherapy platform technology. In such cases, we may not be in a position to develop or commercialize product candidates unless we successfully pursue litigation to nullify or invalidate the third-party intellectual property right concerned, which can be expensive and time-consuming, or have to enter into a license agreement with the intellectual property right holder, if available on commercially reasonable terms at all.
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There is a substantial amount of intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, litigation or other adversarial proceedings regarding intellectual property rights with respect to our product candidates. Parties making claims against us may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize our product candidates. If we are sued for patent infringement, we would need to demonstrate that our product candidates or platform technology either do not infringe the patent claims of a relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do this. Proving invalidity may be difficult. For example, in the United States, proving invalidity in court requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. We may not have sufficient resources to bring these actions to a successful conclusion. If we are unable to successfully settle future claims on terms acceptable to us, we may be required to engage or continue costly, unpredictable, and time-consuming litigation and may be prevented from or experience substantial delays in marketing our product candidates.
In addition, indemnity provisions in various agreements and our corporate documents potentially expose us to substantial liability for intellectual property infringement and other claims. In the ordinary course of business, we enter into agreements that may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement or other liabilities relating to or arising from our clinical trials, breach of warranties or other contractual obligations. In some cases, the indemnification will continue after the termination of the applicable agreement. In addition, in accordance with our bylaws and pursuant to indemnification agreements entered into with directors, officers and certain employees, we have indemnification obligations for claims brought against these persons arising out of certain events or occurrences while they are serving at our request in such capacities. For example, our founder and chief executive officer is subject to a claim from a former employer. We agreed to advance certain defense costs and other expenses, subject to an undertaking to repay us such amounts if, and to the extent that, it is ultimately determined that he is not entitled to indemnification, and his former employer is seeking reimbursement from us for advancements it has made on his behalf. The matter is ongoing. If these matters are resolved in favor of the former employer and if we are required to indemnify our founder and chief executive officer for a loss, we may be required to make an indemnity payment. While we maintain directors’ and officers’ liability insurance, such insurance may not be applicable, be adequate, or cover all liabilities that we may incur. Large indemnity payments, individually or in the aggregate, could have a material impact on our financial position.
Our involvement in litigation, and in any interferences, post-grant proceedings, opposition proceedings, or other intellectual property proceedings inside and outside of the United States may divert management from focusing on business operations, and even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on our business and operations. In addition, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
We may need to obtain licenses of third-party technology that may not be available to us or are available only on commercially unreasonable terms, and which may cause us to operate our business in a more costly or otherwise adverse manner that was not anticipated.
We own and are pursuing rights to the intellectual property, including patent applications relating to our immunotherapy platform technology and our product candidates. In the future, we may be required to license technologies relating to our therapeutic research programs from additional third parties to further develop or commercialize our platform technology and product candidates. The fusion components of our product candidates may have also been the subject of research by companies that could have filed patent applications on their specific construct and therapeutic methods. There can be no assurance any such patents will not be asserted against us or that we will not need to seek licenses from such third parties. We may not be able to secure such licenses on acceptable terms, if at all, and any such litigation would be costly and time-consuming.
Should we be required to obtain licenses to any third-party technology, including any such patents required to manufacture, use, or sell our product candidates or any products, if approved, the growth of our business will likely depend in part on our ability to acquire, in-license, maintain, or use these proprietary rights. The inability to obtain any third-party license required to develop or commercialize any of our product candidates could cause us to abandon any related efforts, which could seriously harm our business and operations.
In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. If we are unable to successfully obtain a license to third-party intellectual property rights necessary for the development of a product candidate or program, we may have to abandon development of that product candidate or program and our business and financial condition could suffer.
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We are and may become subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We generally enter into confidentiality and intellectual property assignment agreements with our employees, consultants, and contractors. These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, those agreements may not be honored and may not effectively assign intellectual property rights to us. Moreover, there may be some circumstances, where we are unable to negotiate for such ownership rights. Disputes regarding ownership or inventorship of intellectual property can also arise in other contexts, such as collaborations and sponsored research. Disputes challenging our rights in or to patents or other intellectual property, such as the lawsuit as we are currently facing in our legal proceedings with Altor/NantCell, have been and could be expensive and time consuming. If we were unsuccessful, we could lose valuable rights in intellectual property that we regard as our own. In addition, interferences, post-grant proceedings, opposition proceedings, derivation proceedings, or other intellectual property proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications.
The failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable. Inventorship disputes may arise from conflicting views regarding the contributions of different individuals named as inventors, the effects of foreign laws where foreign nationals are involved in the development of the subject matter of the patent, conflicting obligations of third parties involved in developing our product candidates or as a result of questions regarding co-ownership of potential joint inventions. Litigation may be necessary to resolve these and other claims challenging inventorship and/or ownership. Alternatively, or additionally, we may enter into agreements to clarify the scope of our rights in such intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
We may rely on trade secret and proprietary know-how, which can be difficult to trace and enforce and, if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some of our technology and product candidates, we may rely on trade secrets and/or confidential know-how to protect our technology, especially where patent protection is believed to be of limited value, to maintain our competitive position with respect to our research programs and product candidates. Elements of our product candidates, including processes for their preparation and manufacture, may involve proprietary know-how, information, or technology that is not covered by patents, and thus for these aspects we may consider trade secrets and know-how to be our primary intellectual property. Any disclosure, either intentional or unintentional, by our employees or by other third parties of our trade secrets or proprietary information could enable competitors to duplicate or surpass our technological achievements, thus adversely eroding our competitive position in our market. Further, monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our internally-developed technology will be effective. Enforcing a claim that a third party illegally obtained and is using trade secrets and/or confidential know-how is also expensive, time-consuming, and unpredictable.
The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction. The laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. Furthermore, if a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, some courts inside and outside the United States are less willing or are unwilling to protect trade secrets or other proprietary information.
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Trade secrets can over time be disseminated within the biopharmaceutical industry through independent development, the publication of journal articles, and the movement of personnel skilled in the art from company to company or academic to industry scientific positions. Though our agreements with third parties typically restrict the ability of our employees, consultants, contractors, collaborators, advisors, and other third parties to publish data potentially relating to our trade secrets, our agreements may contain certain limited publication rights. Because from time to time we expect to rely on third parties in the development, manufacture, and distribution of our product candidates and provision of our services, we must, at times, share trade secrets with them. Despite employing the contractual and other security precautions described above, the need to share trade secrets increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third party, our competitive position would be harmed.
In addition, our competitors may independently develop substantially equivalent trade secrets, proprietary information, or know-how and may even apply for patent protection in respect of the same. If successful in obtaining such patent protection, our competitors could limit our use of our trade secrets and/or confidential know-how. Under certain circumstances and to make it more likely that we have freedom to operate, we may also decide to publish some know-how to make it difficult for others to obtain patent rights covering such know-how, at the risk of potentially exposing our trade secrets to our competitors.
We may be in the future subject to third-party claims asserting that our employees, consultants, contractors, collaborators, or advisors have misappropriated or wrongfully used or disseminated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees, including our senior management, were previously employed at universities or at other biopharmaceutical companies, including our competitors or potential competitors. Some of these employees executed proprietary rights, non-disclosure, and non-competition agreements in connection with such previous employment. Similarly, we work with consultants, contractors, collaborators, advisors, or other third parties who have worked with, and do currently work with, other companies, including our competitors or potential competitors, and have executed proprietary rights, non-disclosure, and non-competition agreements in connection with such other companies. Although we try to ensure that our employees, consultants, contractors, collaborators, advisors, or other third parties do not use or disclose the proprietary information or know-how of others in their work for us, we are and may become subject to claims that we or these employees or individuals that we work with have used or disclosed confidential information or intellectual property of others, including trade secrets or other proprietary information, or that we caused an individual to breach the terms of his or her non-competition or non-solicitation agreement with a current or former employer or competitor.
Litigation may be necessary to defend against these claims and, even if we are successful, could result in substantial costs and could be a distraction to management, our employees, and our routine business. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to develop or commercialize our technology or product candidates. Such a license may not be available on commercially reasonable terms or at all. Moreover, any such litigation or the threat thereof may adversely affect our reputation and our ability to form strategic alliances or sublicense our rights to collaborators, engage with scientific advisors or hire employees or consultants, each of which would have an adverse effect on our business, results of operations, and financial condition.
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Risks Related to Data Privacy and Cybersecurity
Our information technology systems, or those used by our third-party contractors or consultants, may fail or suffer security breaches, which could adversely affect our business.
We collect and maintain information in digital form that is necessary to conduct our business, and we are dependent on our information technology systems and those of third parties to operate our business. In the ordinary course of our business, we collect, store, and transmit large amounts of confidential information, including intellectual property, proprietary business information, and personal information, and data to comply with cGMP, clinical and data integrity requirements. We have established physical, electronic, and organizational measures to safeguard and secure our systems to prevent a data compromise. We have also outsourced elements of our information technology infrastructure, and as a result a number of third-party vendors may or could have access to our confidential information. Despite the implementation of security measures, our information technology systems and data and those of our contractors and consultants are vulnerable to compromise or damage from computer hacking, malicious software, fraudulent activity, employee misconduct, human error, telecommunication and electrical failures, natural disasters, or other cybersecurity attacks or accidents. Future acquisitions could expose us to additional cybersecurity risks and vulnerabilities from any newly acquired information technology infrastructure. While we continue to make investments to improve the protection of data and information technology, there can be no assurance that our efforts will prevent service interruptions or security breaches.
Any cybersecurity incident could adversely affect our business, by leading to, for example, the loss of trade secrets or other intellectual property, demands for ransom or other forms of blackmail, or the unauthorized disclosure of personal or other sensitive information of our employees, clinical trial patients, customers, and others. Although to our knowledge we have not experienced any material cybersecurity incident to date, if such an event were to occur, it could seriously harm our development programs and our business operations. We could be subject to regulatory actions taken by governmental authorities, litigation under laws that protect the privacy of personal information, or other forms of legal proceedings, which could result in significant liabilities or penalties. Further, a cybersecurity incident may disrupt our business or damage our reputation, which could have a material adverse effect on our business, prospects, operating results, share price, stockholder value, and financial condition. We could also incur substantial remediation costs, including the costs of investigating the incident, repairing or replacing damaged systems, restoring normal business operations, implementing increased cybersecurity protections, and paying increased insurance premiums.
We face potential liability related to the privacy of health information we obtain from clinical trials sponsored by us or our collaborators, from research institutions and our collaborators, and directly from individuals.
We and our partners and vendors are subject to various federal, state, and foreign data protection laws and regulations (i.e., laws and regulations that address data privacy and security). If we fail to comply with these laws and regulations, we may be subject to litigation, regulatory investigations, enforcement notices, enforcement actions, fines, and criminal or civil penalties, as well as negative publicity and a potential loss of business.
In the United States, numerous federal and state laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws and regulations that govern the collection, use, disclosure, and protection of health-related and other personal information could apply to our operations or the operations of our partners. For example, most healthcare providers, including research institutions from which we or our collaborators obtain patient health information, are subject to privacy and security regulations promulgated under HIPAA, as amended HITECH. Under HIPAA, we could potentially face substantial criminal or civil penalties if we knowingly receive individually identifiable health information from a HIPAA-covered healthcare provider or research institution that has not satisfied HIPAA’s requirements for disclosure of individually identifiable health information, or otherwise violate applicable HIPAA requirements related to the protection of such information. Even when HIPAA does not apply, failing to take appropriate steps to keep consumers’ personal information secure may constitute a violation of the Federal Trade Commission Act.
In addition, we may maintain sensitive personally identifiable information, including health information, that we receive throughout the clinical trial process, in the course of our research collaborations, and directly from individuals (or their healthcare providers) who enroll in our patient assistance programs. As such, we may be subject to state laws (for example, the CCPA and the California Privacy Rights Act) requiring notification of affected individuals and state regulators in the event of a breach of personal information.
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Our clinical trial programs and research collaborations outside the United States may implicate international data protection laws, including in Europe the GDPR. If our privacy or data security measures fail to comply with the GDPR requirements, we may be subject to litigation, regulatory investigations, enforcement notices, and/or enforcement actions requiring us to change the way we use personal data and/or fines. In addition to statutory enforcement, a personal data breach can lead to negative publicity and a potential loss of business. Further, following the United Kingdom’s withdrawal from the E.U. effective as of December 31, 2020, we have to comply with the GDPR and the GDPR as incorporated into United Kingdom national law, which may have differing requirements. If we fail to comply with United Kingdom data protection laws, we may be subject to litigation, regulatory investigations, enforcement notices, and/or enforcement actions, as well as negative publicity and a potential loss of business.
We are also subject to evolving EEA laws on data export, as we may transfer personal data from the EEA to other jurisdictions. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA to the United States. For example, on July 16, 2020, the CJEU invalidated the Privacy Shield, under which personal data could be transferred from the EEA to United States entities who had self-certified under the Privacy Shield scheme. Moreover, it is uncertain whether the standard contractual clauses will also be invalidated by the European courts or legislature.
As government authorities issue further guidance on personal data export mechanisms and/or start taking enforcement action, we could suffer additional costs, complaints, and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results. These laws and regulations may apply, not only to us, but also to vendors that store or otherwise process data on our behalf, such as information technology vendors. If such a vendor misuses data we have provided to it, or fails to safeguard such data, we may be subject to litigation, regulatory investigations, enforcement notices, and/or enforcement actions, as well as negative publicity and a potential loss of business.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors.
The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the factors described in this “Risk Factors” section and elsewhere in this Annual Report.
The Company has been out of compliance with three applicable rules with respect to its continued listing on The Nasdaq Stock Market, namely, Nasdaq Listing Rule 5450(b)(2)(A) (the “MVLS Rule”), Nasdaq Listing Rule 5450(a)(1) (the “Bid Price Rule”) and Nasdaq Listing Rule 5450(b)(2&3)(C) (the “MVPHS Rule”). As a result, the Listing Staff of The Nasdaq Stock Market LLC (“Nasdaq”) delivered notices of its determination that the Company’s Common Stock was subject to delisting from the Nasdaq Global Market tier of Nasdaq. Nasdaq granted the Company a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the delisting determination of the Nasdaq Listing Staff, which hearing was held on February 13, 2025, at which we presented our plan to regain compliance with all listing requirements. On March 3, 2025, the Panel granted our request to continue our listing on Nasdaq, subject to our demonstrating compliance with the Bid Price Rule on or before April 28, 2025 and our demonstrating compliance with all other Nasdaq Listing Rules on or before June 15, 2025. While the Company is exercising diligent efforts to maintain the listing of our Common Stock on Nasdaq, there can be no assurance that the Company will be able to regain or maintain compliance with the applicable Nasdaq Listing Rules. If the Company’s Common Stock were to be delisted from Nasdaq, it could have a material adverse effect on us and our stockholders.
In addition, the stock market in general, and Nasdaq, and biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Additionally, the trading prices for pharmaceutical, biopharmaceutical and biotechnology companies have been highly volatile. Also, broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.
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Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
As of December 31, 2024, our executive officers, directors and their respective affiliates beneficially owned approximately 40.6% of our outstanding voting stock (excluding any stock options exercisable within 60 days of such date held by such persons). Further, these stockholders invested $2.9 million in senior secured notes, which will be converted according to the Principal Terms agreed if approved by nonaffiliated stockholders at a Special Meeting of the Stockholders to be held on March 31, 2025. Therefore, these stockholders have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval, in matters where they are eligible to vote. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.
We are an emerging growth company as well as a “smaller reporting company”, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies or smaller reporting companies could make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including:
We will remain an emerging growth company until the earlier of:
Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter.
We cannot predict if investors will find our common stock less attractive if we choose to rely on any of the exemptions afforded to emerging growth companies or smaller reporting companies. If some investors find our common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these audited financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
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If we fail to maintain proper and effective internal controls over financial reporting, our ability to produce accurate and timely financial statements could be impaired.
Pursuant to Section 404 of the Sarbanes-Oxley Act, our management was required to report upon the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ending December 31, 2022. When we lose our status as an “emerging growth company” and a “smaller reporting company,” and become an “accelerated filer” or a “large accelerated filer,” our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we have implemented and will continue to implement additional financial and management controls, reporting systems and procedures and we have hired and intend to continue to hire additional accounting and finance staff.
We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations, or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC, or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the market price of our common stock.
Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay, or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions, among other things:
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As a Delaware corporation, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in a business combination specified in the statute with an interested stockholder (as defined in the statute) for a period of three years after the date of the transaction in which the person first becomes an interested stockholder, unless the business combination is approved in advance by a majority of the independent directors or by the holders of at least two-thirds of the outstanding disinterested shares. The application of Section 203 of the Delaware General Corporation Law could also have the effect of delaying or preventing a change of control of our company.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation, provides that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum, to the fullest extent permitted by law, for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a breach of a fiduciary duty owed by any director, officer or other employee to us or our stockholders, (3) any action asserting a claim against us or any director, officer, or other employee arising pursuant to the Delaware General Corporation Law, (4) any action to interpret, apply, enforce, or determine the validity of our amended and restated certificate of incorporation or amended and restated bylaws, or (5) any other action asserting a claim that is governed by the internal affairs doctrine, shall be the Court of Chancery of the State of Delaware (or another state court or the federal court located within the State of Delaware if the Court of Chancery does not have or declines to accept jurisdiction), in all cases subject to the court’s having jurisdiction over indispensable parties named as defendants. In addition, our amended and restated certificate of incorporation provides that the federal district courts of the United States is the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act but that the forum selection provision will not apply to claims brought to enforce a duty or liability created by the Exchange Act. Although we believe these provisions benefit us by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, the provisions may have the effect of discouraging lawsuits against us or our directors and officers. These provisions may limit an investor’s ability to bring a claim in a judicial forum that it finds favorable for disputes with our company, including by increasing the cost of such lawsuits, which may discourage such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, financial condition, and operating results. For example, under the Securities Act, federal courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in our shares of capital stock shall be deemed to have notice of and consented to this exclusive forum provision, but will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder, or maintain profitability.
General Risk Factors
Unfavorable global economic conditions could adversely affect our business, financial condition, stock price and results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. Our operations and the global economy have been impacted by increasing interest rates and inflation. Likewise, the capital and credit markets may be adversely affected by the war in the Middle East, conflict between Russia and Ukraine, and the possibility of a wider European, Middle Eastern, or global conflict, global sanctions imposed in response thereto, or an energy crisis. A severe or prolonged economic downturn, such as the global financial crisis, could result in a variety of risks to our business, including a decrease in the demand for our product candidates and in our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy also could strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. We cannot anticipate all of the ways in which the foregoing, and the current economic climate and financial market conditions generally, could adversely impact our business. Furthermore, our stock price may decline due in part to the volatility of the stock market and any general economic downturn.
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Our money market or other investments or bank deposits may be subject to market, interest and credit risk that may reduce in value.
The value of our investments may decline due to increases in interest rates, downgrades of the bonds and other securities included in our money market or other investments and instability in the global financial markets that reduces the liquidity of securities included in our portfolio. In addition, we are aware of the closure of Silicon Valley Bank and appointment of the Federal Deposit Insurance Corporation as receiver. Furthermore, a possible recession, rising inflation, and the lingering effects of the COVID-19 pandemic has and may continue to adversely affect the financial markets in some or all countries worldwide. Each of these events may cause us to record charges to reduce the carrying value of our money market or other investments or sell investments for less than our acquisition cost. Although we attempt to mitigate these risks through diversification of our investments and continuous monitoring of our portfolio’s overall risk profile, the value of our investments may nevertheless decline.
Our future growth and ability to compete depends on retaining our key personnel and recruiting additional qualified personnel.
Our success depends upon the continued contributions of our key management, scientific, and technical personnel, many of whom have been instrumental for us and have substantial experience with our product candidates and related technology. The loss of key managers and senior scientists could delay our research and development activities. Despite our efforts to retain valuable employees, members of our management, scientific, and development teams may terminate their employment with us on short notice. Although we have employment agreements with certain of our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. In addition, the competition for qualified personnel in the biotechnology and pharmaceutical industries is intense, and our future success depends upon our ability to attract, retain, and motivate highly-skilled scientific, technical, and managerial employees. We face competition for personnel from other companies, universities, public and private research institutions, and other organizations. If our recruitment and retention efforts are unsuccessful in the future, it may be difficult for us to implement our business strategy, which could have a material adverse effect on our business.
Item 1B Unresolved Staff Comments.
None.
Item 1C Cybersecurity.
Risk Management
We recognize the importance of assessing, identifying, and managing material risks associated with cybersecurity threats, as such term is defined in Item 106(a) of Regulation S-K. These risks include, among other things, operational risks; intellectual property theft; fraud; extortion; harm to employees or customers; violation of privacy or security laws and other litigation and legal risk; and reputational risks.
We also maintain an incident response plan to coordinate the activities we take to protect against, detect, respond to and remediate cybersecurity incidents, as such term is defined in Item 106(a) of Regulation S-K, as well as to comply with potentially applicable legal obligations and mitigate brand and reputational damage. As of the reporting date, the Company updated and published other cybersecurity policies and procedures for access control, including remote access; business continuity; information security related to governance, managing and planning; risk management; and vendor risk and management, which leverages and coordinates with procedures in place for the accounting payable process.
We have established physical, electronic, and organizational measures to safeguard and secure our systems to prevent a data compromise. These approaches vary in maturity across our business and we work to continually improve them.
Our approach includes, among other things:
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Our process for identifying and assessing material risks from cybersecurity threats operates alongside our broader overall risk assessment process, covering all Company risks. As part of this process, appropriate HCWB personnel collaborate with subject matter specialists, as necessary, to gather insights for identifying and assessing material cybersecurity threat risks, their severity, and potential mitigation. A key element of managing cybersecurity risk is the ongoing assessment and testing of our processes and practices through auditing, assessments, drills and other exercises focused on evaluating the sufficiency and effectiveness of our risk mitigation. We engage third parties to perform assessments of our cybersecurity measures, including information security maturity assessments and independent reviews of our information security control environment and operating effectiveness. Certain results of such assessments and reviews are reported by the key members of management, the and the board of directors, as appropriate.
Our policy is to conduct an annual cybersecurity assessment and make adjustments to our cybersecurity processes and practices as necessary based on the information provided by the third-party assessments and reviews. For the year ended December 31, 2024, the findings of our annual cybersecurity assessment indicated that HCW Biologics has implemented several key security measures, including documented policies, data encryption, unique user identifiers, DNS filtering, and anti-malware tools. We are in the proactive range for compliance with SEC cybersecurity guidelines, that is, we can address common attacks and current threats.
For the year ending December 31, 2025, the Company has launched projects to improve our controls, particularly for logging and monitoring and vulnerability assessments. We currently leverage an AI-driven endpoint threat detection and prevention system. To strengthen our cybersecurity posture, we intend to implement a Security Information and Event Management (SIEM) solution that will aggregate and analyze logs from all critical infrastructure, including network, cloud, and endpoint security platforms. We also intend to expand our vulnerability management process to ensure regular assessments of public-facing systems and network devices. We are currently conducting a data migration project is expected to enhance the Company’s security posture and resilience against potential threats, in compliance with SEC guidelines.
For the year ended December 31, 2024, we are not aware of any cybersecurity incidents that have materially affected or are reasonably likely to materially affect the Company, including our business strategy, results of operations, or financial condition. We describe whether and how risks from identified cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition, under the heading “Risks Related to Data Privacy and Cybersecurity” included as part of our risk factor disclosures at Item 1A of this Annual Report, which disclosures are incorporated by reference herein.
To date, we have not experienced a material cybersecurity incident and the expenses we have incurred from cybersecurity incidents were immaterial. This includes penalties and settlements, of which there were none.
Governance
Cybersecurity is an important part of our risk management processes and an area of increasing focus for our Board and management.
Our Audit Committee of our Board of Directors is responsible for the oversight of risks from cybersecurity threats. At least annually, the Audit Committee receives an overview from management of our cybersecurity threat risk management and strategy processes covering topics such as data security posture, results from third-party assessments, progress towards pre-determined risk-mitigation-related goals, our incident response plan, and material cybersecurity threat risks or incidents and developments, as well as the steps management has taken to respond to such risks.
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In such sessions, the Audit Committee generally receives materials including a cybersecurity scorecard and other materials indicating current and emerging cybersecurity threat risks, and describing our ability to mitigate those risks, and discusses such matters with our Operations Administrator, who is supported by Compass MSP, a leading provider of technology managed services. Members of the Audit Committee are also encouraged to regularly engage in ad hoc conversations with management on cybersecurity-related news events and discuss any updates to our cybersecurity risk management and strategy programs. Material cybersecurity threat risks may also be considered during separate Board meeting discussions.
Our cybersecurity risk management and strategy processes, which are discussed in greater detail above, are led by our Chief Executive Officer, who has founded and led several biotech companies for over 20 years, all of which have implemented systems and processes to protect sensitive clinical data and patient information. He is supported by our IT consultant, Compass MSP, a leading provider of technology managed services. Our consultant conducts a vulnerability assessment annually and tests our backup and recovery systems frequently.
These members of management are informed about and monitor the prevention, mitigation, detection, and remediation of cybersecurity incidents through their management of, and participation in, the cybersecurity risk management and strategy processes described above, including the operation of our incident response plan. If a cybersecurity incident is determined to be a material cybersecurity incident, our incident response plan and cybersecurity disclosure controls and procedures define the process to disclose such a material cybersecurity incident.
Item 2 Properties.
On August 15, 2022, we purchased a 36,000 square foot building located in Miramar, Florida, as our new headquarters. We intend to use the new facility for research and development laboratories and facilities for manufacturing, as well as offices for our employees, including clinical development, research, development, quality control, quality assurance, regulatory affairs, and administration. We have been in the process of refitting the building for our purposes. Our relocation to the new headquarters is anticipated in the mid-2026. We expect our cGMP manufacturing facility to be validated and operational by the end of 2026. We continue to occupy approximately 12,250 square feet of space in Miramar, Florida and currently lease this space under the terms of a lease that commenced on March 1, 2025 and terminates on February 28, 2026. Given our long relationship with the landlord of our leased location, we believe we will be able to negotiate an extension our lease, if required. We believe our existing location is sufficient to meet our current and near-term needs.
Item 3 Legal Proceedings.
From time to time, the Company is a party to or otherwise involved in legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. Such proceedings can be costly, time consuming, and unpredictable. Therefore, no assurance can be given on the outcome of any proceeding or the potential impact on our results of operations or financial condition.
During the period ended December 31, 2022, Altor/NantCell initiated legal proceedings against Dr. Wong and the Company. On April 26, 2023, the parties stipulated that Altor/NantCell’s action against the Company would be consolidated with the Altor/NantCell Arbitration demand against Dr. Wong. On April 27, 2023, the U.S. District Court for the Southern District of Florida (the “Court”) with jurisdiction over the lawsuit against the Company approved the parties’ stipulation and ordered the parties to Arbitration. On May 1, 2023, Altor/NantCell filed a demand against the Company before JAMS. On May 3, 2023, Altor/NantCell dismissed the federal court action without prejudice and the Court ordered the case dismissed without prejudice and closed the case. Proceedings against the Company and Dr. Wong were consolidated in the Arbitration before JAMS. The Arbitration hearing was held from May 20, 2024 to May 31, 2024, after which the parties entered into settlement negotiations.
As reported in the Company’s Form 8-K filed on July 18, 2024 and further described in Part I, Item 3. – “Legal Proceedings” below, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with Altor BioScience, LLC (“Altor”), NantCell, Inc. (“NantCell”), and ImmunityBio, Inc. (the parent of Altor and NantCell, together with Altor and NantCell, “ImmunityBio”), to resolve the previously disclosed Arbitration before JAMS brought by Altor and NantCell (the “Arbitration”) as well as a complaint Altor filed against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong (“Complaint”). The Settlement Agreement includes mutual general releases by and among the parties thereto. No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in connection with the matter. In accordance with the provisions of the Settlement Agreement, upon completion of remedial procedures, the parties stipulated that the Arbitration and Complaint should be dismissed.
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The Arbitration and related Complaint were dismissed with prejudice on or about December 24, 2024.
Pursuant to the Settlement Agreement, the Company transferred and assigned to ImmunityBio ownership of certain intellectual property (including issued patents, pending patent applications, and know-how) for TOBITM-based molecules. The Company retains the worldwide, perpetual, irrevocable, fully paid-up, royalty-free, exclusive right and license to exploit HCW9218 for all age-related diseases other than cancer. The Company also retains the right to develop treatments for all indications with respect to HCW9302 and HCW9206, which, along with HCW9218, are the lead product candidates in the Company’s clinical development pipeline. ImmunityBio has the exclusive right to pursue oncology indications with all of the TOBITM-based molecules designed with a TGF-β domain, including HCW9218. Under the Settlement Agreement ImmunityBio also receives an exclusive license to exploit fusion proteins, molecules and/or antibodies created utilizing the TOBITM Platform directed to the receptors of PDL-1, IL-7, IL-12, IL-18, IL-15, and IL-21 in the oncology field. The Company’s ownership and rights with respect to HCW9302, HCW9206 and HCW9201 are expressly excluded from the rights transferred to ImmunityBio for oncology indications. In addition, ImmunityBio received a non-exclusive license to exploit HCW9201 administered by injection for oncology indications.
The Company retains ownership and control of the TOBITM platform and TOBI-based molecules, with no restrictions under the Settlement Agreement on our ability to use the TOBITM platform for protein-fusion molecules for non-oncology indications. We have rights to pursue oncology indications, in particular using HCW9302, HCW9206 and HCW9201. Further, the Company retains ownership of the Wugen license and shares of Wugen common stock transferred to the Company as the upfront licensing fee from Wugen for granting the Wugen license. For our molecule, HCW9218, we maintain the exclusive rights for clinical development and use of HCW9218 in the treatment of all non-oncological diseases. We retain ownership of our lead molecule, HCW9302, which expands Treg cells and is designed to treat autoimmune diseases and other proinflammatory diseases, including cancer, and the ownership of HCW9206, a preclinical molecule which we are developing for the treatment of cancer and other age-related diseases. The Company agreed to provide ImmunityBio with a right of first refusal to enter a licensing agreement for oncology indications for HCW9206. We have no restrictions on the development of HCW9206 for our own clinical development activities, including oncology indications. Under the terms of the Settlement Agreement, ImmunityBio will own the cell line and supply for HCW9218, and the parties agreed that within six months from the date of the Settlement Agreement they will enter into a supply agreement providing the Company with a continuing supply of HCW9218 molecules. The Company also retains in vivo rights to HCW9201, a combination of IL-12, IL-15, and IL-18 in a single protein complex which is designed to stimulate activation and proliferation signals in human NK cells. The Company retains ownership of the cell lines for HCW9302, HCW9206 and HCW9201, and thus will retain independent control over manufacturing and supply for these compounds.
Item 4 Mine Safety Disclosures.
Not applicable.
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders of our Common Stock
Our common stock is currently traded on The Nasdaq Global Select Market under the symbol “HCWB”. As of March 25, 2025, 44,557,853 shares of the Company’s common stock were issued and outstanding and were owned by approximately 3,300 holders of record. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Dividend Policy
We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, future debt instruments may materially restrict our ability to pay dividends on our common stock. Payment of future cash dividends, if any, will be at the discretion of the Board after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the Board deems relevant.
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Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On November 18, 2024, the Company entered into a securities purchase agreement (“SPA”) with a single institutional investor pursuant to which the Company agreed to offer and sell (i) in a registered direct offering (the “Registered Offering”) (x) 4,160,000 shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), and (y) pre-funded warrants to purchase up to 2,557,000 shares of common stock (the “Pre-Funded Warrants”) and (ii) in a concurrent private placement (the “Private Placement” and together with the Registered Offering, the “Offering”), unregistered warrants to purchase up to an aggregate of 6,717,000 shares of Common Stock (“Common Stock Warrants”). The combined purchase price for each Share and accompanying Common Stock Warrant to purchase one share of common stock is $1.03 per Share and the combined purchase price for each Pre-Funded Warrant and accompany Common Stock Warrant to purchase one share of common stock is $1.0299.
The Common Stock and Pre-Funded Warrants were each sold with an accompanying Common Stock Warrant to purchase one share of common stock, and the Common Stock and Pre-Funded Warrants are immediately separated from the Common Stock Warrants and will be issued separately. The Common Stock Warrants have an exercise price of $1.03 per share, will be exercisable immediately, and expire on the five year anniversary of the date of issuance. The Pre-Funded Warrants have an exercise price of $0.0001, are exercisable immediately and will not expire until exercised in full.
The shares of Common Stock and Pre-Funded Warrants in the Registered Offering were offered pursuant to a shelf registration statement on Form S-3 (File No. 333-266991), which was declared effective by the SEC on August 26, 2022. The Registered Offering has been made by means of a prospectus supplement filed with the SEC on November 20, 2024 that forms a part of such registration statement.
The gross proceeds to the Company from the Offering were approximately $6.9 million before deducting the placement agent’s fees and other offering expenses payable by the Company. The Offering closed on November 20, 2024.
On November 18, 2024, the Company entered into a placement agency agreement (the “Placement Agency Agreement”) with Maxim Group LLC (“Maxim” or the “Placement Agent) pursuant to which the Company engaged the Placement Agent as the exclusive placement agent in connection with the Offering. The Company agreed to pay the Placement Agent a cash fee equal to 7.0% of gross proceeds from the sale of Shares, Pre-Funded Warrants and Common Stock Warrants to the Purchaser. The Company also agreed to reimburse the Placement Agent for out-of-pocket expenses, including the reasonable legal fees of its counsel not to exceed $50,000. The Placement Agent Agreement also contains representations, warranties, indemnification and other provisions customary for transactions of this nature.
The foregoing descriptions of the Placement Agency Agreement, SPA, Common Stock Warrant and Pre-Funded Warrant filed as Exhibits 10.29, 10.30, 10.31 and 10.32, respectively to this Annual Report on Form 10-K do not purport to be complete and are qualified in their entirety by the full text of each respective document.
Unregistered Sales of Equity Securities
In addition, on November 18, 2024 in conjunction with the transaction described above, the Common Stock Warrants were offered and sold by the Company in a transaction not involving a public offering exclusively to accredited investor under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder and, along with the shares of Common Stock that underlie such Common Stock Warrants, have not been registered under the Securities Act or applicable state securities law. Accordingly, the unregistered Warrants and the underlying shares of Common Stock may not be reoffered or resold in the United States except pursuant to an effective registration statement or an applicable exemption from the registration requirements of the Securities Act and such applicable state securities laws.
On February 20, 2024, we entered into subscription agreements (the “Subscription Agreements”) with certain officers and directors of the Company, including our Founder and Chief Executive Officer, our Chief Financial Officer and the Chairman of the Company’s Board of Directors, pursuant to which the Company sold an aggregate of 1,785,718 shares of our Common Stock, at a purchase price of $1.40 per share for an aggregate purchase price of $2.5 million. The per share purchase price represents a 25% premium to the per share closing price of the Common Stock as reported on the Nasdaq Global Market on the February 20, 2024 and a 19% premium to the 5-day volume weighted average closing price per share of the Common Stock as reported on the Nasdaq Global Market for the period ending on the February 20, 2024.
The shares of Common Stock issued pursuant to the Subscription Agreements were not registered under the Securities Act of 1933, as amended, in reliance upon exemptions under Section 4(a)(2) of the Securities Act of 1933, as amended.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6 [Reserved].
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Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes thereto included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions, which are based on the beliefs of our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Annual Report.
Company Overview
HCW Biologics Inc. (“HCWB” or the “Company”) is a clinical-stage biopharmaceutical company developing proprietary immunotherapies to treat diseases promoted by chronic inflammation, especially age-related and senescence-associated diseases. Our immunotherapeutics represent a new class of drug that we believe has the potential to fundamentally change the treatment of cancer and many other diseases and conditions that are promoted by chronic inflammation — and in doing so, improve patients’ quality of life and possibly extend longevity.
2024 was a pivot point for us. In July 2024, we entered a settlement and general release agreement (“Settlement Agreement”) resolving a long-running arbitration proceeding brought against the Company and Dr. Hing C. Wong, our Founder and Chief Executive Officer, by Altor BioScience, LLC, NantCell, Inc. and ImmunityBio, Inc. (collectively herein, “ImmunityBio”). With the Settlement Agreement, we closed the chapter on an approximately 18-month period during which our clinical development, business development and capital-raising activities were placed substantially on “hold,” awaiting resolution of claims made against us and Dr. Wong by ImmunityBio. See Part I, Item 3. - “Legal Proceedings.” The Settlement Agreement related to the Company’s TOBI Molecules, including HCW9218 and HCW9302, our lead product candidates, among others.
The Company retains all rights to develop and commercialize HCW9302, our clinical-stage, lead product candidate for our autoimmune and proinflammatory disease program. In addition, we hold exclusive rights to develop and commercialize HCW9218 in non-oncology indications, as well as HCW9206 and HCW9201 in all indications. The Settlement Agreement had no impact on our exclusive worldwide license agreement with Wugen Inc. (“Wugen License”). We entered the Wugen License in 2020, granting Wugen Inc. (“Wugen”) limited rights to develop cell-based immunotherapeutic treatments for cancer indications using HCW9206 and HCW9201. WU-NK-101, the Wugen product developed using the licensed molecules, is now being evaluated in a Phase 2 clinical study in solid tumors. ImmunityBio controls the supply of HCW9218, and one of the critical components of continuing our development of HCW9218 is successfully obtaining a supply agreement with ImmunityBio.
In the fourth quarter of 2024, we revealed a new drug discovery and development platform, with a novel scaffolding or “backbone” of proteins called T-cell Receptor β Chain constant region (“TRBC”). The TRBC platform leverages our in-depth knowledge of T cell and natural killer (“NK”) cell immunology. We have developed molecules in each of these classes for treatments of hematologic and solid tumors, virally infected cells, and cellular senescence diseases associated with aging. TRBC Molecules are grouped into three classes, based on their utilities: Class I: Multi-Functional Immune Cell Stimulators; Class II: Second-Generation Immune Checkpoint Inhibitors and Multi-Specific Targeting Fusions; and Class III: Enhanced Immune Cell Engagers. The Company is making an efficacy assessment using relevant animal models, by the end of 2025, results of these studies are expected to show the optimal construction for lead product candidates(s).
With clarity on ownership of intellectual property, the Company reassessed its clinical development pipeline and the future direction of our Company. Our expertise is in immunotherapeutic treatments and our clinical development pipeline will remain so. Our focus continues to be to develop protein-based immunotherapies that are administered by subcutaneous injection. We remain focused on diseases promoted by chronic inflammation driven by senescence, including cancer, especially age-related diseases. The diseases we will target will have no curative FDA approved treatments. Finally, we have selected programs that include life-threatening diseases, such as pancreatic and ovarian cancer, as well as “quality-of-life” indications, such as alopecia areata and senile lentigo. HCW9302 will remain one of our lead product candidates. Future drug discovery and new drug development will be based on TRBC Molecules. There are several potential candidates in each class of TRBC Molecules from which the Company will select lead molecules for each program. Part of this selection will be to determine which TRBC molecules will be developed in-house and which are more appropriate to develop through business development transactions, such as out-licensing agreements.
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Business Highlights
Business Development Transaction
On November 17, 2024, the Company entered an exclusive worldwide license agreement with WY Biotech Co., Ltd. (“WY Biotech”), a China-based company specializing in the early-stage development of recombinant protein drugs and gene/cell therapies, to develop and commercialize HCW11-006, one of the Company’s product candidates generated with our TRBC drug discovery platform, for therapeutic use (the “WY License Agreement”). Key terms of the WY License Agreement include that WY Biotech has agreed to pay HCWB $7.0 million in an upfront payment.
As the Company disclosed in the Form 8-K filed on March 19, 2025, the Company and WY Biotech agreed to amend the WY Biotech License Agreement due to a delay in WY Biotech coming to a definitive agreement with their designated contract development and manufacturing organization (“CDMO”). Specifically, in order to accommodate the delay, the parties agreed to restructure the payment schedule for the $7.0 million upfront license fees, including delaying the initial $4.0 million portion thereof that was originally due on or about March 17, 2025, to reduce the performance milestones that the Company must complete in order to earn the full $7.0 million nonrefundable upfront payment in June 2025, and to provide that either party may terminate the Agreement if WY Biotech is not able to definitively engage its CDMO by June 2025. Under the amended terms, the Company expects to fulfill our performance obligations and earn the full $7.0 million upfront fee in June 2025. There were no other material changes to the WY Biotech License Agreement, which involves the grant to WY Biotech of an exclusive, world-wide license to use and apply HCW11-006 for in vivo applications. See Exhibits 10.27 and 10.28 to this Annual Report on Form 10-K.
The Company has now completed extensive preclinical studies that further support our belief in the potential for HCW11-006 for both an in vivo and ex vivo therapy. The in vivo therapy is licensed by WY Biotech, however, the Company retained all rights to the ex vivo therapy and applications as a reagent in cell-based therapy treatments, including cell-based therapies, such as CAR-T therapies. The Company considers WY Biotech License provisions for the Opt-In Right to take over the development of HCW11-006 for the Americas markets to be an important feature of the WY Biotech License. We believe our right to recapture this market is a potentially high value opportunity. Further, we will be able to base our decision to opt-in on the human-data read-out from a Phase 1 clinical trial, which will mitigate our development risks and provide valuable clinical information about the potential for the indications we will use for Phase 2 clinical studies. See Part I, “Business —Out-License Programs.”
The Company has identified the Class III TRBC Molecules, Immune Cell Engagers, as the next program for out-licensing. In light of recent transactions coupled with the challenges of clinical development, we plan to take advantage of industry interest in this breakthrough drug. The Company continually assesses our portfolio of molecules in order to identify potential business development opportunities.
Financing
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Compliance with Nasdaq Listing Rules
Clinical Development
Trends and Uncertainties
Inflationary Cost Environment, Banking Crisis, Supply Chain Disruption and the Macroeconomic Environment
Our operations have been affected by many headwinds, including inflationary pressures, rising interest rates, ongoing global supply chain disruptions resulting from increased geopolitical tensions such as the war between Russia and Ukraine, the war in the Middle East, China-Taiwan relations, financial market volatility and currency movements. These headwinds, specifically the supply chain disruptions, have adversely impacted our ability to procure certain services and materials, which in some cases impacts the cost and timing of clinical trials and IND-enabling activities. In addition, we have been impacted by inflation when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Further, rising interest rates would also increase borrowing costs to the extent that the Company takes on any additional debt. The Company uses a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines. However, the extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable.
For discussion of risks related to potential impacts of supply chain, inflation, geopolitical and macroeconomic challenges on our operations, business results and financial condition, see Item 1A. “Risk Factors” in this Annual Report.
Components of Results of Operations
Revenues
We have no products approved for commercial sale and have not generated any revenue from commercial product sales of internally-developed immunotherapeutic products for the treatment of cancer and other age-related diseases. The principal source of our revenues to date have been generated from worldwide exclusive licenses for rights to develop and commercialize some of our proprietary molecules. See Note 1 to our audited financial statements included elsewhere in this Annual Report for more information.
Wugen License
We derive revenue from a license agreement granting rights to Wugen to further develop and commercialize products based on two of our internally-developed molecules. Consideration under our contract included a nonrefundable upfront payment, development, regulatory and commercial milestones, and royalties based on net sales of approved products. Additionally, HCW Biologics retained manufacturing rights and has agreed to provide Wugen with clinical and research grade materials for clinical development and commercialization of licensed products under separate agreements.
We assessed which activities in the Wugen License should be considered distinct performance obligations that should be accounted for separately. We develop assumptions that require judgement to determine whether the license to our intellectual property is distinct from the research and development services or participation in activities under the Wugen License.
82
Performance obligations relating to the granting a license and delivery of licensed product and R&D know-how were satisfied when transferred upon the execution of the Wugen License on December 24, 2020. The Company recognized revenue for the related consideration at a point in time. The revenue recognized from a transaction to supply clinical and research grade materials entered into under the MSA and covered by a Statement of Work, represents one performance obligation that is satisfied over time. The Company recognizes revenue generated for supply of material for clinical development using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company’s progress toward completion.
WY Biotech License
We expect to derive revenue from a license agreement granting rights to WY Biotech to further develop and commercialize products based on one of our internally-developed molecules. Consideration under our contract included a nonrefundable upfront payment, development, regulatory and commercial milestones, and royalties based on net sales of approved products.
We assessed which activities in the WY Biotech License, as amended, should be considered distinct performance obligations that should be accounted for separately. We concluded that there is one performance obligation relating to the granting of a license and delivery of the Technology Transfer Report for certification of the licensed molecule required to develop the preclinical licensed molecule. Therefore, the Company will not recognize revenue until the Technology Transfer Report is delivered for certification of the licensed molecule, which we anticipate will take place in the second quarter of 2025.
Operating Expenses
Our operating expenses are reported as research and development expenses and general and administrative expenses.
Research and Development
Our research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
We expense research and development costs as they are incurred. Costs for contract manufacturing are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the agreement, and the pattern of payments for goods and services will change depending on the material. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed.
We expect research and development expenses to increase substantially for the foreseeable future as we continue the development of our product candidates. We cannot reasonably determine the nature, timing, and costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. Product candidates in later stages of development generally have higher development costs than those in earlier stages. See “Risk Factors -- Risks Related to the Development and Clinical Testing of Our Product Candidates,” elsewhere in this Annual Report for a discussion of some of the risks and uncertainties associated with the development and commercialization of our product candidates. Any changes in the outcome of any of these risks and uncertainties with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.
83
General and administrative expenses consist primarily of employee-related expenses, including salaries, related benefits, and stock-based compensation expense for employees in the executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include third-party costs such as insurance costs, fees for professional services, such as legal fees in the ordinary course of business, auditing and tax services, facilities administrative costs, and other expenses.
We expect general and administrative expenses incurred in the normal course of business for other purposes, such as costs for recruitment and retention of personnel, service fees for consultants, advisors and accountants, as well as costs to comply with government regulations, corporate governance, internal control over financial reporting, insurance and other requirements for a public company, to continue to increase for the foreseeable future as we build our clinical programs.
Legal Expenses
Legal expenses consist of fees incurred by the Company in its own defense and that of officers and employees in connection with a legal matter brought against the Company and Dr. Hing C. Wong, our Founder and Chief Executive Officer, by a former employer of Dr. Wong.
During the period ended December 31, 2022, Altor/NantCell initiated legal proceedings against Dr. Wong and the Company. On April 26, 2023, the parties stipulated that Altor/NantCell’s action against the Company would be consolidated with the Altor/NantCell arbitration demand against Dr. Wong. On April 27, 2023, the U.S. District Court for the Southern District of Florida (the “Court”) with jurisdiction over the lawsuit against the Company approved the parties’ stipulation and ordered the parties to arbitration. On May 1, 2023, Altor/NantCell filed a demand against the Company before JAMS. On May 3, 2023, Altor/NantCell dismissed the federal court action without prejudice and the Court ordered the case dismissed without prejudice and closed the case. Proceedings against the Company and Dr. Wong were consolidated in the arbitration before JAMS (the “Arbitration”). On March 26, 2024, Altor/NantCell filed a complaint (the “Complaint”) against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong. The Arbitration hearing was held on May 20, 2024 to May 31, 2024, after which the parties entered into settlement negotiations.
As reported in the Company’s Form 8-K filed on July 18, 2024 and further described in Part I, Item 3. – “Legal Proceedings” below, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with Altor BioScience, LLC (“Altor”), NantCell, Inc. (“NantCell”), and ImmunityBio, Inc. (the parent of Altor and NantCell, together with Altor and NantCell, “ImmunityBio”), to resolve the previously disclosed Arbitration before JAMS brought by Altor and NantCell as well as a Complaint Altor filed against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong. The Settlement Agreement includes mutual general releases by and among the parties thereto. No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in connection with the matter. In accordance with the provisions of the Settlement Agreement, upon completion of these procedures, the parties mutually stipulated that the Arbitration and Complaint should be dismissed. The Arbitration and related Complaint were dismissed on or about December 24, 2024.
Reserve for Credit Losses and Other Expenses
The Company recognized a Reserve for credit losses of $5.3 million, reflecting our conclusion that it was not probable that we would recover the interest reserve deposit established upon entering the credit agreement with Prime Capital Ventures (the “Lender”) based on facts known as of December 31, 2023. As reported in the Company’s Form 8-K filed on January 12, 2024, on January 10, 2024, the Company exercised its right to terminate its credit agreement, dated April 21, 2023, with the Lender, as permitted under the terms of the credit agreement. Subsequently, the Lender defaulted on its obligation to return the interest reserve deposit. The Company entered the credit agreement to obtain financing for the purpose of building its proposed manufacturing facility and upgrading its research and laboratory facilities at a property the Company owns in Miramar, Florida.
As reported in the Company’s Form 8-K filed on May 1, 2024 with the SEC, the Company became aware that it was the victim of a criminal scheme involving the impersonation of a purchaser upon the default on a legally binding commitment to purchase $8.0 million of secured notes from the Company. The scheme resulted in the misdirection of approximately $1.3 million held in Company accounts to a fraudulent account controlled by a third party. The Company is pursuing all available remedies to recover this loss. Given the limited success that these efforts have had to date for the recovery of funds, the Company recognized a loss of $1.3 million in the year ended December 31, 2024.
84
Interest Expense
Interest expense includes interest paid on debt. This includes interest due on the Cogent Bank loan and Senior Notes issued by the Company.
Other Income, Net
Other income, net consists of interest earned on our cash, cash equivalents, unrealized gains and losses related to our investments in U.S. government-backed securities, and other income and expenses related to non-operating activities.
Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2023 and 2024:
|
|
Years Ended |
|
|
|||||
|
|
2023 |
|
|
2024 |
|
|
||
Revenues: |
|
|
|
|
|
|
|
||
Revenues |
|
$ |
2,841,794 |
|
|
$ |
2,566,792 |
|
|
Cost of revenues |
|
|
(2,281,434 |
) |
|
|
(1,607,389 |
) |
|
Net revenues |
|
|
560,360 |
|
|
|
959,403 |
|
|
|
|
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
|
||
Research and development |
|
|
7,676,316 |
|
|
|
6,388,994 |
|
|
General and administrative |
|
|
6,779,515 |
|
|
|
6,839,596 |
|
|
Legal expenses |
|
|
6,571,689 |
|
|
|
15,910,480 |
|
|
Reserve for credit losses and other expenses |
|
|
5,250,000 |
|
|
|
1,300,000 |
|
|
Total operating expenses |
|
|
26,277,520 |
|
|
|
30,439,070 |
|
|
Loss from operations |
|
|
(25,717,160 |
) |
|
|
(29,479,667 |
) |
|
Interest expense |
|
|
(283,042 |
) |
|
|
(631,137 |
) |
|
Other income, net |
|
|
1,005,925 |
|
|
|
86,990 |
|
|
Net loss |
|
$ |
(24,994,277 |
) |
|
$ |
(30,023,814 |
) |
|
Revenue
In the year ended December 31, 2023, we recognized $2.8 million of revenue and cost of revenues of $2.3 million. Revenues were derived exclusively from the sale of licensed molecules to Wugen. There were no deferred revenues as of December 31, 2023.
In the year ended December 31, 2024, we recognized $2.6 million of revenue and cost of revenues of $1.6 million. Revenues were derived exclusively from the sale of licensed molecules to Wugen. There is currently one ongoing Phase 1 clinical study evaluating WU-NK-101, the Wugen product candidate created using the licensed molecules, in solid tumors. There were no deferred revenues as of December 31, 2024.
Research and Development Expenses
The following table summarizes our research and development expenses for the years ended December 31, 2023 and 2024:
|
|
Years Ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2024 |
|
|
$ Change |
|
|
% Change |
|
||||
Salaries, benefits and related expenses |
|
$ |
2,940,979 |
|
|
|
2,797,370 |
|
|
$ |
(143,609 |
) |
|
|
(5 |
)% |
Manufacturing and materials |
|
|
1,280,351 |
|
|
|
1,425,734 |
|
|
|
145,383 |
|
|
|
11 |
% |
Preclinical expenses |
|
|
1,607,601 |
|
|
|
859,701 |
|
|
|
(747,900 |
) |
|
|
(47 |
)% |
Clinical trials |
|
|
1,059,731 |
|
|
|
558,215 |
|
|
|
(501,516 |
) |
|
|
(47 |
)% |
Other expenses |
|
|
787,654 |
|
|
|
747,974 |
|
|
|
(39,680 |
) |
|
|
(5 |
)% |
Total research and development expenses |
|
$ |
7,676,316 |
|
|
$ |
6,388,994 |
|
|
$ |
(1,287,322 |
) |
|
|
(17 |
)% |
85
Research and development expenses decreased by $1.3 million, or 17%, from $7.7 million for the year ended December 31, 2023 to $6.4 million for the year ended December 31, 2024. This decrease was primarily attributable to decreased expenses from preclinical and clinical activities.
Salaries, benefits and related expenses decreased by $143,609, or 5%, from $2.9 million for the year ended December 31, 2023 to $2.8 million for the year ended December 31, 2024. This decrease was primarily attributable to decreases of $43,850 in salaries and related taxes, $52,383 in the cost of benefits and $42,621 in performance-based bonuses. The Company had a staff reduction in May 2024, and continues to operate with the reduced headcount.
Manufacturing and materials expenses increased by $145,383, or 11%, from $1.3 million for the year ended December 31, 2023 to $1.4 million for the year ended December 31, 2024. For the year ended December 31, 2023, the costs we incurred were primarily for production activities associated with the master cell bank characterization for the high-expressing version of HCW9101, which is used in the manufacturing process for all TOBI-based molecules, including those licensed to Wugen. For the year ended December 31, 2024, costs were primarily attributable to the production of HCW9101.
Expenses associated with preclinical activities decreased by $747,900, or 47%, from $1.6 million for the year ended December 31, 2023 to $859,701 for the year ended December 31, 2024. This decrease was primarily attributable to a decline in costs for completing toxicology studies related to IND-enabling activities for HCW9302. In the year ended December 31, 2023, toxicology and other IND-enabling studies were winding down, and we began the process of preparing the IND for submission. In the year ended December 31, 2024, the Company submitted the IND to obtain clearance from the FDA to evaluate HCW9302 in a Phase 1 clinical trial in patients with alopecia areata. The Company received clearance to begin this trial on January 28, 2025.
Expenses associated with clinical trials, including patient fees, ancillary studies, clinical site operating expenses, professional fees related to regulatory filings and outside collaborations, decreased by $501,516, or 47%, from $1.1 million for the year ended December 31, 2023 to $558,215 for the year ended December 31, 2024. For the year ended December 31, 2023, the Company had two ongoing clinical studies: (1) an Investigator-sponsored Phase 1 clinical trial at the Masonic Cancer Center, University of Minnesota to evaluate HCW9218 in chemo-refractory/chemo-resistant solid tumors and (2) a Company-sponsored Phase 1b/2 clinical trial to evaluate HCW9218 in advanced pancreatic cancer, with the National Cancer Institute as the lead clinical site. Both of these studies were completed in the first half of 2024.
Other expenses, which include overhead allocations, decreased by $39,680, or 5%, from $787,654 for the year ended December 31, 2023 to $747,974 for the year ended December 31, 2024. This decrease is primarily attributable to decreases of $50,823 in travel and travel-related expenses and $12,695 in facilities-related expenses, partially offset by increases of $19,879 in rent and occupancy costs and $4,407 for public relations activities, such as press releases.
General and Administrative Expenses
The following table summarizes our general and administrative expense for the years ended December 31, 2023 and 2024:
|
|
Years Ended |
|
|
|
|
|
|
|
|||||||
|
|
2023 |
|
|
2024 |
|
|
$ Change |
|
|
% Change |
|
||||
Salaries, benefits and related expenses |
|
$ |
3,216,860 |
|
|
|
2,563,936 |
|
|
$ |
(652,924 |
) |
|
|
(20 |
)% |
Professional services |
|
|
1,257,879 |
|
|
|
1,171,885 |
|
|
|
(85,994 |
) |
|
|
(7 |
)% |
Facilities and office expenses |
|
|
634,080 |
|
|
|
654,996 |
|
|
|
20,916 |
|
|
|
3 |
% |
Accretion of fixed bonus upon maturity of Senior Notes |
|
|
— |
|
|
|
527,304 |
|
|
|
527,304 |
|
|
|
0 |
% |
Depreciation |
|
|
266,763 |
|
|
|
277,554 |
|
|
|
10,791 |
|
|
|
4 |
% |
Rent and occupancy expense |
|
|
156,807 |
|
|
|
205,511 |
|
|
|
48,704 |
|
|
|
31 |
% |
Other expenses |
|
|
1,247,126 |
|
|
|
1,438,410 |
|
|
|
191,284 |
|
|
|
15 |
% |
Total general and administrative expenses |
|
$ |
6,779,515 |
|
|
$ |
6,839,596 |
|
|
$ |
60,081 |
|
|
|
1 |
% |
General and administrative expenses increased by $60,081, or 1%, from $6.8 million for the year ended December 31, 2023 to $6.8 million for the year ended December 31, 2024. The increase is mainly attributable to an accretion expense of $527,304 for the accretion of the fixed bonus payment that holders of Secured Notes will receive if the Secured Notes are repaid on their Maturity Date of August 31, 2026 and an increase in other expenses, primarily insurance costs, partially offset by a decrease in salaries and benefits.
86
Salaries, benefits and related expenses decreased by $652,924, or 20%, from $3.2 million for the year ended December 31, 2023 to $2.6 million for the year ended December 31, 2024. There was a $322,214 decrease in salaries and related taxes resulted from a reduction in staff and temporary salary reductions as part of cost reductions which took place in the second quarter. In addition, there was a $304,174 decrease in performance-based bonuses, resulting from the waiver of performance-based bonuses due to officers of the Company that were earned in 2022 and deferred until the time they were waived in the second quarter of 2024.
Professional services decreased by $85,994, or 7%, from $1.3 million in the year ended December 31, 2023 to $1.2 million in the year ended December 31, 2024. Professional services include corporate legal services, legal services for procuring patents, as well as other professional services, such as auditing and tax advisory fees. The decrease is primarily attributable to a $117,382 decrease in legal fees incurred in connection with procuring patents, partially offset by a $31,389 increase in fees for other professional services such as audit and tax advisory fees. As a result of the Settlement Agreement, the Company agreed to maintain certain patent protection for rights retained under the Settlement Agreement.
Facilities and office expenses increased by $20,916, or 3%, from $634,080 for the year ended December 31, 2023 to $654,996 for the year ended December 31, 2024, primarily due to increases of $18,290 for janitorial and disposal services and $13,793 for IT services and software licenses, partially offset by a decrease of $12,454 for office equipment and supplies.
There was no accretion in year ended December 31, 2023, but in the year ended December 31, 2024, there was $527,304 in accretion for the fixed bonus payment for Senior Notes issued during 2024. The terms of the Senior Notes were amended in the third quarter of 2024, adding the provision for the fixed bonus payment if the Senior Notes are held to Maturity.
Other expenses increased by $191,284, or 15%, from $1.3 million for the year ended December 31, 2023 to $1.4 million for the year ended December 31, 2024. The increase is primarily due to increases of $178,828 in financing-related costs and $162,522 in insurance costs, partially offset by decreases of $138,158 in Delaware franchise taxes and $12,434 in travel-related expenses.
Reserve for credit losses and other expenses
In the year ended December 31, 2023, the Company recognized a Reserve for credit losses of $5.3 million, reflecting our conclusion that it was not probable that we would recover the interest reserve deposit established upon entering the credit agreement with Prime Capital Ventures (the “Lender”) based on facts known as of December 31, 2023. Subsequent to December 31, 2023, the Lender defaulted on its obligation to refund the interest reserve deposit. In coordination with other entities who were also defrauded by the Lender, the Company continues efforts to recover funds paid for an interest reserve through ongoing receivership and legal remedies.
As reported in the Company’s Form 8-K filed on May 1, 2024 with the SEC, the Company became aware that it was the victim of a criminal scheme involving the impersonation of a purchaser upon the default on a legally binding commitment to purchase $8.0 million of secured notes from the Company. The scheme resulted in the misdirection of approximately $1.3 million held in Company accounts to a fraudulent account controlled by a third party. The Company pursued all available remedies to recover this loss and reported this matter to legal authorities. Given the limited success that these efforts for the recovery of funds, the Company recognized a loss of $1.3 million in the year ended December 31, 2024.
Interest
On August 15, 2022, we entered into a loan and security agreement with Cogent Bank to partially fund our purchase of the property we acquired on that same date. We borrowed $6.5 million under this agreement. Amounts outstanding on the term loan accrue interest at a rate per annum equal to 5.75%. We were obligated to make interest-only payments on this loan from September 2022 through August 2023 and principal and interest payments in 47 equal monthly installments, based on a 25-year maturity schedule, commencing September 15, 2023. We paid $283,042 and $280,794 for interest on this loan for the years ended December 31, 2023 and 2024, respectively.
During the year ended December 31, 2024, the Company issued $6.9 million of Secured Notes, which bear interest at a rate of 9% per annum, payable quarterly in arrears. For the year ended December 31, 2024, the Company paid $350,343 for interest on the Senior Notes.
87
Other Income, Net
Other income, net decreased by $918,935, from $1.0 million for the year ended December 31, 2023 to $86,990 for the year ended December 31, 2024. The decrease is primarily attributable to decreases in interest earned for money market deposits and unrealized gains for investments in U.S. government-backed securities. Other income for the year ended December 31, 2023 also includes rental income of $185,941. On August 15, 2022, the Company entered into a short-term, market-rate lease with the former owner of the building we purchased on the same date. In the year ended December 31, 2023, the lease terminated.
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2024, our principal source of liquidity was $4.7 million in cash and cash equivalents, including money market investments, and as a result, there was substantial doubt over whether the Company had sufficient capital to operate for the next twelve months from the issuance date of this Annual Report. We considered elements of our financing plan that were probable and likely to be implemented within the next year. While we have already begun to successfully execute our financing plan, including a $6.9 million financing and a license agreement with $7.0 million in minimum guarantees payments which the Company expects to receive in 2025, we concluded that remaining steps in our financing plan are not probable and thus they were not sufficient to include in our going concern analysis.
On August 15, 2022, the Company entered into the 2022 Loan Agreement with Cogent Bank, pursuant to which it received $6.5 million in proceeds to purchase a building that will become the Company's new headquarters. The loan is secured by a first priority lien on the building. As of December 31, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction of its new manufacturing facilities and upgraded research laboratories. On December 16, 2024, BE&K Building Group, the prime contractor on the project, sent the Company a draft, unfiled lawsuit and requested the parties discuss payment. On January 22, 2025, the Company entered into a forbearance agreement with BE&K to allow the Company until March 31, 2025 to continue efforts to find the financing required to complete the construction and renovation of the building. Pursuant to the forbearance agreement, the Company made an initial payment of $1.0 million in partial satisfaction of amounts owing to BE&K and its subcontractors. The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements; however, as of the reporting date, to our knowledge, the lender has not elected to do so. As of December 31, 2024, the Company has reflected this loan as Short-term debt, net, to reflect that the lender has the right to accelerate the loan under a discretionary default provision at any time. See Part II, Item 9A. -- “Controls and Procedures.” The Company continues to seek the financing required to complete the construction project, with the cooperation of the lender and lien holders.
The Company and Dr. Wong, our Founder and Chief Executive Officer, entered into a Settlement Agreement and Release of the previously reported Arbitration as of July 13, 2024, subsequently, the Arbitration and related Complaint were dismissed on December 24, 2024. See Part I., Item 3. - “Legal Proceedings.” While the Settlement Agreement has resolved uncertainty regarding the outcome of these proceedings and the ongoing legal expenses, the Company incurred significant legal expenses in the period leading up to the Settlement Agreement. As of December 31, 2024, we reported a balance of $14.4 million for legal fees incurred but not yet paid in the accompany audited balance sheet. Subsequent to the year end, the Company received the benefit of a $2.0 million insurance payment, which was paid directly to the law firm who represented Dr. Wong for his defense during the Arbitration. In order not to overwhelm the Company’s resources, a reasonable payment plan is required, and the Company is engaged in discussions with the law firms involved with this matter.
A benefit of reaching a Settlement Agreement and concluding the Arbitration is a release from restrictions related to protection of privileged information, which hampered investor ability to conduct due diligence. As a result, we believe that other avenues of financing are now available to us, namely, capital-raising activities for equity and equity-like investments as well as business development transactions such as out-licensing agreements for rights for our proprietary molecules. However, there can be no assurance of our success in our capital-raising activities. If we are not successful in raising additional capital, we have the ability to revise our business plan and reduce costs. If such revisions are insufficient, we may have to curtail or cease operations.
In 2024, we have raised $16.3 million in financings from the following capital-raising activities:
88
Subsequent to the end of the reporting period, on February 20, 2025, the Company entered into an Equity Line of Credit Agreement (“ELOC”) for up to $20.0 million (with the potential to increase by an additional $20.0 million) as another element of the Company’s multi-step financing plan. We intend to register shares that will allow us to access the ELOC based on the financial information included in this Annual Report on Form 10-K.
On November 17, 2024, HCW Biologics entered into an exclusive worldwide license agreement with WY Biotech for the rights to develop and commercialize one of HCWB’s preclinical product candidates, HCW11-006. WY Biotech Co., Ltd. is a China-based company specializing in the early-stage development of recombinant protein drugs and gene/cell therapies. As the Company disclosed in the Form 8-K filed on March 19, 2025, the Company and WY Biotech agreed to amend the WY Biotech License Agreement due to a delay in WY Biotech coming to a definitive agreement with their designated contract design CDMO. Specifically, in order to accommodate the delay, the parties agreed to restructure the payment schedule for the $7.0 million upfront license fees, including delaying the initial $4.0 million portion thereof that was originally due on or about March 17, 2025, to reduce the performance milestones that the Company must complete in order to earn the full $7.0 million nonrefundable upfront payments in June 2025, and to provide that either party may terminate the Agreement if WY Biotech is not able to definitively engage its CDMO by June 2025. Under the amended terms, the Company expects to fulfill our performance obligations and earn the full $7.0 million upfront fee in June 2025. There were no other material changes to the WY Biotech License Agreement, which involves the grant to WY Biotech of an exclusive, world-wide license to use and apply HCW11-006 for in vivo applications. In particular, the Company will retain the Opt-In Right thereunder, which gives the Company the option to assume all control and responsibility for the development, manufacture and commercialization of HCW11-006 for in vivo applications in the North America, South America, and Central America. The Company retains ex vivo rights. See Exhibits 10.27 and 10.28 to this Annual Report on Form 10-K.
We considered future elements of our financing plan that were probable and likely to be implemented within the next year to determine if financing activities currently underway are sufficient mitigate the substantial doubt in our going concern analysis. We have capital-raising activities planned for the first half of 2025, for which Maxim Group will act as our Placement Agent. If the Company is not successful in raising additional capital through these activities, management may need to revise its business plan and reduce costs. If such revisions are insufficient, the Company may have to curtail or cease operations.
The accompanying audited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. The Company believes that substantial doubt exists regarding its ability to continue as a going concern for at least 12 months from the date of issuance of the Company’s audited financial statements, without additional funding or financial support. After considering management’s plan for financing and funds raised that are probable to occur within one year, as well as that the Company expects to continue to incur losses from operations for the foreseeable future, management concluded that the substantial doubt that existed in its going concern analysis as of December 31, 2024 was not alleviated.
Because of the numerous risks and uncertainties associated with the clinical development and commercialization of immunotherapeutics, we are unable to estimate the exact amount of capital requirements to pursue these activities. Our funding requirements will depend on many factors, including, but not limited to:
89
A change in the outcome of any of these or other factors with respect to the clinical development and commercialization of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures.
Summary of Statements of Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2023 and 2024:
|
|
Years Ended |
|
|||||
|
|
2023 |
|
|
2024 |
|
||
Cash used in operating activities |
|
$ |
(22,514,121 |
) |
|
$ |
(14,227,428 |
) |
Cash provided by (used in) investing activities |
|
|
3,797,400 |
|
|
|
(261,617 |
) |
Cash (used in) provided by financing activities |
|
|
(14,534 |
) |
|
|
15,568,516 |
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(18,731,255 |
) |
|
$ |
1,079,471 |
|
Operating Activities
Net cash used in operating activities was $22.5 million for the year ended December 31, 2023 and $14.2 million for the year ended December 31, 2024.
Cash used in operating activities for the year ended December 31, 2023 consisted primarily of a net loss of $25.0 million, which includes a $5.3 million noncash charge for reserve for credit losses related to the full impairment of the interest reserve deposit. Other cash used in operating activities includes $5.3 million to establish the interest reserve account which occurred in April 2023; $1.1 million cash decrease arising from an increase in accounts receivable; and $326,742 cash decrease arising from a decrease in a lease liability. These uses were partially offset primarily by a $432,410 cash increase arising from a decrease in prepaid expenses and other assets; a $1.6 million cash increase arising from an increase in accounts payable and other liabilities; and a net increase of $7.3 million arising from adjustments for noncash expenses, consisting of $5.3 million for reserve for credit losses, $1.0 million for stock-based compensation expense, $1.1 million for depreciation and amortization expense, partially offset by a decrease of $248,445 for net unrealized gain on investments.
90
Cash used in operating activities for the year ended December 31, 2024 consisted primarily of a net loss of $30.0 million, which includes $15.9 million of legal expenses related to legal proceedings and a $1.3 million loss related to a misdirection of funds resulting from the Company being a victim of criminal activity. Cash provided by operating activities included a $11.9 million increase resulting from the increase of accounts payable and other liabilities; a $1.0 million increase resulting from a decrease in accounts receivable; and a $831,622 increase related to a decrease in prepaid expenses and other assets. Adjustments for noncash changes also gave rise to an increase in cash from operating activities, including increases of $1.2 million for depreciation, amortization and accretion and a $1.0 million from unrealized losses.
Investing Activities
For the year ended December 31, 2023, cash provided by investment activities was $3.8 million, consisting of proceeds for maturity of short-term investments of $10.0 million, offset by $6.2 million of cash used for construction of our new headquarters and manufacturing facility.
For the year ended December 31, 2024, cash used in investment activities was $261,617, consisting of cash used for construction of our new headquarters and manufacturing facility.
Financing Activities
For the year ended December 31, 2023, cash used in financing activities was $14,534, consisting of cash used for debt repayment of $38,273, partially offset by cash provided by proceeds from the issuance of common stock of $23,739.
For the year ended December 31, 2024, cash provided by financing activities was $15.7 million, consisting of $6.5 million of cash provided through the issuance of common stock, $6.9 million of cash provided through the issuance of Secured Notes, $2.9 million of cash provided through the issuance of warrants, partially offset by $119,398 of cash used for debt repayment and $638,045 of cash used for issuance costs for common stock and warrants.
Contractual Obligations and Commitments
As of December 31, 2023, we had $28,693 of obligations remaining in the lease terms for non-cancellable operating lease agreements related to our facilities in Miramar, Florida. Effective March 1, 2022, we entered into a lease extension for our current location for a period of two years, ending February 29, 2024. On January 30, 2024, we entered into a new one-year lease for the same location, effective March 1, 2024. On January 27, 2025, we entered into a Lease Modification and Extension Agreement for a one-year lease for the same location, effective March 1, 2025.
We have commitments with a third-party manufacturing organization to supply us with clinical grade materials. As of December 31, 2024, we are under contract for obligations of $1.2 million that we expect to pay during the year ending December 31, 2025. As of December 31, 2023, we had commitments to fund $6.9 million in construction costs related to the buildout of our new headquarters and manufacturing facility.
In the normal course of business, we enter into contracts for non-clinical studies, preclinical testing, and other services and products. These contracts generally provide for termination following a certain period after notice and therefore we believe that our non-cancellable obligations under these agreements are not material.
Cogent Loan Agreement
On August 15, 2022, we entered into a loan and security agreement with Cogent Bank to partially fund our purchase of the property that will become our new headquarters. The agreement provides for a term loan of up to $6.5 million. Amounts outstanding on the term loan will accrue interest at a fixed rate per annum equal to 5.75%. We were obligated to make interest-only payments on the term loan from September 2022 through August 2023 and principal and interest payments in 47 equal monthly installments, based on a 25-year amortization schedule, commencing September 15, 2023 followed by one final balloon payment of all remaining principal, interest and fees due on the maturity date of August 15, 2027. Our obligations under the agreement are secured by, among other things, a mortgage on our new corporate headquarters and related real property. As of December 31, 2024, $6.3 million was outstanding under the term loan and we were in current in our interest and principal payments. In accordance with the terms of our loan and security agreement, the Company maintains an account at Cogent Bank as security, with a balance sufficient for the payment of interest, principal and insurance costs for a period of 90 - 120 days.
91
As of December 31, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction of its new manufacturing facilities and upgraded research laboratories. The loan agreement with Cogent Bank contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements; however, as of the reporting date, the lender has not elected to do so. As of December 31, 2024, the Company has reflected this loan as Short-term debt, net, to reflect that Cogent Bank has the right to accelerate the loan under a discretionary default provision, even though they have not elected to do so. The Company continues to seek the financing required to complete the construction project, with the cooperation of the lender and lien holders. See Part II, Item 9A. -- “Controls and Procedures.”
Critical Accounting Policies, Significant Judgements and Use of Estimates
The audited financial statements included elsewhere in this Annual Report are prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in the periods presented. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. We believe the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in developing estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. Refer to Note 1 to our audited financial statements included elsewhere in this Annual Report for our significant accounting policies related to our critical accounting estimates.
We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgements and estimates.
Revenue Recognition
We recognize revenue under the guidance of Topic 606. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, we perform the following five steps: (i) identification of the contract(s) with the customer, (ii) identification of the promised goods or services in the contract and determination of whether the promised goods or services are performance obligations, (iii) measurement of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to our customer.
If all conditions are not met for revenue recognition, the Company recognizes deferred revenue. The Company’s policy is to recognize deferred revenue only to the extent product release occurred after meeting specification required, product is shipped, and cash payment is received.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between fair value measurements based on market data (observable inputs), and those based on our own assumptions (unobservable inputs). This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
92
Fair Value
Under the Wugen License, we received shares of common stock of Wugen on the effective date of the Wugen License. We estimated that the fair value of the stock was $1.6 million. As the common stock of Wugen is not currently publicly traded, the fair value was determined based on inputs other than a public market price. We relied primarily on the most recent third-party financing completed by Wugen. In addition, we considered the results of a third-party valuation assessment. Since our ownership interest in Wugen is less than 20% and we do not have significant influence over the operations of Wugen, we account for these securities as a cost method investment. We will carry this investment at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee. We assess the investment each reporting period to determine if an impairment has occurred. In the event that a public market becomes available for the common stock of Wugen in the future and the shares become freely tradeable, we will recognize changes in fair value according to the market price in other income in the statements of operations.
Stock-based Compensation
As described in Note 1 and Note 11 to our audited financial statements included elsewhere in this Annual Report, we maintain a stock-based compensation plan as a long-term incentive for employees, non-employees, and directors. The plan allows for grants of incentive stock options, non-qualified stock options, and other forms of equity awards. We have granted options with service-based and performance-based vesting conditions.
We measure our stock-based awards granted to employees and directors based on the estimated fair value of the option on the date of grant (grant date fair value) and recognize compensation expense over the vesting period. Compensation expense is recorded as either research and development or general and administrative expenses in the statements of operations based on the function to which the related services are provided. Forfeitures are accounted for as they occur. We estimate grant date fair value using the Black-Scholes option-pricing model.
For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria are probable of being met.
In determining the fair value of the stock-based awards, we use the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and its determination generally requires significant judgment. These assumptions include, but are not limited to:
93
Income Taxes
We recognize deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. In evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance.
As of December 31, 2023 and 2024, we had available federal net operating loss (“NOL”) carryforwards of $40.0 million and $62.2 million, respectively. We also had available state NOLs carryforwards of approximately $40.0 million and $62.3 million, as of December 31, 2023 and 2024, respectively. The federal and state NOLs will carryforward indefinitely. The federal NOLs are available to offset 80% of taxable income for state taxes for tax years starting after 2020. In addition, we had federal research and development credits carryforwards of $1.3 million and $1.5 million, as of December 31, 2023 and 2024, respectively. These credits are available to reduce future federal income taxes, if any, and carryforwards expire from 2038 through 2044 and are subject to review and possible adjustment.
Under Sections 382 and 383 of the Code, substantial changes in our ownership may limit the amount of NOL and research and development credit carryforwards that could be used annually in the future to offset taxable income. The tax benefits related to future utilization of federal and state NOL carryforwards, credit carryforwards, and other deferred tax assets may be limited or lost if cumulative changes in ownership exceeds 50% within any three-year period. We have not completed a Section 382/383 analysis under the Code regarding the limitation of NOL and credit carryforwards. If a change in ownership were to have occurred, the annual limitation may result in the expiration of NOL carryforwards and credits before utilization.
We record unrecognized tax benefits as liabilities or reduce the underlying tax attribute, as applicable, and adjust them when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
Recent Accounting Pronouncements
See Note 1 to our audited financial statements included elsewhere in this Annual Report for more information about recent accounting pronouncements.
Emerging Growth Company and Smaller Company Reporting Status
As an emerging growth company, or EGC, under the JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited financial statements in a registration statement for an initial public offering, or IPO, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements.
We may remain classified as an EGC until the December 31, 2026, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have annual gross revenues of $1.235 billion or more in any fiscal year, we would cease to be an emerging growth company as of December 31 of the applicable year. We also would cease to be an EGC if we issue more than $1 billion of non-convertible debt over a three-year period.
We are also a “smaller reporting company,” as defined in Rule 12b-2 under the Exchange Act. Similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations, such as an ability to provide simplified executive compensation information and only two years of audited financial statements in an annual report on Form 10-K, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure.
94
Item 7A Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company, as defined by Rule 12b-2 under the Exchange Act and are not required to provide the information under this item.
95
Item 8 Financial Statements and Supplementary Data.
HCW Biologics Inc.
Index to Financial Statements
Years ended December 31, 2023 and 2024
Audited Financial Statements |
|
Page |
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) |
|
97 |
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 173) |
|
98 |
|
99 |
|
|
100 |
|
|
101 |
|
|
102 |
96
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
HCW Biologics Inc.
Opinion on the financial statements
We have audited the accompanying balance sheet of HCW Biologics Inc. (the “Company”) as of December 31, 2023, the related statements of operations, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provided a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor from 2019 to 2024.
Miami, FL
May 15, 2024 (except for Note 16, as to which the date is March 28, 2025)
97
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of HCW Biologics Inc.
Miramar, Florida
Opinion on the Financial Statements
We have audited the accompanying balance sheet of HCW Biologics Inc (the "Company") as of December 31, 2024, the related statements of operations, stockholders’ equity (deficit), and cash flows for the year ended December 31, 2024, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring negative cash flows from operations, negative working capital and the need for funding to support its operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/ Crowe LLP
We have served as the Company's auditor since September 2024.
Indianapolis, Indiana
March 28, 2025
98
HCW Biologics Inc.
Balance Sheets
|
|
December 31, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2024 |
|
||
|
|
|
|
|
|
|
||
ASSETS |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
3,595,101 |
|
|
$ |
4,674,572 |
|
Accounts receivable, net |
|
|
1,535,757 |
|
|
|
582,201 |
|
Prepaid expenses |
|
|
1,042,413 |
|
|
|
328,181 |
|
Other current assets |
|
|
230,916 |
|
|
|
113,528 |
|
Total current assets |
|
|
6,404,187 |
|
|
|
5,698,482 |
|
Investments |
|
|
1,599,751 |
|
|
|
1,599,751 |
|
Property, plant and equipment, net |
|
|
20,453,184 |
|
|
|
22,909,869 |
|
Other assets |
|
|
56,538 |
|
|
|
28,476 |
|
Total assets |
|
$ |
28,513,660 |
|
|
$ |
30,236,578 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
6,167,223 |
|
|
$ |
22,332,261 |
|
Accrued liabilities and other current liabilities |
|
|
2,580,402 |
|
|
|
981,940 |
|
Short-term debt, net |
|
|
— |
|
|
|
6,314,684 |
|
Total current liabilities |
|
|
8,747,625 |
|
|
|
29,628,885 |
|
Debt, net |
|
|
6,304,318 |
|
|
|
7,377,865 |
|
Total liabilities |
|
|
15,051,943 |
|
|
|
37,006,750 |
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
||
Stockholders’ equity (deficit): |
|
|
|
|
|
|
||
Common stock: |
|
|
|
|
|
|
||
Common, $0.0001 par value; 250,000,000 shares authorized |
|
|
3,603 |
|
|
|
4,454 |
|
Additional paid-in capital |
|
|
83,990,437 |
|
|
|
93,781,511 |
|
Accumulated deficit |
|
|
(70,532,323 |
) |
|
|
(100,556,137 |
) |
Total stockholders’ equity (deficit) |
|
|
13,461,717 |
|
|
|
(6,770,172 |
) |
Total liabilities and stockholders’ equity (deficit) |
|
$ |
28,513,660 |
|
|
$ |
30,236,578 |
|
The accompanying notes are an integral part of these financial statements.
99
HCW Biologics Inc.
Statements of Operations
|
|
Years Ended |
|
|
|||||
|
|
2023 |
|
|
2024 |
|
|
||
Revenues: |
|
|
|
|
|
|
|
||
Revenues |
|
$ |
2,841,794 |
|
|
$ |
2,566,792 |
|
|
Cost of revenues |
|
|
(2,281,434 |
) |
|
|
(1,607,389 |
) |
|
Net revenues |
|
|
560,360 |
|
|
|
959,403 |
|
|
|
|
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
|
||
Research and development |
|
|
7,676,316 |
|
|
|
6,388,994 |
|
|
General and administrative |
|
|
6,779,515 |
|
|
|
6,839,596 |
|
|
Legal expenses |
|
|
6,571,689 |
|
|
|
15,910,480 |
|
|
Reserve for credit losses and other expenses |
|
|
5,250,000 |
|
|
|
1,300,000 |
|
|
Total operating expenses |
|
|
26,277,520 |
|
|
|
30,439,070 |
|
|
Loss from operations |
|
|
(25,717,160 |
) |
|
|
(29,479,667 |
) |
|
Interest expense |
|
|
(283,042 |
) |
|
|
(631,137 |
) |
|
Other income, net |
|
|
1,005,925 |
|
|
|
86,990 |
|
|
Net loss |
|
$ |
(24,994,277 |
) |
|
$ |
(30,023,814 |
) |
|
Net loss per share, basic and diluted |
|
$ |
(0.70 |
) |
|
$ |
(0.77 |
) |
|
Weighted average shares outstanding, basic and diluted |
|
|
35,929,446 |
|
|
|
38,793,018 |
|
|
The accompanying notes are an integral part of these financial statements.
100
HCW Biologics Inc.
Statements of Changes in Stockholders’ Equity (Deficit)
|
|
Stockholders’ Equity (Deficit) |
|
|||||||||||||||||
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated |
|
|
Total |
|
||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Equity (Deficit) |
|
|||||
Balance, January 1, 2023 |
|
|
35,876,440 |
|
|
$ |
3,588 |
|
|
$ |
82,962,964 |
|
|
$ |
(45,538,046 |
) |
|
$ |
37,428,506 |
|
Issuance of Class A |
|
|
148,664 |
|
|
|
15 |
|
|
|
23,724 |
|
|
|
— |
|
|
|
23,739 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
1,003,749 |
|
|
|
— |
|
|
|
1,003,749 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24,994,277 |
) |
|
|
(24,994,277 |
) |
Balance, December 31, 2023 |
|
|
36,025,104 |
|
|
$ |
3,603 |
|
|
$ |
83,990,437 |
|
|
$ |
(70,532,323 |
) |
|
$ |
13,461,717 |
|
Issuance of |
|
|
13,473 |
|
|
|
1 |
|
|
|
2,443 |
|
|
|
— |
|
|
|
2,444 |
|
Issuance of |
|
|
1,785,718 |
|
|
|
178 |
|
|
|
2,499,827 |
|
|
|
— |
|
|
|
2,500,005 |
|
Issuance of |
|
|
4,160,000 |
|
|
|
416 |
|
|
|
2,452,249 |
|
|
|
— |
|
|
|
2,452,665 |
|
Issuance of warrants |
|
|
— |
|
|
|
— |
|
|
|
4,465,589 |
|
|
|
— |
|
|
|
4,465,589 |
|
Exercise of pre-funded warrants |
|
|
2,557,000 |
|
|
|
256 |
|
|
|
— |
|
|
|
— |
|
|
|
256 |
|
Issuance cost of common stock |
|
|
— |
|
|
|
— |
|
|
|
(226,201 |
) |
|
|
— |
|
|
|
(226,201 |
) |
Issuance costs of common stock warrants |
|
|
— |
|
|
|
— |
|
|
|
(411,844 |
) |
|
|
— |
|
|
|
(411,844 |
) |
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
1,009,011 |
|
|
|
— |
|
|
|
1,009,011 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30,023,814 |
) |
|
|
(30,023,814 |
) |
Balance, December 31, 2024 |
|
|
44,541,295 |
|
|
$ |
4,454 |
|
|
$ |
93,781,511 |
|
|
$ |
(100,556,137 |
) |
|
$ |
(6,770,172 |
) |
The accompanying notes are an integral part of these financial statements.
101
HCW Biologics Inc.
Statements of Cash Flows
|
|
Years Ended December 31, |
|
|||||
|
|
2023 |
|
|
2024 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
(24,994,277 |
) |
|
$ |
(30,023,814 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
1,135,184 |
|
|
|
1,184,389 |
|
Stock-based compensation |
|
|
1,003,749 |
|
|
|
1,009,011 |
|
Unrealized (gain) on investments, net |
|
|
(248,445 |
) |
|
|
— |
|
Realized (gain) on investments, net |
|
|
(15,625 |
) |
|
|
— |
|
Changes in the carrying amount of right-of-use asset |
|
|
(1,671 |
) |
|
|
(418 |
) |
Reserve for credit losses |
|
|
5,250,000 |
|
|
|
— |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
(1,118,061 |
) |
|
|
953,556 |
|
Deposit for interest reserve |
|
|
(5,250,000 |
) |
|
|
— |
|
Prepaid expenses and other assets |
|
|
432,410 |
|
|
|
831,622 |
|
Accounts payable and other liabilities |
|
|
1,619,357 |
|
|
|
11,874,767 |
|
Operating lease liability |
|
|
(326,742 |
) |
|
|
(56,541 |
) |
Net cash used in operating activities |
|
|
(22,514,121 |
) |
|
|
(14,227,428 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
(6,202,600 |
) |
|
|
(261,617 |
) |
Proceeds for sale or maturities of short-term investments |
|
|
10,000,000 |
|
|
|
— |
|
Net cash provided by (used in) investing activities |
|
|
3,797,400 |
|
|
|
(261,617 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from issuance of common stock |
|
|
23,739 |
|
|
|
6,462,834 |
|
Proceeds from issuance of debt |
|
|
— |
|
|
|
6,905,000 |
|
Proceeds from common stock warrants |
|
|
— |
|
|
|
2,958,125 |
|
Issuance costs for common stock and warrants |
|
|
— |
|
|
|
(638,045 |
) |
Debt repayment |
|
|
(38,273 |
) |
|
|
(119,398 |
) |
Net cash (used in) provided by financing activities |
|
|
(14,534 |
) |
|
|
15,568,516 |
|
Net (decrease) increase in cash and cash equivalents |
|
|
(18,731,255 |
) |
|
|
1,079,471 |
|
Cash and cash equivalents at the beginning of the period |
|
|
22,326,356 |
|
|
|
3,595,101 |
|
Cash and cash equivalents at the end of the period |
|
$ |
3,595,101 |
|
|
$ |
4,674,572 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
||
Cash paid for interest, net of amounts capitalized |
|
$ |
283,042 |
|
|
$ |
569,770 |
|
Noncash operating, investing and financing activities: |
|
|
|
|
|
|
||
Capital expenditures accrued, but not yet paid |
|
$ |
4,240,593 |
|
|
$ |
2,010,478 |
|
Purchases of property and equipment included in accounts payable and other liabilities |
|
$ |
— |
|
|
$ |
829,207 |
|
Reserve for credit losses |
|
$ |
5,250,000 |
|
|
$ |
— |
|
The accompanying notes are an integral part of these financial statements.
102
HCW Biologics Inc.
Notes to the Financial Statements
December 31, 2023 and 2024
1. Organization and Summary of Significant Accounting Policies
Organization
HCW Biologics Inc. (the “Company”) 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. The Company believes age-related low-grade chronic inflammation, or “inflammaging,” is a significant contributing factor to several chronic diseases and conditions, such as cancer, cardiovascular disease, diabetes, neurodegenerative diseases, and autoimmune diseases. The Company is located in Miramar, Florida and was incorporated in the state of Delaware in April 2018.
Liquidity and Going Concern
In accordance with FASB Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements – Going Concern (“Topic 205-40”), management is required to evaluate whether there are conditions and events, considered in the aggregate that raise substantial doubt about the Company’s ability to continue as a going concern for at least 12 months from the issuance date of the Company’s audited financial statements. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
As of December 31, 2024, the Company had not generated any revenue from commercial product sales of its internally developed immunotherapeutic products for the treatment of cancer and other age-related diseases. During its development activities, the Company has sustained operating losses and expects to continue to incur operating losses for the foreseeable future. Since inception to December 31, 2024, the Company incurred cumulative net losses of $98.1 million. These losses reflect the events previously reported in the Form 10-K/A filed on May 15, 2024 with the Securities and Exchange Commission (“SEC”), involving reserve for credit losses and other expenses of $6.6 million. The reserve for credit losses and other expenses arose from two events previous reported by the Company on the Form 8-K filed on January 12, 2024 and the Form 8-K filed on May 1, 2024. See Part II, Item 9A. -- “Controls and Procedures.”
On August 15, 2022, the Company entered into a loan and security agreement (the “2022 Loan Agreement”) with Cogent Bank, pursuant to which it received $6.5 million in proceeds to purchase a building that will become the Company's new headquarters. The loan is secured by a first priority lien on the building. As of December 31, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction of its new manufacturing facilities and upgraded research laboratories. The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements; however, as of the reporting date, the lender has not elected to do so. As of December 31, 2024, the Company has reflected this loan as Short-term debt, net, to reflect that the lender has the right to accelerate the loan under a discretionary default provision. The Company continues to seek the financing required to complete the construction project, with the cooperation of the lender and lien holders.
To date, the Company has funded operations primarily through the sale of stock, issuance of Senior Notes and revenues generated from the Company’s exclusive worldwide license with Wugen, Inc. (“Wugen”), pursuant to which Wugen licensed limited rights to develop, manufacture, and commercialize cell therapy treatments for cancer based on two of the Company’s internally-developed multi-cytokine fusion protein molecules, and its manufacturing and supply arrangement with Wugen. In the years ended December 31, 2023 and 2024, Company recognized revenues generated from the supply of clinical and research grade material to Wugen of $2.8 million and $2.6 million, respectively.
103
As reported in the Company’s Form 8-K filed on July 18, 2024 and further described in Part I, Item 3. – “Legal Proceedings” below, as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with ImmunityBio and its affiliates. The Settlement Agreement includes mutual general releases by and among the parties thereto. No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in connection with the matter. In accordance with the provisions of the Settlement Agreement, upon completion of remedial procedures, the parties stipulated that the Arbitration and Complaint should be dismissed. The Arbitration and related Complaint were dismissed on December 24, 2024.
The Company entered into the Settlement Agreement to avoid the costs, disruption and distraction of further litigation. In the accompanying condensed balance sheet as of December 31, 2024, the Company reported a balance of $14.4 million for legal fees incurred but not yet paid that were included within Accounts payable and an accrual of $42,800 for accrued legal fees within Accrued liabilities and other current liabilities. The Company is engaged in discussions with the law firms involved with this matter to arrange a reasonable payment plan with respect to those legal fees. With the execution of the Settlement Agreement, the Company resolved the attendant uncertainties for the outcome of the Arbitration and additional complexities, and it launched its new financing plan. Subsequent to the year end, the Company received a $2.0 million insurance payment, which was paid directly to the law firm who represented Dr. Wong for his defense during the Arbitration. See Note 18. Subsequent Events.
Prior to the resolution of the Arbitration, the Company had limited options to raise capital required to operate. On February 20, 2024, the Company completed a $2.5 million private placement of shares of common stock with certain of its officers and directors at a price of $1.40 per share. The Company issued 1,785,718 shares of common stock in connection with the offering. The shares have not been registered and will not be sold or transferred except as permitted under law and pursuant to registration or exemption therefrom. The Board of Directors and Audit Committee of the Board of Directors reviewed the transaction under the Company’s policy for Related Party Transactions (the “Policy”) and determined that the transaction was in compliance with the Policy. In multiple closings that occurred from March 31, 2024 to October 31, 2024, the Company issued an aggregate of $6.9 million of Secured Notes, with $2.9 million from the Company’s officers and members of the board of directors, including $2.4 million purchased by Dr. Hing C. Wong, Founder and CEO, $220,000 purchased by Rebecca Byam, Chief Financial Officer, $140,000 purchased by Scott T. Garrett, Chairman of the board of directors, $60,000 purchased by Gary M. Winer, member of the board of directors, $25,000 purchased by Lee Flowers, Senior Vice President for Business Development, and $25,000 purchased by Rick S. Greene, member of the board of directors.
The Company launched a new financing plan in the third quarter of 2024. On November 13, 2024, we entered into an engagement letter with the Maxim Group to act as the exclusive placement agent for a multi-step equity financing. In November 2024, the Company completed two financing transactions. On November 18, 2024, the Company entered a $6.9 million securities purchase agreement with an institutional investor, involving a registered direct offering and a concurrent private placement of common stock and warrants. The offering, priced above market under Nasdaq rules and closed on November 20, 2024. As a result of this offering, the Company issued 6,717,000 shares of Common Stock and warrants to purchase 6,717,000 shares of Common Stock at $1.03 per shares, at a combined price of $1.03 per unit consisting of one share of Common Stock and one five-year warrant to purchase a share of Common Stock.
On November 17, 2024, HCW Biologics entered into an exclusive worldwide license agreement with WY Biotech for the rights to develop and commercialize one of HCWB’s preclinical product candidates, HCW11-006. WY Biotech Co., Ltd. is a China-based company specializing in the early-stage development of recombinant protein drugs and gene/cell therapies. As the Company disclosed in the Form 8-K filed on March 19, 2025, the Company and WY Biotech agreed on the principal terms for an amendment to the WY Biotech License Agreement, in which the parties agreed to restructure the payment schedule for the $7.0 million upfront license fees, including delaying the initial $4.0 million portion thereof that was originally due on or about March 17, 2025. The parties also agreed to amend the Company’s final deliverable to fulfill the performance obligation is the delivery of a report on the characterization of the license molecule. Under the amended terms, the Company expects to fulfill its performance obligations and earn the full $7.0 million upfront fee in June 2025. There were no other material changes to the WY Biotech License Agreement, which involves the grant to WY Biotech of an exclusive, world-wide license to use and apply HCW11-006 for in vivo applications. In particular, the Company will retain the Opt-In Right thereunder, which gives the Company the option to assume all control and responsibility for the development, manufacture and commercialization of HCW11-006 for in vivo applications in the North America, South America, and Central America. The Company retains ex vivo rights.
104
On March 3, 2025, the Nasdaq Hearings Panel (the “Panel”) of The Nasdaq Stock Market LLC (“Nasdaq” or the “Exchange”) granted the Company an extension in which to regain compliance with all Nasdaq continued listing rules. The Panel’s determination follows a hearing on February 13, 2025, at which the Panel considered the Company’s plan to regain compliance with Listing Rules 5450(a)(1), 5450(b)(2)(A) and 5450(b)(2&3)(C), the minimum bid price (“Bid Price”), the market value of publicly held securities (“MVPHS”) and the market value of listed securities (“MVLS”) rules, respectively. As a result of the extension, the Panel granted the Company’s request for continued listing on the Exchange, provided that the Company demonstrates compliance with the Bid Price Rule by April 28, 2025, and all other Exchange continued listing rules by June 15, 2025.
As of December 31, 2024, the conclusion of a going concern assessment, before consideration of our financing plans, was that there is substantial doubt about the Company’s ability to continue as a going concern. The Company considered future elements of its financing plan that were probable and likely to be implemented within the next year to determine if financing activities currently underway are sufficient mitigate the substantial doubt in the going concern analysis, in addition to considering continued operating losses and the burden of obligations for expenses incurred in connection with past legal proceedings. The Company expects to complete other capital-raising transactions in the first half of 2025, for which Maxim Group will act as our Placement Agent. Management concluded that there were no mitigating circumstances which alleviated the substantial doubt over its ability to continue as a going concern. If the Company is not successful in raising additional capital through these activities, management intends to revise its business plan and reduce costs. If such revisions are insufficient, the Company may have to curtail or cease operations.
The accompanying audited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. The Company believes that substantial doubt exists regarding its ability to continue as a going concern for at least 12 months from the date of issuance of the Company’s audited financial statements and that the substantial doubt that existed in its going concern analysis was not alleviated.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying audited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
Reclassification of Prior Period Presentation of Legal Expenses
Certain prior period amounts have been reclassified to distinguish between General and administrative expenses in the ordinary course of business and legal expenses incurred in connection with the Arbitration and Settlement Agreement described in Notes 1. Reclassification of legal expenses incurred in connection with legal proceedings impacts the audited statements of operations. There is no effect on reporting results of operations from prior periods.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Management must apply significant judgment in this process. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from estimates.
105
Segment Reporting
The Company operates and manages its business as one reportable and operating segment, which is the business of developing and commercializing novel immunotherapies for diseases promoted by chronic inflammation, especially age-related diseases. The Company’s chief executive officer, who is the chief operating decision maker ("CODM"), reviews financial information on an aggregate basis for allocating and evaluating financial performance. In addition, our CODM is regularly provided with detailed results of preclinical and clinical data which is considered in his decision for the allocation of resources. See Note 16. Segment Reporting for further details. The single operating segment constitutes all of the Company activity, the chief operating decision maker regularly reviews the entity-wide operating results and performance. All long-lived assets are maintained in the United States of America.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits at financial institutions, money market funds, and highly liquid investments with original maturities of three months or less.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“Topic 820”), establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between fair value measurements based on market data (observable inputs) and those based on the Company’s own assumptions (unobservable inputs). This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
Fair value measurements are classified based on the lowest level of input that is significant to the measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, as disclosed in Note 3, takes into account the market for the Company’s financial assets and liabilities, the associated credit risk, and other factors as required. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash, cash equivalents, accounts receivable, and investments. The Company’s cash and cash equivalents are deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
For the year ended December 31, 2024, the Company recognized revenues of $2.6 million. All of the Company's revenues were derived from the supply of clinical grade material to Wugen under the supply agreement between Wugen and the Company, as contemplated in the Wugen License. As of December 31, 2024, there was a balance of $582,201 in accounts receivable related to sales to Wugen on the accompanying audited balance sheet, which was collected as of the date of issuance of the Annual Report. Since December 24, 2020, the Company holds 2,174,311 shares of Wugen common stock, which were received as consideration for the Wugen License on December 24, 2020. Currently, these shares represent a 5.6% equity ownership interest of Wugen, based on fully diluted, issued and outstanding shares as of December 31, 2024. The Company has not been able to realize any benefit from the sale of these shares, as they are not currently traded on any public market and thus have limited marketability.
The Company is highly dependent on a third-party manufacturer to supply drug products for its research and development activities of its programs, including clinical and non-clinical studies. These programs could be adversely affected by a significant interruption in the supply of such drug products. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements.
106
Property, Plant and Equipment, Net
Property, plant and equipment are stated at cost less accumulated depreciation. The Company has elected to use component depreciation for property, plant and equipment, which is permitted but not required under US GAAP. A long-lived asset may consist of several different and significant physical components.
A component is a tangible part or portion of property, plan and equipment that (a) can be separately identified as an asset and depreciated or amortized over its own separate expected useful life and (b) is expected to provide economic benefit for more than one year. If a component has an expected useful life that differs from the expected useful life of the asset to which it relates, the cost should be accounted for separately and depreciated or amortized over its separate expected useful life. The Company identifies the components at the time of the acquisition or construction of the long-lived asset. The total capitalized costs of the long-lived asset is allocated to components either on a specific identification basis or based on relative fair value.
Depreciation expense for each component is calculated using the straight-line method over the estimated useful lives of the assets within the component, which range from 3 to 39 years. Land is not subjected to the recording of depreciation expense because it has an infinite life. Leasehold improvements are amortized on a straight-line method over the shorter of the useful life of the leasehold improvement or the term of the lease.
Construction-in-progress represents property and buildings under construction and consists of construction expenditures, equipment procurement, and other direct costs attributable to the construction. Construction-in-progress is not depreciated. Upon completion and becoming ready for intended use, construction-in-progress is reclassified to the appropriate component within property, plant and equipment. If a component that is separately identified and depreciated is replaced, the replacement should be capitalized at the time of its installation if the capitalization criteria have been met. The net book value of the component that was replaced, if any, should be charged to depreciation expense in the period it is replaced. If not separately identifiable in the accounting records, the estimated net book value of an item to be replaced should be calculated by estimating the previously capitalized costs of the replaced component and subtracting an estimate of accumulated depreciation. The estimate of accumulated depreciation is calculated using the same depreciation method and expected useful life previously used to depreciate the total asset to which the component relates.
Depreciation of property, plant and equipment is calculated by component using the straight-line method over the estimated useful lives of the assets, as follows:
|
|
Estimated Useful Lives |
|
Building |
|
39 years |
|
Property |
|
5 - 15 years |
|
Laboratory equipment |
|
5 years |
|
Office equipment |
|
3 years |
|
Furniture and fixtures |
|
7 years |
|
Leasehold improvements |
|
The lesser of the lease term or life of the asset |
|
Costs, such as repairs and maintenance, associated with replacing items not identified as a component are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for indications of possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the future undiscounted cash flows attributable to these assets. An impairment loss is recognized to the extent an asset group is not recoverable, and the carrying amount exceeds the projected discounted future cash flows arising from these assets. Impairment losses, if any, are recognized in earnings. There were no impairment losses for any of the periods presented.
107
Collaborative Arrangements
When the Company enters into collaboration arrangements, it assesses whether the arrangements fall within the scope of FASB issued ASC 808, Collaborative Arrangements, based on whether the arrangements involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. If the payments from the collaboration partner to the Company represent consideration from a customer, such as license fees and contract research and development activities, the Company accounts for those payments within the scope of FASB issued ASC 606, Revenue from Contracts with Customers (“Topic 606”). However, if the Company concludes that the payments are not from a customer, for certain activities and associated payments, such as for certain collaborative research, development, manufacturing, and commercial activities, these payments are presented as a reduction of research and development expense or general and administrative expense, based on where the Company presents the underlying expense.
Revenue Recognition
The Company accounts for revenues in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”). To determine revenue recognition for arrangements that fall within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services transferred to the customer.
At contract inception, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. To date, the Company's revenues have been generated exclusively from the Wugen License, which consists of licenses of intellectual property, cost reimbursements, upfront signing fees, milestone payments and royalties on future licensee’s product sales. In addition, the Company and Wugen have an agreement for the supply of clinical and research grade materials under which the Company also recognized revenues.
License Grants:
For out-licensing arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement.
Milestone and Contingent Payments:
At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event. When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. The Company’s licensees will generally pay milestones payments subsequent to achievement of the triggering event.
108
Materials Supply:
The Company provides clinical and research grade materials so that licensees may develop products based on the licensed molecules. The amounts billed are recognized as revenue as the performance obligations are satisfied by the Company, once the Company determines that a contract exists.
On June 18, 2021, the Company entered into a master services agreement (“MSA”) with Wugen for the supply of materials for clinical development of licensed products. Each of these transactions represents a single performance obligation that is satisfied over time. The Company recognizes revenue using an input method based on the costs incurred relative to the total expected cost, which determines the extent of the Company’s progress toward completion. As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgement to determine the progress towards completion. The Company reviews its estimate of the progress toward completion based on the best information available to recognize the cumulative progress toward completion as of the end of each reporting period, and makes revisions to such estimates, if facts and circumstances change during each reporting period. Any such revisions are recorded on a cumulative catch-up basis, noting no material revisions during the years ended December 31, 2023 and 2024. For each in process SOW, amounts are billed in the same quarter the costs are incurred.
For the years ended December 31, 2023 and 2024, the Company recognized revenues related to sale of development supply materials to Wugen of $2.8 million and $2.6 million, respectively.
Accounts Receivable, Net
Accounts receivable is presented in accordance the current expected credit losses (“CECL”) impairment model as required under Topic 326. The Company estimates a reserve for expected credit losses based on existing contractual payment terms, actual payment patterns of its customers, current and future economic and market conditions and individual customer circumstances. As of December 31, 2023 or December 31, 2024, the Company determined that a reserve for expected credit losses was not required. No accounts were written off during the periods presented.
Deferred Revenue
Deferred revenue represents amounts billed, or in certain cases, yet to be billed to the Company’s customer for which the related revenues have not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue represents the amount to be recognized within one year from the balance sheet date based on the estimated performance period of the underlying performance obligations. There were no deferred revenue balances as of December 31, 2023 or 2024.
Investments
The Company holds a minority interest in Wugen. The underlying shares of common stock are not traded on any public market and thus have limited marketability. The Company does not have any influence over the operating and financial policies of Wugen. As a result, the Company has accounted for this investment using the measurement alternative whereby the investment is recorded at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same investee. No impairment was recognized during the years ended December 31, 2023 and 2024. See Note 18. Subsequent Events.
109
Operating Leases
The Company determines if an arrangement is a lease at inception. Operating leases right of use (“ROU”) assets are included in Other assets, and operating liabilities are included in Accrued liabilities and other current liabilities, and Other liabilities on the balance sheets included in the audited financial statements. ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company has a lease agreement with lease and non-lease components, which are accounted for separately. For short-term leases with a term of one year or less, the Company uses the practical expedient and does not record an ROU asset for such short-term leases.
Research and Development Expenses
Research and development costs are expensed as incurred and include salaries, benefits, and other operating costs such as outside services, supplies and allocated overhead expenses. The Company may perform research and development for its own proprietary drug candidates and technology development or for certain third parties under collaborative arrangements. For its proprietary drug candidates and its own internal technology development programs, the Company invests its own funds without reimbursement from a third party. Where the Company performs research and development activities under a clinical joint development collaboration, it records the partner’s share of collaboration expenses as a reduction to research and development expense when reimbursement amounts are due under the agreement.
The Company records an accrued expense for the estimated costs of its contract manufacturing activities performed by third parties if there is no invoice. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows to vendors. Payments under the contracts include upfront payments and milestone payments, which depend on factors such as the achievement of the completion of certain stages of the manufacturing process. For purposes of recognizing expense, the Company assesses whether the production process is sufficiently defined to be considered the delivery of a good, as evidenced by predictive or contractually required yields in the production process, or the delivery of a service, where processes and yields are developing and less certain. If the Company considers the process to be the delivery of a good, the Company recognizes the expense when the drug product is delivered, or otherwise bears risk of loss. If the Company considers the process to be the delivery of a service, the expense is recognized based on its best estimates of the contract manufacturer’s progress towards completion of the stages in the contracts. The Company recognizes and amortizes upfront payments and accrues for liabilities based on the specific terms of each arrangement. Arrangements may provide upfront payments for certain stages of the arrangement and milestone payments for the completion of certain stages, and, accordingly, may result in advance payments for services that have not been completed or goods not delivered and liabilities for stages where the contract manufacturer is entitled to a milestone payment.
Advance payments for goods or services that will be used or rendered for future research and development activities are capitalized as prepaid expenses and recognized as expense as the related goods are delivered or the related services are performed. The Company bases its estimates on the best information available at the time. However, additional information may become available to the Company which may allow it to make a more accurate estimate in future periods. In this event, the Company may be required to record adjustments to research and development expenses in future periods when the actual level of activity becomes more certain. Such increases or decreases in cost are generally considered to be changes in estimates and will be reflected in research and development expenses in the period identified.
Patent Costs
Costs related to filing and pursuing patent applications are recorded as general and administrative expenses in the statement of operations and expensed as incurred, since recoverability of such expenditures is uncertain.
Stock-based Compensation
The Company measures its 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 recognizes compensation expense over the vesting period. Compensation expense is recorded as either research and development or general and administrative expenses in the statement of operations based on the function to which the related services are provided. The Company has granted options with service-based and performance-based vesting conditions.
110
The Company uses the Black-Scholes option pricing model for the respective grant to determine the grant date fair value. The Black-Scholes option pricing model requires the input of highly subjective assumptions. These variables include, but are not limited to, its stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Management will continue to assess the assumptions and methodologies used to calculate the estimated grant date fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and materially impact the Company’s grant date fair value determination.
For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria are probable of being met.
Debt Issuance Costs
Debt issuance costs are presented in the balance sheet as a direct deduction from the carrying amount of the related debt and are amortized, using the effective interest method, as interest expense over the contractual life of the related debt.
Deferred Offering Costs
The Company defers offering costs consisting of legal, accounting and other fees and costs directly attributable to offering costs. For offerings expected to occur within 90 days, the deferred offering costs will be offset against the proceeds received upon the completion of the offering. Deferred offering costs will be recorded under Other noncurrent assets on the balance sheet. In the event an offering is terminated or the timing for completing the offering is uncertain, all of the deferred offering costs will be expensed within the Company’s statement of operations in the period in which the determination is made.
Income Taxes
The Company accounts for income taxes using an asset and liability approach in accordance with applicable guidance prescribed by FASB issued ASC 740, Income Taxes (“Topic 740”). Topic 740 requires that the deferred tax consequences of temporary differences between the amounts recorded in the financial statements and the amounts included in the federal and state income tax returns to be recognized in the balance sheet.
The Company makes judgments regarding the realizability of its deferred tax assets. The balance sheet carrying value of its deferred tax assets is based on whether the Company believes it is more likely than not that the Company will generate sufficient future taxable income to realize these deferred tax assets after consideration of all available evidence. The Company regularly reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Generally, cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed.
The Company’s tax positions may be subject to income tax audits. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its tax provision. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. The provision for income taxes includes the effects of any accruals that the Company believes are appropriate, as well as the related net interest and penalties. The Company had no accrual for interest or penalties on its balance sheets as of December 31, 2023 and 2024, and has not recognized interest or penalties in its statements of operations for the years ended December 31, 2023 and 2024.
111
Tax Credit Receivable
The Company may be eligible for research and development credits for its research and development activities, in accordance with Internal Revenue Code (“I.R.C.”) § 41(c). The credits are generally available to offset income tax liabilities. As of December 31, 2023 and 2024, the outstanding payroll tax receivables is included in Other current assets in the balance sheet.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted average number of common shares plus the potential dilutive effects of potential dilutive securities outstanding during the period. Potential dilutive securities are excluded from diluted earnings or loss per share if the effect of such inclusion is anti-dilutive. The Company’s potentially dilutive securities, which include convertible redeemable preferred stock and outstanding stock options under the 2019 Equity Incentive Plan (“2019 Plan”) and the 2021 Equity Incentive Plan (“2021 Plan”), have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.
Recently Issued Accounting Pronouncements
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures which requires significant disclosures about income taxes, primarily focused on the disclosure of income taxes paid and the rate reconciliation table. The new guidance will be applied prospectively and is effective for the Company for fiscal periods beginning after December 15, 2024. The Company is evaluating the impact of the standard on the Company’s financial statements.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (ASU 2024-03) which requires public business entities to provide enhanced disaggregation of expenses in financial statements, including detailed disclosures on inventory purchases, employee compensation, depreciation, and amortization. The new guidance is effective for the Company for fiscal periods beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. The Company is evaluating the impact of the standard on the Company’s financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segments Disclosures (“ASU No. 2023-07”), which improves segment disclosure requirements, primarily through enhanced disclosure requirements for significant segment expenses. The improved disclosure requirements apply to all public entities that are required to report segment information, including those with only one reportable segment. We adopted ASU No. 2023-07 on January 1, 2024. The adoption had no impact on the reportable segment we have identified, and additional required disclosures have been included in Note 16. Segment Reporting.
2. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
|
|
At December 31, |
|
|||||
|
|
2023 |
|
|
2024 |
|
||
Land |
|
$ |
2,150,038 |
|
|
$ |
2,150,038 |
|
Building |
|
|
6,105,570 |
|
|
|
6,105,570 |
|
Property |
|
|
1,767,231 |
|
|
|
1,767,231 |
|
Laboratory equipment |
|
|
2,146,637 |
|
|
|
2,146,637 |
|
Office equipment |
|
|
225,369 |
|
|
|
225,369 |
|
Furniture and fixtures |
|
|
292,045 |
|
|
|
292,045 |
|
Leasehold improvements |
|
|
354,276 |
|
|
|
354,276 |
|
Construction in progress |
|
|
10,443,859 |
|
|
|
13,545,161 |
|
|
|
$ |
23,485,025 |
|
|
$ |
26,586,327 |
|
Less: Accumulated depreciation and amortization |
|
|
(3,031,841 |
) |
|
|
(3,676,458 |
) |
Property, plant and equipment, net |
|
$ |
20,453,184 |
|
|
$ |
22,909,869 |
|
112
Construction in progress of $13.5 million represents direct costs of construction and equipment incurred for the Company’s new research lab and manufacturing facilities, that are not ready for their intended use. Depreciation and amortization expense for the year ended December 31, 2023 was $794,619, of which $541,679 is included in research and development expenses. Depreciation and amortization expense for the year ended December 31, 2024 was $644,616, of which $390,209 is included in research and development expenses.
During the year ended December 31, 2023 and 2024, the Company capitalized interest expense of $95,627 and $189,416, respectively, which is presented within Construction in progress.
3. Fair Value of Financial Instruments
The carrying amount of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, U.S. government backed securities with maturity dates up to one year, accounts payable and accrued liabilities, are measured at approximate fair value due to their short-term maturities.
Money market funds included in cash and cash equivalents and U.S. government-backed securities are measured at fair value based on quoted prices in active markets, which are considered Level 1 inputs. No transfers between levels occurred during the periods presented. The following table presents the Company’s assets which were measured at fair value at December 31, 2023 and 2024:
|
|
At December 31, 2023: |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
1,626,129 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,626,129 |
|
Total |
|
$ |
1,626,129 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,626,129 |
|
|
|
At December 31, 2024: |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
3,748,325 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,748,325 |
|
Total |
|
$ |
3,748,325 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,748,325 |
|
4. Investments
In December 2020, the Company entered into the Wugen License for limited rights to develop, manufacture and commercialize cellular therapy products based on two of the Company’s fusion protein molecules. As part of the consideration received for the Wugen License, the Company received shares of Wugen common stock, which were recognized at $1.6 million, the fair value of the securities as of December 24, 2020, the effective date for the Wugen License. Initial recognition was at fair value based on level 3 inputs, since there was no public market on which to trade these shares at the time they were received. The fair value was determined based primarily on the pricing and terms of a third-party financing completed by Wugen in 2020. So long as there continues to be no public market for these securities, the Company will classify this asset as a cost method investment, recorded at cost less impairment adjusted for observable market changes.
As of December 31, 2023 and 2024, Investments had a balance of $1.6 million, reflecting the investment in Wugen, which the Company continues to carry at cost since no public market exists for these securities and no impairment adjustments have been necessary since the acquisition date. See Note 18. Subsequent Events.
113
5. Accrued Liabilities and Other Current Liabilities
As of December 31, 2023, the Company had a balance of $2.6 million included in Accrued liabilities and other current liabilities in the balance sheet included in the audited financing statements, consisting of $392,000 for construction expenses, $105,000 for manufacturing expenses, $1.1 million for legal expenses, $262,000 for clinical expenses, $365,000 in bonus expense, $160,000 for salary expenses, $119,000 for the current portion of long-term debt, $28,500 in lease liability and $68,500 of other liabilities.
As of December 31, 2024, the Company had a balance of $981,940 included in Accrued liabilities and other current liabilities in the balance sheet included in the audited financing statements, consisting of $422,000 for construction expenses, $49,000 for manufacturing expenses, $155,000 for legal expenses, $121,000 for clinical expenses, $5,000 in bonus expense, $202,000 for salary expenses and $28,000 of other liabilities.
6. Debt, Net
Cogent Bank Loan
On August 15, 2022, the Company entered into the 2022 Loan Agreement with Cogent Bank, pursuant to which it received $6.5 million in proceeds to purchase a building that will become the Company's new headquarters. The loan is secured by a first priority lien on the building. The interest-only period was one year followed by 48 months of equal payments of principal and interest beginning on September 15, 2023 based on a 25-year amortization rate. The unamortized balance is due on August 15, 2027 (the “Maturity Date”), and bears interest at a fixed per annum rate equal to 5.75%. Upon the Maturity Date, a final payment of unamortized principal will be due. The Company has the option to prepay the outstanding balance of the loan prior to the Maturity Date without penalty. Under the terms of the 2022 Loan Agreement, the Company is required to keep an operating account from which payments to service the Cogent Bank Loan will be drawn. In addition, the Company also agreed to maintain an escrow account with adequate funds for at least 90 days of principal payments, interest payments, taxes and insurance, with a balance of $185,436 as of December 31, 2024.
As of December 31, 2024, certain subcontractors have filed mechanics liens related to unpaid invoices issued in connection with the Company’s construction of its new manufacturing facilities and upgraded research laboratories. The 2022 Loan Agreement contains a provision for a discretionary default in the event that the Company fails to pay sums due in connection with construction of any improvements; however, as of the reporting date, the lender has not elected to do so. As of December 31, 2024, the Company has reflected this loan as Short-term debt, net, to reflect that the lender has the right to accelerate the loan under a discretionary default provision. As of December 31, 2024, $6.3 million is included in Short-term debt, net in the accompanying audited balance sheet.
Senior Secured Notes
On March 31, 2024, the Company entered into a Note Purchase Agreement with the Purchasers (as defined in the Note Purchase Agreement), pursuant to which the Company may issue secured notes up to an aggregate principal amount up to $10.0 million (“Secured Notes”).
As of December 31, 2024, the Company received $6.9 million through the issuance of Secured Notes, which is included within Debt, Net on the accompanying audited balance sheet. Investors included Dr. Hing C. Wong, Founder and Chief Executive Officer, who invested $2.4 million; Rebecca Byam, Chief Financial Officer, who invested $220,000; Lee Flowers, Senior Vice President of Business Development, who invested $25,000; Scott T. Garrett, the Chairman of the Company’s board of directors, who invested $140,000; Gary M. Winer, a member of our board of directors, who invested $60,000; Rick S. Greene, a member of the board of directors, who invested $25,000, as well as unrelated parties.
As of July 2, 2024, existing investors in Secured Notes unanimously agreed to an Amended and Restated Note Purchase Agreement and related documents (“Amended and Restated Note Purchase Agreement”). On September 30, 2024, existing investors approved an amendment to the Amended and Restated Note Purchase Agreement which extended the last closing date to October 31, 2024. No other terms were changed. Under the terms of the Amended and Restated Note Purchase Agreement, the Secured Notes continue to bear interest at a rate of 9% per annum, payable quarterly in arrears. The Secured Notes will mature on August 30, 2026 (the “Maturity Date”), on which date the principal balance, accrued but unpaid interest and other amounts owed under the terms of the Amended and Restated Note Purchase Agreement shall be due and payable. The Company pledged its equity ownership interest in Wugen, which was equivalent to a 5.6% ownership stake in that company as of December 31, 2024 (“Pledged Collateral”). The Pledged Collateral will be held and released according to the terms of the Escrow Agreement, as security for the Secured Notes.
The Secured Notes have a Mandatory Prepayment provision, according to which the Company is required to prepay the Secured Notes before the Maturity Date under certain circumstances. In the event of a Mandatory Prepayment, Secured Notes may receive a bonus payment based on the gross proceeds of the sale of the Pledged Collateral. If the Secured Notes are repaid on the Maturity Date, holders will receive their pro rata share of a fixed bonus payment of $3.4 million in addition to payment of outstanding principal and accrued and unpaid interest.
114
If a bonus payment is paid, then there is no prepayment penalty. The Amended and Restated Note Purchase Agreement also contains default provisions, according to which, following an event of default, the Company may be required to distribute the Pledged Collateral to the Purchasers on a pro rata basis based on a $10.0 million issuance of Secured Notes, in full satisfaction of the indebtedness evidenced by the Secured Notes.
As of December 31, 2024, the fair value of the embedded derivative, which incorporated the likelihood of certain events occurring, was immaterial. Thus, as of December 31, 2024, the Company did not recognize the embedded derivative in the accompanying condensed financial statements. See Note 18. Subsequent Events.
The Company accounts for the bonus payment to be paid if the Secured Notes are repaid on the Maturity Date by accreting the bonus payment to the full amount due on the Maturity Date, utilizing the effective interest rate method. As of December 31, 2024, the Company recognized $527,304 for the accretion of the fixed bonus payment.
Five-Year Maturities
The Company classifies the total undiscounted contractual payments that are due in the next 12 months as current. The loan was initially measured on a present value basis. An amortization schedule is used to determine how much of each payment is applied to interest and principal each period. The payment is first applied to interest, and the remainder reduces the principal balance. The table below shows the amount of maturities for each of the five years following the date of the latest balance sheet:
Cogent Bank Loan |
|
|
|
|
|
|
Maturities per Year |
|
|
2025 |
|
$ |
127,623 |
|
2026 |
|
|
135,266 |
|
2027 |
|
|
6,079,440 |
|
Total Debt |
|
$ |
6,342,329 |
|
|
|
|
|
|
Senior Secured Notes |
|
|
|
|
|
|
Maturities per Year |
|
|
2026 |
|
$ |
9,252,700 |
|
Total Debt |
|
$ |
9,252,700 |
|
Note that the total debt in the table above includes the full accretion of debt issuance costs for the Cogent Bank Loan and the full accretion of the fixed bonus payment for the Senior Secured Notes.
7. License Agreements
Wugen License
On December 24, 2020, the Company entered into the Wugen License transferring rights to Wugen to develop, manufacture, and commercialize certain cellular therapy products based on two of the Company’s fusion protein molecules. The term of the agreement will expire on a product-by-product and country-by-country basis, upon the later of (i) ten years from the first commercial sale of the product or (ii) the expiration of the last-to-expire valid patent claim of such product. The Company concluded that Wugen is a customer and the Wugen License is a functional license under the provisions of Topic 606.
WY Biotech License
On November 17, 2024, the Company entered into the WY Biotech License transferring rights to WY Biotech to develop and commercialize a preclinical molecule constructed with the Company’s T-cell Receptor β Chain constant region (“TRBC”) drug discovery and development platform. The term of the agreement with expire on the date on which all obligations under this Agreement between the parties with respect to the payment of milestones or royalties with respect to licensed products have passed or expired. On March 17, 2025, the parties agreed to the principal terms of an amendment to the terms of the WY Biotech License. The Company concluded that WY Biotech is a customer and the WY Biotech License, as amended, is a functional license under the provisions of Topic 606.
115
Opt-In Right for WY Biotech License
Under the terms of the WY Biotech License, the Company has an “opt-in right” for United States, Canada, Central America, and South America markets for no cost, that may be exercised after the completion of a Phase 1 trial in China. WY Biotech is responsible for all of the costs for the clinical study. The Company will make a determination of whether it will exercise the Opt-In Right upon the release of a human-data read-out from the Phase 1 trial to be conducted by WY Biotech.
Milestones and Royalties
In addition to upfront fees and revenues from other transactions that took place upon entering the these licenses, the licenses includes milestone payments and royalties. The Company uses judgment to determine whether milestones or other variable consideration should be included in the transaction price. For revenue-based royalties, including milestone payments based on the level of sales, the Company will include royalties in the transaction price at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalties are allocated has been satisfied (or partially satisfied). As part of management’s evaluation of the transaction price, the Company considers numerous factors, including whether the achievement of the milestones is outside of its control, contingent upon the efforts of others or subject to scientific risks of success. If the Company concludes it is probable that a significant revenue reversal would not occur, the associated milestone payment is included in the transaction price. Milestone payments that are not within its control, such as regulatory approvals, are generally not considered probable until those milestones are achieved. The Company reevaluates the transaction price, including estimated variable consideration included in the transaction price and all constrained amounts, in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
8. Sale of Common Stock and Warrants
On November 18, 2024, the Company entered into a securities purchase agreement with a single institutional investor (the “Investor”) for the issuance and sale of (i) 4,160,000 shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) and (ii) pre-funded warrants to purchase up to 2,557,000 shares of Common Stock (the “Pre-Funded Warrants”) in a registered direct offering (the “Registered Offering”), pursuant to a shelf registration statement on Form S-3 (File No. 333-266991), which was declared effective by the SEC on August 26, 2022. The Registered Offering was made by means of a prospectus supplement filed with the SEC on November 20, 2024 that forms a part of such registration statement. In a concurrent private placement (the “Private Placement” and together with the Registered Offering, the “Offering”), the Company also issued unregistered warrants to purchase up to an aggregate of 6,717,000 shares of Common Stock (“Common Stock Warrants”) for $1.03 per share.
The Company sold the Common Stock and Pre-Funded Warrants with an accompanying Common Stock Warrant to purchase one share of Common Stock, and the Common Stock and Pre-Funded Warrants were immediately separated from the Common Stock Warrants and issued separately. The combined purchase price for each Share and accompanying Common Stock Warrant was $1.03 per unit and the combined purchase price for each Pre-Funded Warrant and accompanying Common Stock Warrant was $1.0299 per unit. The Common Stock Warrants have an exercise price of $1.03 per share, are exercisable immediately, and expire on the five-year anniversary of the date of issuance. The Pre-Funded Warrants have an exercise price of $0.0001 per share, are exercisable immediately, and will not expire until exercised in full.
The gross proceeds to the Company from the Offering were approximately $6.9 million before deducting the placement agent’s fees and other offering expenses of $638,045 payable by the Company. The Offering closed on November 20, 2024.
The Investor may not exercise any portion of the Common Stock Warrants or Pre-Funded Warrants to the extent it would beneficially own more than the limits defined in the respective Warrant Purchase Agreement. The exercise price and number of shares of Common Stock issuable upon the exercise of the Common Stock Warrants and Pre-Funded Warrants are subject to adjustment in the event of any stock dividends and distributions, stock splits, stock combinations or stock reclassifications, as described in the respective warrant agreements. Under certain circumstances, the warrants may be exercised on a “cashless” basis.
116
Both the Common Stock Warrants and Pre-Funded Warrants were classified as a component of permanent stockholders’ equity within additional paid-in-capital and were recorded at the issuance date. The Common Stock Warrants and Pre-Funded Warrants are equity classified because they are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, permit the holders to receive a fixed number of shares of Common Stock upon exercise, are indexed to the Company’s Common Stock and meet the equity classification criteria. In addition, the Common Stock Warrants and the Pre-Funded Warrants do not provide any guarantee of value or return.
On November 20, 2024, the Investor exercised all of the Pre-Funded Warrants by delivering a notice of exercise to the Company and paying the exercise price. The Company issued 2,557,000 shares of registered Common Stock to the Investor on November 21, 2024.
There were no Common Stock Warrants exercised as of December 31, 2024.
9. Preferred Stock
At December 31, 2023 and December 31, 2024, the Company had 10,000,000 shares of preferred stock authorized and no such shares issued.
10. Net Loss Per Share
The following table summarizes the computation of the basic and diluted net loss per share:
|
|
Years Ended December 31, |
|
|
|||||
|
|
2023 |
|
|
2024 |
|
|
||
Numerator: |
|
|
|
|
|
|
|
||
Net loss |
|
$ |
(24,994,277 |
) |
|
$ |
(30,023,814 |
) |
|
Denominator: |
|
|
|
|
|
|
|
||
Weighted-average common shares outstanding |
|
|
35,929,446 |
|
|
|
38,793,018 |
|
|
Net loss per share, basic and diluted |
|
$ |
(0.70 |
) |
|
$ |
(0.77 |
) |
|
The following table summarizes the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their inclusion would be anti-dilutive:
|
|
At December 31, |
|
|||||
|
|
2023 |
|
|
2024 |
|
||
Common stock options |
|
|
1,779,338 |
|
|
|
1,784,036 |
|
Potentially dilutive securities |
|
|
1,779,338 |
|
|
|
1,784,036 |
|
11. Stock-based Compensation
On June 21, 2021, the 2021 Plan was adopted by the Company’s board of directors and approved by the Company’s stockholders. As of the adoption date, the 2019 Plan was terminated. No terms were changed for grants previously awarded under the 2019 Plan, and the Company concluded a modification did not occur. Under the 2019 Plan, the Company primarily granted employees incentive stock options, which had a maximum term of ten years from the date of the grant. Generally, the incentive stock options granted under the 2019 Plan have a four-year, service-based vesting period. All of the options granted under the 2019 Plan had an exercise price equal to the fair value of a share of common stock on the date of the grant, according to Company policy.
117
The 2021 Plan permits the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, and stock bonus awards. The 2021 Plan initially reserved 3,444,343 shares of Common Stock, including the transfer of remaining shares reserved under the 2019 Plan. In addition, the number of shares reserved for issuance under the 2021 Plan will increase automatically on the first day of each fiscal year beginning with the 2022 fiscal year.
Under the 2021 Plan, the term of each stock option must be stated in the stock award agreement. In the case of an incentive stock option, the term will be ten years from the date of grant, or such shorter term as may be provided in the stock award agreement. Moreover, in the case of an incentive stock option granted to a participant who owns stock representing more than 10% of the total combined voting power of all classes of our stock or the stock of any of our affiliates, the term of the incentive stock option will be five years from the date of grant or such shorter term as may be provided in the stock award agreement. Under the 2021 Plan, the Company continues to have a policy to grant options with an exercise price equal to the fair value of a share of common stock, as determined by the closing price on Nasdaq on the grant date.
The following summarizes the Company’s stock option activity for the years ended December 31, 2023 and 2024:
|
Shares |
|
|
Weighted |
|
Weighted Average |
|
|
|
|||
|
Issuable |
|
|
Average |
|
Remaining |
|
Aggregate |
|
|||
|
under |
|
|
Exercise |
|
Contract |
|
Intrinsic |
|
|||
|
Options |
|
|
Price |
|
Term |
|
Value |
|
|||
Outstanding at December 31, 2022 |
|
|
1,867,458 |
|
|
3.11 |
|
8.5 years |
|
$ |
671,878 |
|
Granted |
|
|
91,000 |
|
|
1.88 |
|
|
|
|
|
|
Exercised |
|
|
(148,664 |
) |
|
0.16 |
|
|
|
|
|
|
Forfeited or cancelled |
|
|
(26,342 |
) |
|
1.86 |
|
|
|
|
|
|
Expired |
|
|
(4,114 |
) |
|
3.40 |
|
|
|
|
|
|
Outstanding at December 31, 2023 |
|
|
1,779,338 |
|
|
3.31 |
|
7.7 years |
|
$ |
238,210 |
|
Exercisable at December 31, 2023 |
|
|
942,998 |
|
|
3.07 |
|
7.6 years |
|
$ |
173,385 |
|
|
|
|
|
|
|
|
|
|
|
|
||
Outstanding at December 31, 2023 |
|
|
1,779,338 |
|
|
3.31 |
|
7.7 years |
|
$ |
238,210 |
|
Granted |
|
|
50,000 |
|
|
1.12 |
|
|
|
|
|
|
Exercised |
|
|
(13,473 |
) |
|
0.18 |
|
|
|
|
|
|
Forfeited or cancelled |
|
|
(21,901 |
) |
|
1.69 |
|
|
|
|
|
|
Expired |
|
|
(9,928 |
) |
|
1.91 |
|
|
|
|
|
|
Outstanding at December 31, 2024 |
|
|
1,784,036 |
|
|
3.3 |
|
6.8 years |
|
$ |
56,352 |
|
Exercisable at December 31, 2024 |
|
|
1,336,886 |
|
|
3.18 |
|
6.7 years |
|
$ |
56,352 |
|
The exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options as of the reporting date. The intrinsic value of stock options exercised during the years ended December 31, 2023 and 2024 was $202,917 and $14,484, respectively. The weighted-average fair value of options granted during the years ended December 31, 2023 and 2024 was $1.42 and $0.85 per share, respectively.
For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria are probable of being met.
In determining the grant date fair value of the stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and its determination generally requires significant judgment.
Fair Value of Common Stock—Since the completion of our initial public offering on July 19, 2021, the fair value of each share of common stock underlying stock option grants is based the quoted market price on the primary stock exchange on which our common stock is traded on the day the stock award or option is granted.
Expected term—The expected term of stock options is determined using the “simplified” method, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data.
118
Expected volatility—The expected volatility was derived from the historical stock volatilities of comparable peer public companies within our industry.
Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury Bond in effect at the time of grant for periods corresponding with the expected term.
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.
For the years ended December 31, 2023 and 2024, the fair value of employee and director stock option awards was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:
|
|
Years Ended December 31, |
||
|
|
2023 |
|
2024 |
Expected term (years) |
|
5.71 |
|
5.5 |
Expected volatility |
|
89.90% |
|
92.93% |
Risk-free interest rate |
|
3.99% |
|
4.22% |
Dividend yield |
|
— |
|
— |
Fair value underlying common stock |
|
$1.42 |
|
$0.85 |
For the year ended December 31, 2023, for options with service-based vesting conditions, the Company recognized $65,941 of employee stock-based compensation expense in research and development expenses and $937,808 of employee stock-based compensation in general and administrative expenses in the statement of operations included in the audited financial statements. For the year ended December 31, 2024, for options with service-based vesting conditions, the Company recognized $61,250 of employee stock-based compensation expense in research and development expenses and $947,762 of employee stock-based compensation in general and administrative expenses in the statement of operations included in the audited financial statements.
As of December 31, 2024, the Company had an aggregate of $799,393 of unrecognized employee stock-based compensation cost for options with service-based vesting, which is expected to be recognized over a weighted average vesting period of 0.72 years.
12. Employee Benefit Plan
The Company offers a defined contribution savings plan (the “Benefit Plan”) under Section 401 of the Internal Revenue Code for all eligible employees. The Benefit Plan allows for discretionary contributions which are limited to the maximum allowable for federal tax purposes. The total expense related to the discretionary payments made by the Company to the Benefit Plan for the years ended December 31, 2023 and 2024 was $184,214 and $160,851, respectively.
13. Collaborative Arrangements
The Company has certain contract research agreements with contractors that were entered during the two years ended December 31, 2024 for the (i) hybridoma development, (ii) cell line manufacturing productivity improvement, and (iii) research to support pre-clinical studies. Under the hybridoma development and cell line manufacturing productivity improvement agreements, we own all rights to the resulting intellectual property, including the antibodies, sequences, and data. For certain contractors, the Company is obligated to pay one future milestone payment upon filing and acceptance of an IND for each respective human antibody or protein from cell line; however no additional future development or financial obligations are due under these contract research agreements as of December 31, 2023 or 2024. For certain research collaborations agreements, the research intellectual property may be jointly owned or ownership may be based upon inventorship. In those circumstances, the Company has obtained the exclusive option to an exclusive license for the research intellectual property.
119
14. Income Taxes
The Company did not have a provision for income taxes (current or deferred tax expense) for tax years ended December 31, 2023 and 2024.
The following table summarizes the differences between the statutory federal income tax rate and the Company's effective income tax rate (percent data):
Rate Reconciliation |
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
||||
Net Loss Before Taxes |
|
$ |
(24,994,277 |
) |
|
|
|
|
|
(30,023,814 |
) |
|
|
|
||
Benefit at statutory rate |
|
|
(5,248,798 |
) |
|
|
21.00 |
% |
|
|
(6,305,001 |
) |
|
|
21.00 |
% |
State tax benefit net of federal benefit |
|
|
(1,027,320 |
) |
|
|
4.11 |
% |
|
|
(1,303,419 |
) |
|
|
4.34 |
% |
Permanent book/tax differences |
|
|
31,046 |
|
|
|
(0.12 |
%) |
|
|
34,362 |
|
|
|
(0.11 |
%) |
Deferred adjustments & true-up |
|
|
— |
|
|
|
0.00 |
% |
|
|
54,325 |
|
|
|
(0.18 |
%) |
R&D credit carryforward |
|
|
(540,777 |
) |
|
|
2.16 |
% |
|
|
(324,035 |
) |
|
|
1.08 |
% |
Change in valuation allowance |
|
|
6,785,849 |
|
|
|
(27.15 |
%) |
|
|
7,843,768 |
|
|
|
(26.13 |
%) |
Income tax expense/(benefit) |
|
$ |
— |
|
|
|
0.00 |
% |
|
$ |
— |
|
|
|
0.00 |
% |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2023 and 2024 are presented below:
|
|
2023 |
|
|
2024 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Federal net operating loss carryforward |
|
$ |
8,403,928 |
|
|
|
13,058,574 |
|
State net operating loss carryforward |
|
|
1,738,257 |
|
|
|
2,707,319 |
|
Capitalized section 174 R&D expenses |
|
|
3,872,297 |
|
|
|
4,113,266 |
|
Reserve for credit losses |
|
|
1,330,613 |
|
|
|
1,330,613 |
|
R&D credit |
|
|
1,260,942 |
|
|
|
1,530,652 |
|
Accrued expenses |
|
|
123,408 |
|
|
|
37,786 |
|
Capitalized legal fees for patents |
|
|
1,235,488 |
|
|
|
2,698,931 |
|
Stock-based compensation |
|
|
566,396 |
|
|
|
792,057 |
|
Charitable contributions |
|
|
65 |
|
|
|
65 |
|
ROA asset |
|
|
106 |
|
|
|
— |
|
Total deferred tax assets |
|
|
18,531,500 |
|
|
|
26,269,263 |
|
Deferred tax Liabilities: |
|
|
|
|
|
|
||
Unrealized gain/loss |
|
$ |
(5,238 |
) |
|
$ |
(5,238 |
) |
Depreciable assets |
|
|
(127,474 |
) |
|
|
(27,054 |
) |
Deferred revenue/costs |
|
|
(14,202 |
) |
|
|
(8,617 |
) |
Total deferred tax liability |
|
|
(146,914 |
) |
|
|
(40,909 |
) |
Net deferred tax asset |
|
|
18,384,586 |
|
|
|
26,228,354 |
|
Less: valuation allowance |
|
|
(18,384,586 |
) |
|
|
(26,228,354 |
) |
Net deferred tax asset (after valuation allowance) |
|
$ |
— |
|
|
$ |
— |
|
A valuation allowance is recorded to reduce the deferred tax asset if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2024, after consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $26.2 million is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized. During the year ended December 31, 2024, the valuation allowance increased by $7.8 million.
As of December 31, 2023 and 2024, the Company had available federal NOL carryforwards of $40.0 million and $62.2 million, respectively. The Company also has available state NOLs carryforwards of approximately $40.0 million and $62.3 million, as of December 31, 2023 and 2024, respectively. The federal and state NOLs will carryforward indefinitely. The Federal NOLs are available to offset 80% of taxable income. In addition, the Company had federal research and development credits carryforwards of $1.3 million and $1.5 million, as of December 31, 2023 and 2024, respectively, to reduce future federal income taxes, if any. These carryforwards expire from 2038 through 2044 and are subject to review and possible adjustment.
120
Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the Code), substantial changes in the Company’s ownership may limit the amount of net operating loss and research and development credit carryforwards that could be used annually in the future to offset taxable income. A formal Section 382 study has not been completed to determine if an ownership change has occurred and if its net operating losses are subject to an annual limitation. Such annual limitations could affect the utilization of NOL and tax credit carryforwards in the future.
Effective for tax years beginning after December 31, 2021, Section 174 requires that research and experimental expenses (“R&E”) be capitalized and amortized. The amortization period is five years for domestic expenses and 15 years for foreign expenses. Since the Company has a significant amount of expenses that fall under the definition of R&E expenses, the change can materially affect the Company's tax provision.
During the year ended December 31, 2023 and 2024, the Company analyzed its expenses and determined that expenses of $9.8 million and $6.4 million, respectively, fell within the definition of Section 174. Accordingly, these expenditures were capitalized and amortized for tax purposes. As of December 31, 2023 and 2024, the Company had $2.6 million and $3.8 million, respectively, of amortization expense related to Section 174 capitalized R&E costs.
The Company’s tax returns remain subject to examination by tax authorities beginning with the tax year ended December 31, 2020. However, due to NOLs and credits carried forward from prior tax years, substantially all tax years may also be subject to examination. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon review by the taxing authorities based on the technical merits. The Company recognizes interest accrued and penalties for unrecognized tax benefits in its tax provision. As of December 31, 2023 and 2024, the Company had not recognized any expense related to uncertain tax position in its statement of operations.
15. Related Party Transactions
On February 20, 2024, the Company completed a $2.5 million private placement of shares of common stock with certain of its officers and directors at a price of $1.40 per share. The Company issued 1,785,718 shares of common stock in connection with the offering. The shares have not been registered and will not be sold or transferred except as permitted under law and pursuant to registration or exemption therefrom. The Board of Directors and Audit Committee of the Board of Directors reviewed the transaction under the Company’s policy for Related Party Transactions (the “Policy”) and determined that the transaction was in compliance with the Policy.
As of October 31, 2024, the Company issued an aggregate of $6.9 million of Secured Notes, with $2.9 million from the Company’s officers and members of the board of directors, including $2.4 million purchased by Dr. Hing C. Wong, Founder and CEO, $220,000 purchased by Rebecca Byam, Chief Financial Officer, $140,000 purchased by Scott T. Garrett, Chairman of the board of directors, $60,000 purchased by Gary M. Winer, member of the board of directors, $25,000 purchased by Lee Flowers, Senior Vice President for Business Development, and $25,000 purchased by Rick S. Greene, member of the board of directors.
16. Segment Reporting
HCW Biologics, Inc. has one reportable segment: life science. The life science segment consists of operations focused on discovering and developing novel immunotherapies to lengthen health span by disrupting the link between chronic, low-grade inflammation and diseases. The Company’s CODM is the chief executive officer.
The accounting policies of the life science segment are the same as those described in the summary of significant accounting policies. The CODM assesses performance for the life science segment based on net loss, which is reported on the statement of operations as net loss. The measure of segment assets is reported on the balance sheet as total assets.
The Company has not generated any product revenue from commercial product sales of internally-developed immunotherapeutic products for the treatment of diseases, as no products have been approved for commercial sale as of December 31, 2024. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future as it advances molecules through all stages of development and clinical trials and, ultimately, seek approval for commercial sale.
As such, the CODM uses cash forecast models in deciding how to invest into the life science segment. Such cash forecast models are reviewed to assess the entity-wide operating results and performance in conjunction with monitoring the results of R&D experiments for preclinical compounds and clinical trial data for clinical-stage compounds. The assessment of results of preclinical and clinical studies are critical to the allocation of resources by the CODM.
121
The tables below summarizes the significant expense categories regularly reviewed by the CODM for the years ended December 31, 2023 and 2024:
|
|
Years Ended |
|
|
|||||
|
|
2023 |
|
|
2024 |
|
|
||
Revenues: |
|
|
|
|
|
|
|
||
Revenues |
|
$ |
2,841,794 |
|
|
$ |
2,566,792 |
|
|
Cost of revenues |
|
|
(2,281,434 |
) |
|
|
(1,607,389 |
) |
|
Net revenues |
|
|
560,360 |
|
|
|
959,403 |
|
|
|
|
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
|
||
Research and development expenses |
|
|
|
|
|
|
|
||
Salaries, benefits and related expenses |
|
|
2,940,979 |
|
|
|
2,797,370 |
|
|
Manufacturing and materials |
|
|
1,280,351 |
|
|
|
1,425,734 |
|
|
Preclinical expenses |
|
|
1,607,601 |
|
|
|
859,701 |
|
|
Clinical trials |
|
|
1,059,731 |
|
|
|
558,215 |
|
|
Overhead allocations |
|
|
787,654 |
|
|
|
747,974 |
|
|
Total research and development expenses |
|
|
7,676,316 |
|
|
|
6,388,994 |
|
|
General and administrative |
|
|
|
|
|
|
|
||
Salaries, benefits and related expenses |
|
|
3,216,860 |
|
|
|
2,563,936 |
|
|
Professional services(a) |
|
|
1,257,879 |
|
|
|
1,171,885 |
|
|
Facilities and office expenses |
|
|
634,080 |
|
|
|
654,996 |
|
|
Depreciation expenses |
|
|
266,763 |
|
|
|
277,554 |
|
|
Rent and occupancy expenses |
|
|
156,807 |
|
|
|
205,511 |
|
|
Insurance |
|
|
789,678 |
|
|
|
952,200 |
|
|
Taxes |
|
|
334,962 |
|
|
|
196,804 |
|
|
Other expenses |
|
|
122,486 |
|
|
|
289,406 |
|
|
Total general and administrative expenses |
|
|
6,779,515 |
|
|
|
6,312,292 |
|
|
Other segment items(b) |
|
|
11,098,806 |
|
|
|
18,281,931 |
|
|
Total operating expenses |
|
|
25,554,637 |
|
|
|
30,983,217 |
|
|
Net segment loss |
|
$ |
(24,994,277 |
) |
|
$ |
(30,023,814 |
) |
|
(a) |
Professional services consist primarily of audit and accounting advisory services, tax advisory services, corporate legal services related to SEC compliance, and legal fees related to patent filings.
|
(b) |
Other segment items include the following unusual or nonrecurring items: |
|
|
Years Ended |
|
|
|||||
|
|
2023 |
|
|
2024 |
|
|
||
Arbitration legal fees |
|
$ |
6,571,689 |
|
|
$ |
15,910,480 |
|
|
Reserve for credit losses and other expenses |
|
|
5,250,000 |
|
|
|
1,300,000 |
|
|
Accretion of fixed bonus upon maturity of Senior Notes |
|
|
— |
|
|
|
527,304 |
|
|
Interest expense |
|
|
283,042 |
|
|
|
631,137 |
|
|
Other income, net |
|
|
(1,005,925 |
) |
|
|
(86,990 |
) |
|
Other segment items |
|
$ |
11,098,806 |
|
|
$ |
18,281,931 |
|
|
122
17. Commitments and Contingencies
Operating Leases
The Company has operating leases for approximately 12,250 square feet of space located in Miramar, Florida. On February 29, 2024, the lease on the Company's current location reached the end of its term and the Company entered a new one-year lease for the same location which commenced on March 1, 2024 and terminated on February 28, 2025. On January 27, 2025, the Company entered a new one-year lease for the same location which commenced on March 1, 2025 and terminates on February 28, 2026. As a lease of 12 months or less in duration and qualifies for a short-term lease exemption under ASC 842-20-25-2. The Company elected to account for this lease on a straight-line basis over the lease term and will not recognize a ROU asset and a lease liability as a result. The Company has no obligations under financing leases.
As of December 31, 2024, the remaining lease payments were as follows:
2025 |
|
$ |
293,844 |
|
2026 |
|
$ |
49,349 |
|
Total future minimum lease payments |
|
$ |
343,193 |
|
For the years ended December 31, 2023 and 2024, rent expense recognized by the Company was $169,700 and $196,000, respectively, of which $88,800 and $101,300, respectively, is included in Research and development in the statements of operations included in the audited financial statements.
Contractual Commitments
The Company has commitments with a third-party manufacturing organization to supply us with clinical grade materials. As of December 31, 2024, we are under contract for obligations of $12,500 that we expect to pay during the year ending December 31, 2025. As of December 31, 2024 the Company had commitments to fund $4.4 million for future construction costs related to the buildout of its new headquarters and manufacturing facility under the terms of a construction agreement with BE&K Building Group (“Construction Contract”) , which are not included in the balance sheets. The Construction Contract was terminated as of December 31, 2024. As of December 31, 2024, certain subcontractors had filed mechanics liens related to unpaid invoices issued in connection with the facility. On December 16, 2024, BE&K sent the Company a draft, unfiled lawsuit and requested the parties discuss payment. On January 22, 2025, the Company entered into a forbearance agreement with BE&K to allow the Company until March 31, 2025 to continue efforts to find the financing required to complete the construction and renovation of the building. Pursuant to the forbearance agreement, the Company made an initial payment of $1.0 million in partial satisfaction of amounts owing to BE&K and its subcontractors. The Company has continued to pursue financing alternatives to provide the funding needed to come current in past amounts due and complete the construction and renovation of the Property.
Project Financing
On January 10, 2024, the Company exercised its right to terminate its credit agreement (the “Credit Agreement”), dated April 21, 2023, with Prime Capital Ventures, LLC (the “Lender”), as permitted under the terms of the Credit Agreement. The termination followed repeated delays in funding and related concerns. There are no borrowings under the Credit Agreement, and the Company will not incur any penalties as a result of such termination under the terms of the Agreement. Upon exercising its right to terminate the Agreement, the Company was entitled to receive the return of the $5.3 million that the Company placed on deposit to establish an interest reserve account with the Lender. Subsequent to the year ended December 31, 2023, the Lender defaulted on its obligation to return the interest reserve deposit. Given the uncertainty of when or if funds will be recovered from the Lender, the Company recognized a reserve for a credit loss for $5.3 million as of December 31, 2023. The Company continues to pursue all available remedies to recover these funds, including legal actions, receivership and insurance.
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Legal Matters
Legal Proceedings
From time to time, the Company is a party to or otherwise involved in legal proceedings, including suits, assessments, regulatory actions and investigations generally arising out of the normal course of business. In addition, the Company enters into agreements that may include indemnification provisions, pursuant to which the Company agrees to indemnify, hold harmless and defend the indemnified parties for losses suffered or incurred by the indemnified party. When the Company believes that the outcome of such a matter will result in a liability that is probable to be incurred and result in a potential loss, or range of loss, that can be reasonably estimated, the Company will accrue a liability and make the appropriate disclosure in the footnotes to the financial statements.
Arbitration, Settlement and General Release
On December 23, 2022, Altor BioScience, LLC and NantCell, Inc. (collectively “ImmunityBio”) initiated an arbitration against Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, in California alleging breach of contract and fiduciary duty, among other claims . On that same date, ImmunityBio filed a lawsuit against the Company in federal court alleging misappropriation of trade secrets, inducement of breach of contract and breach of fiduciary duty, among other claims against the Company. On April 26, 2023, the parties stipulated that ImmunityBio’s action against the Company would be consolidated with the ImmunityBio Arbitration demand against Dr. Wong. On April 27, 2023, the Court approved the parties’ stipulation and ordered the parties to Arbitration. On May 1, 2023, ImmunityBio filed a demand against the Company before JAMS. On May 3, 2023, ImmunityBio dismissed the federal court action without prejudice and the Court ordered the case dismissed without prejudice and closed the case. ImmunityBio’s proceeding against the Company proceeded in Arbitration before JAMS and consolidated with the arbitration ImmunityBio initiated against Dr. Wong (the “Arbitration”). On March 26, 2024, ImmunityBio filed a complaint (the “Complaint”) against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong.
As reported in the Company’s Form 8-K filed on July 18, 2024 and described in Part I, Item 3. – “Legal Proceedings,” as of July 13, 2024, the Company and Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, entered into a confidential Settlement Agreement and Release (the “Settlement Agreement”) with Altor BioScience, LLC (“Altor”), NantCell, Inc. (“NantCell”), and ImmunityBio, Inc. (the parent of Altor and NantCell, together with Altor and NantCell, “ImmunityBio”), to resolve the previously disclosed Arbitration before JAMS brought by Altor and NantCell as well as the Complaint Altor filed against the Company in the Chancery Court of the State of Delaware for the contribution of legal fees and expenses advanced to Dr. Wong. The Settlement Agreement includes mutual general releases by and among the parties thereto. No party is required to make any monetary payments to any other party or person under the Settlement Agreement and each party will bear its own expenses incurred in connection with the matter. In accordance with the provisions of the Settlement Agreement, upon completion of these procedures, the parties mutually stipulated that the Arbitration and Complaint should be dismissed. The Arbitration and the Complaint were dismissed on December 24, 2024.
Inflationary Cost Environment, Geopolitical Risks and Other Macroeconomic Factors
The Company’s operations have been affected by many headwinds, including inflationary pressures, rising interest rates, ongoing global supply chain disruptions resulting from increased geopolitical tensions such as the war in the Middle East, the conflict between Russia and Ukraine, China-Taiwan relations, financial market volatility and currency movements. The Company has been impacted by inflation, and may continue to be so, when procuring materials required for the buildout of our new headquarters, the costs for recruiting and retaining employees and other employee-related costs. Management employs a number of strategies to effectively navigate these issues, including product redesign, alternate sourcing, and establishing contingencies in budgeting and timelines. Future developments in these and other areas present material uncertainty and risk with respect to the Company's clinical trials, IND-enabling activities, buildout of the new headquarters, as well as the Company's financial condition and results of operations. The extent and duration of such events and conditions, and resulting disruptions to our operations, are highly unpredictable.
18. Subsequent Events
Subsequent events have been evaluated through the date the financial statements were filed. In addition to the required recognition or disclosure disclosed in the footnotes herein, there were also the following subsequent events after the reporting date:
As the Company disclosed in the Form 8-K filed on March 19, 2025, the Company and WY Biotech agreed to amend the WY Biotech License Agreement due to a delay in WY Biotech coming to a definitive agreement with their designated contract design development and manufacturing organization (“CDMO”).
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Specifically, in order to accommodate the delay, the parties agreed to restructure the payment schedule for the $7.0 million upfront license fees, including delaying the initial $4.0 million portion thereof that was originally due on or about March 17, 2025, to reduce the performance milestones that the Company must complete in order to earn the full $7.0 million nonrefundable upfront payments in June 2025, and to provide that either party may terminate the Agreement if WY Biotech is not able to definitively engage its CDMO by June 2025. Under the amended terms, the Company expects to fulfill our performance obligations and earn the full $7.0 million upfront fee in June 2025. There were no other material changes to the WY Biotech License Agreement, which involves the grant to WY Biotech of an exclusive, world-wide license to use and apply HCW11-006 for in vivo applications.
On March 3, 2025, the Nasdaq Hearings Panel (the “Panel”) of The Nasdaq Stock Market LLC (“Nasdaq” or the “Exchange”) granted the Company an extension in which to regain compliance with all Nasdaq continued listing rules. The Panel’s determination followed a hearing on February 13, 2025, at which the Panel considered the Company’s plan to regain compliance with Listing Rules 5450(a)(1), 5450(b)(2)(A) and 5450(b)(2&3)(C), the minimum bid price (“Bid Price”), the market value of publicly held securities (“MVPHS”) and the market value of listed securities (“MVLS”) rules, respectively. As a result of the extension, the Panel granted the Company’s request for continued listing on the Exchange, provided that the Company demonstrates compliance with the Bid Price Rule by April 28, 2025, and all other Exchange continued listing rules by June 15, 2025.
As reported in the Company’s Form 8-K filed on February 21, 2025, on February 20, 2025, the Company entered into an Equity Purchase Agreement with Square Gate Capital Master Fund, LLC - Series 4 (“Square Gate”), pursuant to which the Company will have the right, but not the obligation, to sell to Square Gate, and Square Gate will have the obligation to purchase from the Company, up to $20,000,000 (the “Maximum Commitment Amount”) (with a potential increase of an additional $20,000,000) worth of the Company’s shares of Common Stock, at the Company’s sole discretion, over the next 36 months (the “Put Shares”), subject to certain conditions precedent and other limitations. Square Gate covenanted not to cause or engage in any short sales or hedging transactions with respect to the shares of the Company’s Common Stock. On February 20, 2025, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with Square Gate, pursuant to which the Company agreed to submit to the SEC an initial registration statement on Form S-1 by April 6, 2025 and to use commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC. The Maxim Group LLC acted as the Company’s exclusive Placement Agent in connection with this transaction.
Pursuant to Equity Purchase Agreement, following the expiration of the due diligence period, the Company was obligated to pay Square Gate a commitment fee of $150,000, which was required to be paid in shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”), valued at the closing share price of the Common Stock on The Nasdaq Stock Market on February 19, 2025. The due diligence period expired on or about March 10, 2025. On March 12, 2025, the Company issued 384,615 shares of Common Stock to Square Gate, and such share will be restricted until such time as the Company has an effective S-1 registration statement to register these shares, as is required by the Registration Rights Agreement.
On February 20, 2025, the Company and certain holders of Senior Notes agreed on the Principal Terms for conversion of approximately $6.6 million of the outstanding principal of the Senior Notes into shares of the Company’s Common Stock at an exercise price of $0.65 per share, along with issuance of warrants to purchase shares of the Company’s Common Stock at an exercise price of $0.65 per share up to approximately $3.3 million of such shares, and the granting of rights to receive proceeds from some of the Company’s shares of Wugen common stock. Upon conversion, the Senior Notes will be surrendered, including the right to receive their pro rata portion of a $3.4 million fixed bonus if they had been repaid at maturity. The conversion terms are contingent on stockholder approval and will be subject to a vote at the Special Meeting of the Stockholders scheduled on March 31, 2025.
On February 21, 2025, the Company filed a definitive proxy statement related to matters that will be presented to stockholders for their approval at a Special Meeting of Stockholders (“Special Meeting”) to be held on March 31, 2025. At the Special Meeting, the Company will submit to its stockholders the following three proposals, each of which is, among other things, part of the Company’s plan to regain compliance with applicable Nasdaq continued listing requirements: (1) approval of one or more reverse splits of the Company’s Common Stock, (2) approval of the full issuance of shares of our Common Stock under an Equity line of Credit, and (3) approval of the issuance of shares of the Company’s Common Stock upon conversion of approximately $6.6 million of the $6.9 million outstanding principal of the Secured Notes pursuant to the Principal Terms for Conversion Amendment, as defined, and more fully described in Part II, Item 9B – “Other Information – Special Meeting of the Stockholders.”
After reaching an agreement earlier in January, on January 24, 2025, the Company received a $2.0 million insurance payment to offset its legal expenses related to fees incurred in mounting a defense for Dr. Hing C. Wong, the Company’s Founder and Chief Executive Officer, in the Arbitration between ImmunityBio and the Company and Dr. Wong. See Note 17. Commitments and Contingencies - Legal Matters.
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As of December 31, 2024, certain subcontractors had filed mechanics liens related to unpaid invoices issued in connection with construction of the Company’s new manufacturing facilities and upgraded research laboratories. On January 22, 2025, the Company entered into a forbearance agreement with BE&K Building Group, the prime contractor on the project, to allow the Company until March 31, 2025 to continue efforts to find the financing required to complete the construction and renovation of the Property. Pursuant to the forbearance agreement, the Company made an initial payment of $1.0 million in partial satisfaction of amounts owing to BE&K and its subcontractors. The Company has continued to pursue financing alternatives to provide the funding needed to come current in past amounts due and complete the construction and renovation of the facility.
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Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
As the Company reported in its Form 8-K filed on September 20, 2024, on September 19, 2024, the Audit Committee (the “Audit Committee”) of the Board of Directors (the “Board”) of HCW Biologics Inc. (the “Company”) dismissed Grant Thornton LLP (“Grant Thornton”) as the Company’s auditing firm, effective immediately. This decision was not related to any disagreements with Grant Thornton on any matter of accounting principles, financial statements disclosures, auditing scope or auditing procedure. The Audit Committee appointed Crowe LLP (“Crowe”), as the successor independent registered public accounting firm beginning in the quarter ended September 30, 2024, and is effective immediately.
Item 9A Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by the SEC Rules 13a-15(e) and 15d-15(e), we carried out an evaluation under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2024.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.
As of December 31, 2024, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2024.
Remediation of Previously Reported Material Weaknesses
During 2024, executive management made a strong commitment to the importance of internal control and to create and maintain an effective internal control environment commensurate with the Company’s growth. Management continued to implement improvements to the Company’s system of internal control, including reevaluating the adequacy of design and the operational effectiveness of internal controls over financial reporting in all financially significant processes. These improvements and remediation efforts include:
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Based on the remediation efforts described above that were performed in 2024, the principal executive officer and principal financial officer, along with management, concluded that the previously disclosed material weaknesses had been remediated as of December 31, 2024. These included:
Inherent Limitations of Internal Controls
While we strive to create a stronger control environment, we recognize that it is impossible for our internal controls over financial reporting to prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. While we are committed to continuously improve and strengthen our control environment, over time, our internal controls over financial reporting may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls over financial reporting may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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Changes in Internal Control over Financial Reporting
Except as described above, there were no changes in the Company’s internal control over the financial reporting during the fourth quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Independent Registered Public Accounting Firm
This Annual Report does not include an attestation report of our registered public accounting firm. For as long as we remain an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, we intend to take advantage of the exemption permitting us not to comply with the requirement that our independent registered public accounting firm provide an attestation on the effectiveness of our internal control over financial reporting.
Item 9B Other Information.
10b5-1 Trading Plans
During the fiscal quarter ended December 31, 2023, none of our officers or directors adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Special Meeting of Stockholders
The Company will hold a Special Meeting of Stockholders (“Special Meeting”) on Monday, March 31, 2025 at 10:00 a.m. Eastern Time. At the Special Meeting the Company will submit the following three proposals to its stockholders for approval:
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To approve an amendment to the Company’s Certificate of Incorporation on or before the one (1) year anniversary of the Special Meeting, to implement one or more reverse stock splits of the outstanding shares of the Company’s common stock, par value $0.0001 per share (our “Common Stock”) (as necessary to maintain a listing of our common stock on The Nasdaq Stock Market LLC (“Nasdaq”)) in an aggregate range from one-for-twenty (1:20) up to one-for-fifty (1:50), or anywhere between (the “Reverse Stock Split”), all as determined in the sole discretion of our Board of Directors (our “Board”) (the “Reverse Stock Split Proposal”) (“Proposal One”); |
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To approve, for purposes of complying with Nasdaq Listing Rule 5635(d), the full issuance of shares of our Common Stock, or such lesser number of shares as our Board determines, pursuant to that certain Equity Purchase Agreement, dated February 20, 2025 (the “Purchase Agreement”) set forth on Appendix A attached hereto and that certain Registration Rights Agreement, dated February 20, 2025 (the “Rights Agreement”) set forth on Appendix A hereto, entered into in connection with an equity line of credit with Square Gate Capital Master Fund, LLC – Series 4 (the “ELOC Proposal”) (“Proposal Two”); |
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To approve, for purposes of complying with Nasdaq Listing Rules 5635(c) and 5635(d), the issuance of shares of our Common Stock upon conversion of up to $6,905,000 of principal amount of Senior Secured Notes issued by the Company to certain investors therein, including certain officers, directors and stockholders of the Company (the “Noteholders”), pursuant to that certain Amended and Restated Senior Secured Note Purchase Agreement dated July 2, 2024, as amended by the First Amendment to Amended and Restated Senior Secured Note Purchase Agreement dated September 30, 2024, and as it may be further amended in accordance with the Principal Terms for Conversion Amendment, which has been approved by our Board and the Noteholders and set forth on Appendix B attached hereto (the “Principal Terms”) and such additional terms and conditions not materially inconsistent with such Principal Terms for Conversion as our Board may hereafter approve (the “Note Conversion Proposal”) (“Proposal Three”). |
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To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof. |
For the complete definitive proxy statement and its appendices, see Exhibit 10.35 to this Annual Report on Form 10-K.
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Sale of Common Stock and Warrants
On November 18, 2024, the Company entered into a securities purchase agreement (“SPA”) with a single institutional investor (the "Purchaser") pursuant to which the Company agreed to offer and sell (i) in a registered direct offering (the “Registered Offering”) (x) 4,160,000 shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), and (y) pre-funded warrants to purchase up to 2,557,000 shares of Common Stock (the “Pre-Funded Warrants”) and (ii) in a concurrent private placement (the “Private Placement” and together with the Registered Offering, the “Offering”), unregistered warrants to purchase up to an aggregate of 6,717,000 shares of Common Stock (“Common Stock Warrants”). The combined purchase price for each Share and accompanying Common Stock Warrant to purchase one share of common stock was $1.03 per Share and the combined purchase price for each Pre-Funded Warrant and accompany Common Stock Warrant to purchase one share of Common Stock is $1.0299.
The Common Stock and Pre-Funded Warrants were each sold with an accompanying Common Stock Warrant to purchase one share of Common Stock, and the Common Stock and Pre-Funded Warrants are immediately separated from the Common Stock Warrants and will be issued separately. The Common Stock Warrants have an exercise price of $1.03 per share, will be exercisable immediately, and expire on the five year anniversary of the date of issuance. The Pre-Funded Warrants have an exercise price of $0.0001, are exercisable immediately and will not expire until exercised in full.
The shares of Common Stock and Pre-Funded Warrants in the Registered Offering were offered pursuant to a shelf registration statement on Form S-3 (File No. 333-266991), which was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on August 26, 2022. The Registered Offering has been made by means of a prospectus supplement filed with the SEC on November 20, 2024 that forms a part of such registration statement.
The gross proceeds to the Company from the Offering are approximately $6.9 million before deducting the placement agent’s fees and other offering expenses payable by the Company. The Offering closed on November 20, 2024.
On November 18, 2024, the Company entered into a placement agency agreement (the “Placement Agency Agreement”) with Maxim Group LLC (“Maxim” or the “Placement Agent”) pursuant to which the Company engaged the Placement Agent as the exclusive placement agent in connection with the Offering. The Company agreed to pay the Placement Agent a cash fee equal to 7.0% of gross proceeds from the sale of Shares, Pre-Funded Warrants and Common Stock Warrants to the Purchaser. The Company also agreed to reimburse the Placement Agent for out-of-pocket expenses, including the reasonable legal fees of its counsel not to exceed $50,000. The Placement Agent Agreement also contains representations, warranties, indemnification and other provisions customary for transactions of this nature.
The foregoing descriptions of the Placement Agency Agreement, SPA, Common Stock Warrant and Pre-Funded Warrant filed as Exhibits 10.29, 10.30, 10.31 and 10.32, respectively to this Annual Report on Form 10-K.
Secured Note Financing
On March 28, 2024, the Company entered into a senior secured note purchase agreement (the “Note Purchase Agreement”) with the Purchasers (as defined in the Note Purchase Agreement), pursuant to which we agreed to issue senior secured notes in an aggregate principal amount of up to $10.0 million (“Secured Notes”) to certain accredited investors, including unrelated parties as well as officers and directors of the Company. As of March 31, 2024, the Company had an initial closing and issued $2.0 million in Initial Secured Notes. As of June 30, 2024, all existing investors approved an Amended and Restated Note Purchase Agreement (“Amended and Restated Note Purchase Agreement”), with terms described below. As of September 30, 2024, the Amended and Restated Note Purchase Agreement was amended to extend the last closing date to issue Additional Secured Notes to October 31, 2024. See Exhibit 10.25. No other terms were amended. The material terms of the Additional Secured Notes are identical to the terms of the Initial Secured Notes.
As of October 31, 2024, the Company issued an aggregate of $6.9 million of Secured Notes, with $2.9 million from the Company’s officers and members of the board of directors, including $2.4 million purchased by Dr. Hing C. Wong, Founder and CEO, $220,000 purchased by Rebecca Byam, Chief Financial Officer, $140,000 purchased by Scott T. Garrett, Chairman of the board of directors, $60,000 purchased by Gary M. Winer, member of the board of directors, $25,000 purchased by Lee Flowers, Senior Vice President for Business Development, and $25,000 purchased by Rick S. Greene, member of the board of directors.
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The Senior Notes bear interest at a rate of 9% per annum, payable quarterly in arrears, and mature on August 30, 2026 (the “Maturity Date”), on which date the principal balance, accrued but unpaid interest, and other amounts that may be due under the terms of the Amended and Restated Note Purchase Agreement shall be due and payable. The Secured Notes may be prepaid on or prior to December 31, 2024, but will be subject to a 5% prepayment penalty (“Premium Amount”). Thereafter, the Senior Notes may be repaid upon a Mandatory Redemption event or at the end of the term.
As a condition to entering into the Amended and Restated Note Purchase Agreement, the Company, Mercedes M. Sellek, P.A. (“Escrow Agent”), and the Purchasers entered into that certain Escrow Agreement and Amended and Restated Pledge Agreement, dated July 2, 2024, pursuant to which the Company agreed to pledge our equity ownership interest in Wugen, which was equivalent to a 5.6% ownership stake in that company as of December 31, 2024 (the “Pledged Collateral”), to be held and released by Escrow Agent according to the terms of the Escrow Agreement, as security for the Secured Notes.
Upon a qualifying event Mandatory Redemption involving a transaction such as an acquisition, merger or initial public offering in which the Pledged Collateral can be sold or liquidated prior to the Maturity Date, subject to certain limitations (such as a threshold price per share in the case of an initial public offering), the Company agreed to repay all indebtedness (including accrued interest) related to the Secured Notes plus a Bonus Payment (as defined in the Amended and Restated Note Purchase Agreement). If there is no such Mandatory Redemption prior to the Maturity Date, the Company agreed to pay the holders of Secured Note a Bonus Payment under certain circumstances.
Upon a bona fide equity offering (as defined in the Amended and Restated Note Purchase Agreement), Senior Note holders have the right to convert to shares of the Company’s common stock (as defined in the Amended and Restated Note Purchase Agreement). The Amended and Restated Note Purchase Agreement sets forth preliminary terms that are subject to final documentation.
Upon an Event of Default (as defined in the Amended and Restated Note Purchase Agreement), the Company will have a thirty (30) day cure period (the “Cure Period”), and if the Event of Default is not so cured at the end of the Cure Period, the Company is required to distribute the Pledged Collateral to the Purchasers on a pro rata basis, determined based on the issuance of $10.0 million in Secured Notes, in full satisfaction of the indebtedness evidenced by the Secured Notes.
The foregoing descriptions of the Amended and Restated Note Purchase Agreement, Amended and Restated Senior Notes, Escrow Agreement and Amended and Restated Pledge Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the Form of Amended and Restated Senior Secured Note Purchase Agreement, Form of Senior Secured Promissory Note, Form of the Amended and Restated Pledge Agreement and Form of Amended and Restated Escrow Agreement, copies of which are filed as Exhibit 10.21 (and Exhibit 10.25 for the first amendment thereto as amended on September 30, 2024), Exhibit 10.22, Exhibit 10.23 and Exhibit 10.24, respectively, to this Annual Report and on Form 10-K are incorporated herein by reference.
The issuance of the Additional Secured Notes was exempt from the registration requirements of the Securities Act of 1933, as amended, in accordance with Section 4(a)(2), as a transaction by an issuer not involving a public offering. In addition, our Board of Directors and the Audit Committee of our Board of Directors reviewed the transaction under our policy for Related Party Transactions (the “Policy”) and determined that the issuance of the Additional Secured Notes was in compliance with the Policy.
On February 20, 2025, the Company and certain Noteholders agreed to Principal Terms for Conversion of their Secured Notes. Noteholders and the Company agreed that, subject to stockholder approval, at least $6,580,000 principal amount of the Secured Notes will be converted into shares of our Common Stock at a conversion price of $0.65 per share. As part of the conversion, the Company will issue warrants to purchase shares of our Common Stock to the converting Noteholders for up to an additional $3,290,000 of shares of our Common Stock, at an exercise price of $0.65 per share (as these amounts may be adjusted to account for a Reverse Stock Split or similar transaction). Upon conversion, converting Noteholders would be subject to a lock-up period of 180 days from the date of conversion. Further, the Escrow Agreement will be amended such that the proceeds from the Pledged Collateral will be allocated among the Company and the converting Noteholders, as provided for in the Principal Terms. The conversion of principal amount of the Secured Notes will result in a dollar-for-dollar increase in stockholders’ equity (partially offset by the carrying value of the portion of the Company’s investment in the Pledged Collateral the proceeds of which will be paid to converting Noteholders), contributing to the Company’s plan to gain compliance with the Nasdaq Minimum Shareholder Equity Rule and to maintaining listing of the our Common Stock on Nasdaq.
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Item 9C Disclosure Regarding Foreign Jurisdictions That Prevent Inspections.
Not applicable.
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PART III
Item 10 Directors, Executive Officers and Corporate Governance.
The information required by this item is included under the captions “Board of Directors and Corporate Governance,” “Proposal One: Director Election,” “Executive Officers” and “Delinquent Section 16(a) Reports” included in our definitive Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2024, and is incorporated herein by reference.
Our board of directors has adopted a Code of Conduct and Ethics applicable to all officers, directors, and employees, which is available on our website (https://investors.hcwbiologics.com/) under “Governance.” We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Conduct and Ethics by posting such information on the website address and location specified above.
Item 11 Executive Compensation.
The information required by this item is included under the captions “Board of Directors and Corporate Governance” and “Executive Compensation” in our definitive Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2024, and is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is included under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in our definitive Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2024, and is incorporated herein by reference.
Item 13 Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is included under the captions “Board of Directors and Corporate Governance” and “Certain Relationships and Related Party Transactions” in our definitive Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2024 and is incorporated herein by reference.
Item 14 Principal Accounting Fees and Services.
The information required by this item is included under the caption “Proposal Two: Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2024, and is incorporated herein by reference.
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PARTIV
Item 15 Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The information concerning HCW Biologics’ audited financial statements and the Report of Independent Registered Public Accounting Firm required by this Item 15(a)(1) is incorporated by reference herein to the section of this Annual Report, Item 8, titled, “Financial Statements and Supplementary Data.”
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable or because the information required is already included in the audited financial statements or the notes to those audited financial statements.
(a)(3) Exhibits
We have filed, or incorporated into this Annual Report by reference, the exhibits listed on the accompanying Exhibit Index immediately preceding the signature page of this Annual Report.
134
Exhibit Index
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Incorporated by reference |
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Filed or furnished herewith |
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Exhibit No. |
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Exhibit title |
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Form |
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File No. |
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Exhibit No. |
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Filing date |
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3.1 |
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8-K |
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001-40591 |
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3.1 |
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07/26/2021 |
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3.2 |
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8-K |
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001-40591 |
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3.2 |
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07/26/2021 |
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4.1 |
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S-1/A |
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333-256510 |
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4.1 |
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07/09/2021 |
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4.2 |
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10-K |
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001-40591 |
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4.2 |
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03/29/2022 |
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4.3 |
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Form of Common Stock Purchase Warrant between the Company and Holder |
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8-K |
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001-40591 |
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4.1 |
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11/20/2024 |
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4.4 |
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Form of Pre-Funded Common Stock Purchase Warrant between the Company and Holder |
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8-K |
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001-40591 |
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4.2 |
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11/20/2024 |
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10.1 |
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Form of Indemnification Agreement between HCW Biologics Inc. and each of its officers and directors. |
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S-1/A |
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333-256510 |
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10.1 |
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07/09/2021 |
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10.2+ |
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2019 Equity Incentive Plan, as amended, and forms of agreement thereunder. |
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S-1 |
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333-256510 |
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10.2 |
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07/09/2021 |
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10.3+ |
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S-1 |
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333-256510 |
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10.3 |
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07/09/2021 |
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10.4+ |
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2021 Equity Incentive Plan and forms of agreement thereunder |
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S-1 |
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333-256510 |
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10.4 |
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07/09/2021 |
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10.5+ |
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Employment Agreement, dated July 6, 2021, between Peter Rhode and HCW Biologics Inc. |
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S-1 |
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333-256510 |
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10.6 |
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07/09/2021 |
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10.6+ |
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Employment Agreement, dated October 9, 2019, between Rebecca Byam and HCW Biologics Inc. |
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S-1 |
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333-256510 |
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10.7 |
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07/09/2021 |
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10.7+ |
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S-1 |
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333-256510 |
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10.8 |
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07/09/2021 |
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10.8+ |
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Employment Agreement, dated June 18, 2021, between Dr. Hing C. Wong and HCW Biologics Inc. |
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S-1 |
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333-256510 |
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10.13 |
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07/09/2021 |
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10.9+ |
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S-1 |
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333-256510 |
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10.11 |
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07/09/2021 |
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10.10† |
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Exclusive License Agreement, dated December 24, 2020, between HCW Biologics Inc. and Wugen, Inc. |
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S-1 |
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333-256510 |
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10.10 |
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07/09/2021 |
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10.11† |
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Master Services Agreement, dated March 14, 2019, between HCW Biologics Inc. and EirGenix, Inc. |
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S-1 |
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333-256510 |
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10.12 |
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07/09/2021 |
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10.12†# |
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10-Q |
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001-40591 |
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10.1 |
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08/12/2022 |
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10.13 |
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S-3 |
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333-266991 |
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1.2 |
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08/19/2022 |
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10.14 |
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Loan Agreement by and between HCW Biologics Inc. and Cogent Bank, dated August 15, 2022 |
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10-Q
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001-40591 |
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10.1 |
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11/07/2022 |
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10.15 |
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10-Q |
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001-40591 |
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10.2 |
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11/07/2022 |
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10.16 |
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8-K |
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011-40591 |
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10.1 |
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02/22/2024 |
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10.17*†# |
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10-K |
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011-40591 |
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10.17 |
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04/01/2024 |
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10.18*†# |
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10-K |
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011-40591 |
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10.18 |
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04/01/2024 |
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10.19*†# |
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10-K |
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011-40591 |
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10.19 |
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04/01/2024 |
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10.20*†# |
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10-K |
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011-40591 |
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10.20 |
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04/01/2024 |
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135
136
32.2* |
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X |
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97.1 |
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10-K |
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011-40591 |
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97.1 |
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04/01/2024 |
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101.INS |
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Inline XBRL Instance Document |
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X |
101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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X |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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X |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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X |
101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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X |
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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X |
104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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X |
* Furnished and not filed.
+ Indicates a management contract or compensatory plan or arrangement.
†† Certain information in this document has been excluded pursuant to Item 601(b)(10) of Regulation S-K. Such excluded information is not material and is the type of information the Registrant treats as private and confidential. The Registrant agrees to furnish supplementally such information to the SEC upon request.
# Certain information in this document has been excluded pursuant to Item 601(a)(5) or (a)(6) of Regulation S-K. The Registrant agrees to furnish supplementally such information to the SEC upon request.
Item 16 Form 10-K Summary
None.
137
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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HCW Biologics Inc. |
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Date: March 28, 2025 |
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By: |
/s/ Hing C. Wong, Ph.D. |
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Hing C. Wong, Ph.D. |
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Founder and Chief Executive Officer |
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Hing C. Wong and Rebecca Byam, and each of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name |
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Title |
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Date |
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/s/ Hing C. Wong, Ph.D. |
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Founder, Chief Executive Officer |
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March 28, 2025 |
Hing C. Wong, Ph.D. |
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(Principal Executive Officer) |
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/s/ Rebecca Byam |
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Chief Financial Officer |
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March 28, 2025 |
Rebecca Byam |
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(Principal Financial and Accounting Officer) |
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/s/ Scott T. Garrett |
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Chairperson of the Board of Directors |
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March 28, 2025 |
Scott T. Garrett |
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/s/ Lisa M. Giles |
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Director |
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March 28, 2025 |
Lisa M. Giles |
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/s/ Rick S. Greene |
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Director |
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March 28, 2025 |
Rick S. Greene |
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/s/ Gary M. Winer |
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Director |
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March 28, 2025 |
Gary M. Winer |
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138
Exhibit 10.27
LICENSE, RESEARCH, AND CO-DEVELOPMENT AGREEMENT
This License, Research, and Co-Development Agreement (this “Agreement”) is made and entered into as of the 17th day of November, 2024 (the “Effective Date”) by and between HCW Biologics Inc., a Delaware corporation with a principal place of business at 2929 North Commerce Parkway, Miramar, Florida 33025 (“Licensor”) and WY Biotech Co., Ltd. (上海圆阳威壹医疗科技有限公司), a company organized under the laws of the People’s Republic of China, with offices located at Room 1115-1118, Tower A, No. 500, Yunjin Road, Xuhui District, Shanghai, China (“Licensee”). Licensor and Licensee are each referred to herein individually as a “Party” and collectively as the “Parties.”
WHEREAS, Licensor possesses certain expertise and proprietary technologies related to *** based fusion complex containing ***, *** and *** and generally referred to as HCW11-006;
WHEREAS, Licensee is a biotechnology company with expertise and capability in developing and commercializing human therapeutics; and WHEREAS, Licensor and Licensee are entering into this Agreement whereby Licensee will have the exclusive rights to develop and commercialize HCW11-006 and Licensed Improvements derived therefrom in the treatment of human disease in the Territory in exchange for upfront, milestone, and royalty payments, subject to Licensor’s Opt-In Right with respect to the Opt-In Territory and certain drag-along rights as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the amount and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
For purposes of this Agreement, in addition to terms defined elsewhere, the following terms shall have the respective meanings set forth below in this Article 1.
1
2
3
4
5
6
7
Except as may otherwise be set forth herein, Net Sales shall be calculated on an accrual basis in accordance with IFRS.
Sales between or among Licensee and its Affiliates and its Sublicensees shall be excluded from the computation of Net Sales, but Net Sales shall include the first sales to Third Parties (other than Sublicensees) by Licensee or any such Affiliates or Sublicensees.
In the event a Licensed Product is sold in combination with one or more other pharmaceutical drugs which are not Licensed Products under this Agreement (as used in this definition of Net Sales, a “Combination”), then for each Calendar Quarter payment period and on a jurisdiction-by-jurisdiction basis for the remainder of this paragraph, the gross amount invoiced for that Licensed Product shall be calculated by multiplying the gross amount invoiced for such Combination by the fraction A/(A+B), where “A” is the gross amount invoiced for the Licensed Product sold separately and “B” is the gross amount invoiced for the other pharmaceutical drug(s) sold separately.
8
In the event that the other pharmaceutical drug is not sold separately, then the gross amount invoiced for that Licensed Product shall be calculated by multiplying the gross amount invoiced for the Combination by the fraction A/C, where “A” is the gross invoice amount for the Licensed Product, if sold separately, and “C” is the gross invoice amount for the Combination. In the event that a particular Combination is not addressed by the foregoing, Net Sales for royalty determination shall be determined by the Parties in good faith.
9
10
11
12
13
14
15
16
17
18
19
20
21
For clarity, Licensor acknowledges and agrees that any changes in payment terms pursuant to this Section4.11 are the result of the China Transaction, not that of Licensor’s exercise of Opt-In Right. This Section 4.11 shall not apply to (i) any assignment or transfer of this Agreement (including any assignment or transfer of this Agreement in connection with a Change of Control) pursuant to Section 14.1; or (ii) a Major Transaction.
22
23
24
25
26
27
28
The agreement entered into by and among the parties for the consummation of the Major Transaction shall be referred to as the “Transaction Agreement”.
29
30
31
32
33
34
35
36
37
38
39
40
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Notices to Licensor: *** ADDRESS: 2929 North Commerce Parkway, Miramar, Florida 33025, USA EMAIL: *** Copy to (which shall not constitute notice): HCW Legal Department ADDRESS: 2929 North Commerce Parkway, Miramar, Florida 33025, USA EMAIL: legal@hcwbiologics.com |
|
Notices to Licensee: *** ADDRESS: 1115-1118 Building A, Greenland Center No.500 Yunjin RD Xuhui District Shanghai China EMAIL: *** Copy to (which shall not constitute notice): Morrison & Foerster LLP ADDRESS: Suite 4401, HKRl Centre One, HKRl Taikoo Hui, 288 Shimen Road (No. 1), Shanghai, China Attention: *** EMAIL: *** |
Either Party may change its address for notices or facsimile number at any time by sending written notice to the other Party.
41
[Remainder of page intentionally left blank; signature page follows.]
42
IN WITNESS WHEREOF, the Parties hereto have executed this License, Research and Co-Development Agreement effective as of the Effective Date.
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HCW BIOLOGICS INC. |
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By: ______/s/ Hing C. Wong_____________________ |
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Name: Hing C. Wong |
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Title: Founder and Chief Executive Officer |
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WY BIOTECH CO., LTD. (上海圆阳威壹医疗科技有限公司) |
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By: ___/s/ Qi Qi Lu________________________ |
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Name: Qi Qi Lu |
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Title: Chairman of the Board |
Signature Page to License, Research, and Co-Development Agreement
EXHIBIT A
LICENSED PATENT RIGHTS
***
EXHIBIT B
PRESS RELEASE
***
Schedule 1.41
HCW 9109
***
SCHEDULE 2.3
Regulatory Materials
***
SCHEDULE 2.5
Technology Transfer
***
SCHEDULE 3.5.3
Third Party Sublicensees
***
Exhibit 10.28
Letter Agreement for Principal Terms for the Amendment of the License, Research and Co-Development Agreement with WY Biotech dated March 17, 2025
and
Company’s Letter to Agree and Accept dated March 19, 2025
WY Biotech Co. Ltd.
1115-1118 Tower A
No. 500 Yunjin Road
Xuhui, Shanghai
China
HCW Biologics Inc.
2929 North Commerce Parkway
Miramar, FL 33025
USA
Attn: Dr. Hing Wong, CEO
March 17, 2025
Dear Dr. Wong,
HCW Biologics Inc. (“HCWB”) and WY Biotech Co. Ltd. (“WY”) signed the License, Research and Co-Development Agreement (“Agreement”) on November 17, 2024. After the Agreement was signed, our designated CDMO made a change, as the follows.
As I informed you on the phone, after the Agreement was signed, ***, our CDMO, had decided not to honor the (non-binding) Term Sheet it had signed with WY. As a result, we are unable to sign the final collaboration and development service agreement with ***. The technology transfer and CMC development plan will be delayed, until we have this CDMO issue solved. We are confident that we will be able to have issue resolved by June 13, 2025, and continue our Agreement.
We are in an unexpected situation. Therefore, we propose to defer the upfront payments to June 13, 2025, payable by July 13, 2025. Please accept our proposal to keep our Agreement effective, continuous and live. If, in the worst case scenario, the CDMO issue will continue beyond June 13, 2025, either party may decide to terminate the Agreement by written notice by 5 pm Eastern Standard Time US on June 13, 2025.
As we discussed, WY agrees that HCWB’s “Completion of Technology Transfer”, which triggers HCWB’s right to receive the final payment of the $7 million upfront payment under the Agreement, will mean that HCWB has delivered to WY its written notice and report detailing the Licensed Manufacturing Know-How required for technology transfer and reporting on the characterization of the improved high-production Cell Line HCW11-006 (“Technology Transfer Report”). HCWB will deliver the report on or before May 13, 2025. Unless either party elects to terminate as provided in the preceding paragraph, HCWB will have earned the full $7 million upfront payment on June 13, 2025. WY will provide confirmation of wire sent to HCWB on or before July 13, 2025.
Exhibit 10.35
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
AMENDMENT NO. 1
Filed by the Registrant☒
Filed by a Party other than the Registrant☐
Check the appropriate box:
☐ Preliminary Proxy Statement
☐ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
☒ Definitive Proxy Statement
☐ Definitive Additional Materials
☐ Soliciting Material under §240.14a-12
HCW BIOLOGICS INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
☒ No fee required.
☐ Fee paid previously with preliminary materials.
☐ Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a-6(i)(1) and 0-11.
EXPLANATORY NOTE
On February 21, 2025, HCW Biologics Inc. (the “Company”) filed with the U.S. Securities and Exchange Commission its Definitive Proxy Statement on Schedule 14A for its Special Meeting of Stockholders (the “Proxy Statement”) to be held on March 31, 2025 (the “Special Meeting”). This Amendment No. 1 to the Proxy Statement (“Amendment No. 1”) is filed solely to amend the Proxy Statement to correct, in two places in the Proxy Statement, an inadvertent clerical error to the number of shares of common stock, par value $0.0001 per share, of the Company (the “Common Stock”) outstanding as of the close of business on February 18, 2025, the record date for the Special Meeting, from 44,540,394 shares of Common Stock to 44,544,996 shares of Common Stock. This Amendment No. 1 supersedes in its entirety only (1) the disclosure on page 3 of the Proxy Statement answering the following question: “Q: Who may vote at the Special Meeting”, and (2) the table on page 13 of the Proxy Statement showing the impact of a Reverse Stock Split at different ratios, both of which updated disclosures are set forth on the following page.
THE PROXY STATEMENT THAT HAS BEEN PRINTED AND DISTRIBUTED TO THE COMPANY’S STOCKHOLDERS WAS CORRECTED PRIOR TO PRINTING AND DOES NOT CONTAIN THE CLERICAL ERROR DESCRIBED ABOVE AND SET FORTH BELOW.
Except as described above and as set forth below on the following page, this Amendment No. 1 does not supersede, modify or update any disclosure in the Proxy Statement. In addition, this Amendment No. 1 does not reflect events occurring after the date of the Proxy Statement or modify or update such disclosure that may have been affected by subsequent events.YOU SHOULD READ THIS AMENDMENT NO. 1 IN CONJUNCTION WITH THE PROXY STATEMENT, AND THE PROXY STATEMENT SHOULD BE READ IN ITS ENTIRETY, EXCEPT AS SUPERSEDED BY THE INFORMATION IN THIS AMENDMENT NO. 1 AND THE UPDATED DISCLOSURES BELOW REGARDING THE RELEVANT ITEMS ON PAGES 3 AND 13 OF THE PROXYSTATEMENT.
The following question and answer from page 3 of the Proxy Statement, which is included in the section of the Proxy Statement titled “QUESTIONS AND ANSWERS ABOUT PROXY MATERIALS, VOTING, AND THE MEETING,” is amended and restated in its entirety as follows:
Q: Who may vote at the Special Meeting?
A: Stockholders of record as of the close of business on February 18, 2025, (“the Record Date”), are entitled to receive notice of, to attend and participate, and to vote at the Special Meeting. At the close of business on the Record Date, there were 44,544,996 shares of our Common Stock outstanding and entitled to vote.
The following table and accompanying footnotes from page 13 of the Proxy Statement, which is included in the section of the Proxy Statement titled “Principal Effects of a Reverse Stock Split”, is amended and restated in its entirety as follows:
|
Number of
|
1-for-20
|
1-for-30
|
1-for-40
|
1-for-50
|
Authorized |
250,000,000 |
250,000,000 |
250,000,000 |
250,000,000 |
250,000,000 |
Issued and Outstanding1 |
44,544,996 |
2,227,250 |
1,484,833 |
1,113,625 |
890,900 |
Issuable Upon Conversion of Senior Secured Notes2 |
10,123,083 |
506,154 |
337,436 |
253,077 |
202,462 |
Issuable under Outstanding Equity Awards3 |
1,779,338 |
88,967 |
59,311 |
44,483 |
35,587 |
Reserved for Future Issuance4 |
3,444,343 |
172,217 |
114,811 |
86,109 |
68,887 |
|
|
|
|
|
|
Authorized but Unissued and Unreserved5 |
190,108,240 |
247,005,412 |
248,003,609 |
248,502,706 |
248,802,164 |
1 Issued and outstanding shares include 6,717,000 shares of our Common Stock issued in an equity financing on November 20, 2024.
2 The conversion of the Senior Secured Notes is subject to stockholder approval, but if approved, at least $6,580,000 of outstanding principal will convert to shares of our Common Stock at a conversion price of $0.65 per share.
3 Shares issuable under outstanding equity awards, as reported as of December 31, 2023.
4 Shares reserved for future issuance under the Company’s 2021 Equity Incentive Plan, as reported as of December 31, 2023.
5 Consists of shares of Common Stock authorized but unissued and unreserved for future issuance.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
On March 31, 2025
February 21, 2025
To Our Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of HCW Biologics Inc. (the “Company” or “HCWB”) on Monday, March 31, 2025 at 10:00 a.m. Eastern Time. This Special Meeting will be a completely virtual meeting, conducted only via live webcast at www.virtualshareholdermeeting.com/HCWB2025SM. You will be able to attend and participate in the Special Meeting online, submit questions during the meeting and vote your shares electronically. In addition, although the live webcast is available only to stockholders at the time of the meeting, following completion of the Special Meeting, a webcast replay will be available at www.virtualshareholdermeeting.com/HCWB2025SM for a period of one year after the Special Meeting.
At the Special Meeting the Company will submit the following three proposals to its stockholders for approval:
1. To approve an amendment to the Company’s Certificate of Incorporation on or before the one (1) year anniversary of the Special Meeting, to implement one or more reverse stock splits of the outstanding shares of the Company’s common stock, par value $0.0001 per share (our “Common Stock”) (as necessary to maintain a listing of our common stock on The Nasdaq Stock Market LLC (“Nasdaq”)) in an aggregate range from one-for-twenty (1:20) up to one-for-fifty (1:50), or anywhere between (the “Reverse Stock Split”), all as determined in the sole discretion of our Board of Directors (our “Board”) (the “Reverse Stock Split Proposal”) (“Proposal One”);
2. To approve, for purposes of complying with Nasdaq Listing Rule 5635(d), the full issuance of shares of our Common Stock, or such lesser number of shares as our Board determines, pursuant to that certain Equity Purchase Agreement, dated February 20, 2025 (the “Purchase Agreement”) set forth on Appendix A attached hereto and that certain Registration Rights Agreement, dated February 20, 2025 (the “Rights Agreement”) set forth on Appendix A hereto, entered into in connection with an equity line of credit with Square Gate Capital Master Fund, LLC – Series 4 (the “ELOC Proposal”) (“Proposal Two”);
3. To approve, for purposes of complying with Nasdaq Listing Rules 5635(c) and 5635(d), the issuance of shares of our Common Stock upon conversion of up to $6,905,000 of principal amount of Senior Secured Notes issued by the Company to certain investors therein, including certain officers, directors and stockholders of the Company (the “Noteholders”), pursuant to that certain Amended and Restated Senior Secured Note Purchase Agreement dated July 2, 2024, as amended by the First Amendment to Amended and Restated Senior Secured Note Purchase Agreement dated September 30, 2024, and as it may be further amended in accordance with the Principal Terms for Conversion Amendment, which has been approved by our Board and the Noteholders and set forth on Appendix B attached hereto (the “Principal Terms”) and such additional terms and conditions not materially inconsistent with such Principal Terms for Conversion as our Board may hereafter approve (the “Note Conversion Proposal”) (“Proposal Three”).
4. To transact such other business as may properly come before the Special Meeting or any adjournments or postponements thereof.
On or about February 21, 2025, we will commence mailing a Notice of Special Meeting and Proxy Statement to our stockholders along with instructions on how to access our Proxy Statement via the Internet and authorize a proxy to vote your shares online. Please use this opportunity to take part in our affairs by voting on the business to come before the Special Meeting. Our Board has fixed the close of business on February 18, 2025, as the record date for the Special Meeting (the “Record Date”), and only stockholders of record as of the Record Date may vote at the Special Meeting and any postponements or adjournments of the meeting. All stockholders are cordially invited to participate in the Special Meeting and any postponements or adjournments there of. Returning the paper proxy card or voting electronically does NOT deprive you of your right to participate in the virtual meeting and to vote your shares for the matters acted upon at the meeting.
Our Board recommends a vote FOR Proposal One and Proposal Two. As four of the five members of our Board are Noteholders, our Board will not make a recommendation for Proposal Three. For ten days prior to the Special Meeting, a complete list of stockholders entitled to vote at the meeting will be available for examination by any stockholder, for any purpose relating to the meeting, during ordinary business hours at our principal offices located at 2929 N. Commerce Parkway, Miramar, Florida 33025.
Your vote is important. Whether or not you expect to attend and participate in the Special Meeting, please vote as soon as possible by submitting your proxy electronically via the internet or, if you requested paper copies of the proxy materials, by telephone by following the instructions in the proxy materials or by completing, signing and dating the proxy card and returning it in the enclosed postage paid envelope.
On behalf of our Board, thank you for your participation in this important process.
Sincerely,
Hing C. Wong, Ph.D.
Founder and Chief Executive Officer
2929 N. Commerce Parkway
Miramar, Florida 33025
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING TO BE HELD ON March 31, 2025: THE PROXY STATEMENT AND PROXY CARD ARE AVAILABLE FREE OF CHARGE AT www.proxyvote.com.
HCW BIOLOGICS INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held March 31, 2025
Time and Date: |
March 31, 2025 at 10:00 a.m., Eastern Time. |
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The Special Meeting will be a virtual meeting conducted exclusively online via live audio webcast on the internet at www.virtualshareholdermeeting.com/HCWB2025SM. By logging onto this website with the control number included on your proxy card or voting instruction form at the designated time, stockholders and proxyholders of record as of the record date identified below may be deemed present in person and eligible to vote at the Special Meeting. |
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Items of Business: |
1. To approve an amendment to the Company’s certificate of incorporation on or before the one (1) year anniversary of the Special Meeting, to implement one or more reverse stock splits of the outstanding shares of the Company’s common stock, par value $0.0001 per share (our “Common Stock”) (as necessary to maintain a listing of our Common Stock on The Nasdaq Stock Market LLC (“Nasdaq”)) in an aggregate range from one-for-twenty (1:20) up to one-for-fifty (1:50), or anywhere between (the “Reverse Stock Split”), all as determined in the sole discretion of the our Board of Directors (our “Board”) (the “Reverse Stock Split Proposal”) (“Proposal One”). |
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2. To approve, for purposes of complying with Nasdaq Listing Rule 5635(d), the full issuance of shares of our Common Stock, or such lesser number of shares as our Board determines, pursuant to that certain Equity Purchase Agreement, dated July 20, 2025 (the “Purchase Agreement”) and that certain Registration Rights Agreement, dated July 20, 2025 (the “Rights Agreement”) entered into in connection with an equity line of credit with Square Gate Capital Master Fund, LLC – Series 4 (the “ELOC Proposal”) (“Proposal Two”). |
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3. To approve, for purposes of complying with Nasdaq Listing Rules 5635(c) and 5635(d), the issuance of shares of our Common Stock upon conversion of up to $6,905,000 of principal amount of Senior Secured Notes issued by the Company to certain investors therein, including certain officers, directors and stockholders of the Company (collectively, the “Noteholders”), pursuant to that certain Amended and Restated Senior Secured Note Purchase Agreement dated July 7, 2024, as amended by the First Amendment to Amended and Restated Senior Secured Note Purchase Agreement dated September 30, 2024, and as it may be further amended in accordance with the Principal Terms for Conversion Amendment, which has been approved by the Company and the Noteholders signatory thereto and set forth on Appendix B attached hereto (the “Principal Terms”) and such additional terms and conditions not materially inconsistent with such Principal Terms for Conversion as our Board may hereafter approve (the “Note Conversion Proposal”) (“Proposal Three”). |
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4. To transact such other business as may properly come before the Special Meeting or any adjournment or postponement thereof. |
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Record Date: |
Only stockholders of record at the close of business on February 18, 2025 are entitled to notice of, and to vote at, the Special Meeting and any postponements or adjournments thereof. |
Proxy Voting: |
Each share of common stock that you own represents one vote. |
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For questions regarding your stock ownership, you may contact us through our website at https://investors.hcwbiologics.com/ir-resources/contact-us or email us at info@hcwbiologics.com, or, if you are a registered holder, contact our transfer agent, Equiniti Trust Company, LLC, through its website at www.equiniti.com or by phone at (800) 937-5449. |
By Order of the Board of Directors,
Hing C. Wong, Ph.D.
Founder and Chief Executive Officer
Miramar, FL
February 21, 2025
Whether or not you expect to participate in the virtual Special Meeting, please vote as promptly as
possible in order to ensure your representation at the Special Meeting. You may vote online or, if you received printed copies of the proxy materials, by telephone or by using the proxy card or voting instruction form provided with the printed proxy materials.
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT PROXY MATERIALS, VOTING, AND THE MEETING |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, that are based on expectations, estimates and projections as of the date of this proxy statement. All statements other than statements of historical facts contained in this proxy statement, including statements regarding effecting a reverse stock split, the timing of a reverse stock split, the principal effects of a reverse stock split, and the intended benefits of a reverse stock split, are forward-looking statements.
The words “anticipate,” “believe,” “could,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from anticipated results, including:
• the effect of the Reverse Stock Split, the ELOC and/or the Note Conversion on the price of our common stock;
• the effect of the Reverse Stock Split, the ELOC and/or the Note Conversion on the liquidity of our common stock; and
• our ability to regain and maintain compliance with the listing standards of Nasdaq.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this proxy statement. We have based these forward-looking statements largely on our current expectations about future events. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described under the heading, “Certain Risks and Potential Disadvantages” in each of Proposals 1 through 3 and in our other filings with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this proxy statement may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this proxy statement to conform these statements to actual results or to changes in our expectations.
HCW BIOLOGICS INC.
PROXY STATEMENT FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MONDAY, MARCH 31, 2025
INFORMATION ABOUT SOLICITATION AND VOTING
The accompanying proxy is solicited on behalf of the board of directors of HCW Biologics Inc. (“HCW Biologics”, “HCWB” or the “Company”) for use at HCW Biologics’ Special Meeting of Stockholders (the “Special Meeting” or “meeting”) to be held online on Monday, March 31, 2025 at 10:00 a.m., Eastern Time via live webcast at www.virtualshareholdermeeting.com/HCWB2025SM. References in this proxy statement for the Special Meeting (the “Proxy Statement”), to “we,” “us,” “our,” the “Company,” “HCWB” or “HCW Biologics” refer to HCW Biologics Inc.
INTERNET AVAILABILITY OF PROXY MATERIALS
We will begin the process of mailing, on or about February 21, 2025, the Proxy Statement, as well as the Notice of Internet Availability of Proxy Materials (the “Notice of Internet Availability”), to our stockholders of record and beneficial owners at the close of business on February 18, 2025. On the date of mailing of the Notice, all stockholders and beneficial owners will have the ability to access all of the proxy materials on a website referred to in the Notice of Internet Availability (in addition to receiving a hard copy of the proxy materials by mail). These proxy materials will be available free of charge.
The Notice of Internet Availability will identify the website where the proxy materials will be made available; the date, the time and location of the Special Meeting; the matters to be acted upon at the meeting and our board of directors’ recommendations with regard to each matter; and information on how to participate in the meeting and vote in person.
QUESTIONS AND ANSWERS ABOUT PROXY MATERIALS, VOTING, AND THE MEETING
Q: What is the purpose of the meeting?
A: At the meeting, stockholders will act upon the proposals described in this Proxy Statement. In addition, following the formal portion of the meeting, management will be available to respond to questions from stockholders.
Q: What is included in the proxy materials?
A: These materials include:
• Notice of Special Meeting of Stockholders; and
• The Proxy Statement and Appendices
If you received printed versions of these materials by mail (rather than through electronic delivery), the materials also included a proxy card or voting instruction form.
Q: What proposals are scheduled to be voted on at the meeting?
A: Stockholders will be asked to vote on the following three proposals at the meeting, each of which are, among other things, part of the Company’s plan to regain compliance with applicable Nasdaq listing requirements:
1. To approve an amendment to the Company’s Certificate of Incorporation on or before the one (1) year anniversary of the Special Meeting, to implement one or more reverse stock splits of the outstanding shares of the Company’s common stock, par value $0.0001 per share (our “Common Stock”) (as necessary to maintain a listing of our Common Stock on Nasdaq) in an aggregate range from one-for-twenty (1:20) up to one-for-fifty (1:50), or anywhere between (the “Reverse Stock Split”), all as determined in the sole discretion of our Board (the “Reverse Stock Split Proposal”) (“Proposal One”); and
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To approve, for purposes of complying with Nasdaq Listing Rule 5635(d), the full issuance of shares of our Common Stock, or such lesser number of shares as our Board determines, pursuant to that certain Equity Purchase Agreement, dated July 20, 2025 (the “Purchase Agreement”) set forth on Appendix A attached hereto and that certain Registration Rights Agreement, dated July 20, 2025 (the “Rights Agreement”) set forth on Appendix A attached hereto, entered into in connection with an equity line of credit with Square Gate Capital Master Fund, LLC – Series 4 (the “ELOC Proposal”) (“Proposal Two”); and 3. To approve, for purposes of complying with Nasdaq Listing Rules 5635(c) and 5635(d), the issuance of shares of our Common Stock upon conversion of up to $6,905,000 of principal amount of Senior Secured Notes issued by the Company to certain investors therein, including certain officers, directors and stockholders of the Company (collectively, the “Noteholders”), pursuant to that certain Amended and Restated Senior Secured Note Purchase Agreement dated July 7, 2024, as amended by the First Amendment to Amended and Restated Senior Secured Note Purchase Agreement dated September 30, 2024, and as it may be further amended in accordance with the Principal Terms for Conversion Amendment, which has been approved by the Company and the Noteholders and set forth on Appendix B attached hereto (the “Principal Terms”) and such additional terms and conditions not materially inconsistent with such Principal Terms for Conversion as the Board of Directors may hereafter approve (the “Note Conversion Proposal”) (“Proposal Three”).
Additionally, stockholders may be asked to transact any other business as may properly come before the Special Meeting or any adjournment or postponement thereof.
Q: Could matters other than Proposal One, Proposal Two and Proposal Three be decided at the meeting?
A: Our bylaws require that we receive advance notice of any proposal to be brought before the meeting by stockholders of HCW Biologics, and we have not received notice of any such proposals. If any other matter were to come before the meeting, the proxy holders appointed by our board of directors will have the discretion to vote on those matters for you.
Q: How does the board of directors recommend I vote on these proposals?
A: Our board of directors recommends that you vote your shares:
• “FOR” the Reverse Stock Split Proposal (Proposal One); and
• “FOR” the ELOC Proposal (Proposal Two); and
• As four of five members of our Board are also Noteholders, the board of directors does not make a recommendation with respect to the Note Conversion Proposal (Proposal Three).
Q. How can I access the proxy materials?
A: We are mailing the Special Meeting proxy materials to our stockholders and also providing access to those materials over the Internet. In connection with this process, a Notice of Internet Availability is being mailed to our stockholders who have not previously requested electronic access to our proxy materials or paper proxy materials. The Notice of Internet Availability contains instructions on how you may access and review our proxy materials on the internet and how you may submit a proxy for your shares over the internet. The Notice of Internet Availability will also tell you how to request our proxy materials in printed form or by email, at no charge. The Notice of Internet Availability contains a control number that you will need to submit a proxy for your shares. Please keep the Notice for your reference through the meeting date. Anyone attending the Special Meeting must observe the rules approved by the board of directors.
Q: Who may vote at the Special Meeting?
A: Stockholders of record as of the close of business on February 18, 2025, (“the Record Date”), are entitled to receive notice of, to attend and participate, and to vote at the Special Meeting. At the close of business on the Record Date, there were 44,544,996 shares of our Common Stock outstanding and entitled to vote.
Stockholder of Record: Shares Registered in Your Name
If your shares are registered directly in your name with our transfer agent, Equiniti Trust Company, LLC, you are considered the stockholder of record with respect to those shares, and these proxy materials were sent directly to you by HCW Biologics.
Beneficial Owner of Shares Held in Street Name: Shares Registered in the Name of a Broker or Nominee
If your shares are held in an account at a brokerage firm, bank, broker-dealer, or other similar organization, then you are the “beneficial owner” of shares held in “street name,” and these proxy materials were forwarded to you by that organization rather than from us. The organization holding your account is considered the stockholder of record for purposes of voting at the Special Meeting. As a beneficial owner, you have the right to instruct that organization on how to vote the shares held in your account.
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Because you are not the stockholder of record, you may not vote your shares at the Special Meeting unless you request and obtain a valid proxy from the organization that holds your shares giving you the right to vote the shares at the Special Meeting. Beneficial owners must obtain a valid proxy from the organization that holds their shares and present it to Equiniti Trust Company, LLC, at least two (2) weeks in advance of the Special Meeting.
Q: How do I vote?
A: The procedures for voting are as follows:
Stockholder of Record: Shares Registered in Your Name
If you are the stockholder of record, you may vote your shares online during the virtual Special Meeting (see “How can I participate in the virtual Special Meeting?” below) or by proxy in advance of the Special Meeting by internet (at www.virtualshareholdermeeting.com/HCWB2025SM), by telephone (at 1-800-690-6903), or, if you requested and received a printed copy of the proxy materials, you may vote by mail by completing, signing and dating the enclosed proxy card and returning it in the enclosed prepaid envelope. Votes submitted by telephone or through the internet must be received by 11:59 p.m. Eastern Time, on March 30, 2025. If you vote by mail, your proxy card must be received before voting begins at the Special Meeting. Submitting your proxy, whether by telephone, through the internet or by mail will not affect your right to vote in person virtually should you decide to attend and participate in the meeting virtually.
Beneficial Owner: Shares Registered in the Name of a Broker or Other Nominee
If you are not the stockholder of record, please refer to the voting instructions provided by your nominee to direct it how to vote your shares. The voting deadlines and availability of telephone and internet voting for beneficial owners of shares will depend on the voting processes of the broker, bank or other nominee that holds your shares. Therefore, we urge you to carefully review and follow the voting instruction form and any other materials that you receive from that organization. To ensure that your vote is counted, complete and mail the voting instruction form provided by your brokerage firm, bank, or other nominee as directed by your nominee. To electronically vote in person virtually at the meeting online, you must obtain a legal proxy from your nominee. Follow the instructions from your nominee included with our proxy materials or contact your nominee to request a proxy form.
Your vote is important. Whether or not you plan to participate in the Special Meeting, we urge you to vote by proxy to ensure that your vote is counted.
Q: What shares can I vote?
A: Each share of our Common Stock issued and outstanding as of the close of business on February 18, 2025 is entitled to vote on all items being voted on at the meeting. You may vote all shares owned by you as of February 18, 2025, including (1) shares held directly in your name as the stockholder of record, and (2) shares held for you as the beneficial owner in street name through a broker, bank, trustee, or other nominee.
Q: How many votes am I entitled to per share?
A: Each holder of shares of common stock is entitled to one vote for each share of common stock held as of February 18, 2025.
Q: What is the quorum requirement for the meeting?
A: The holders of a majority of the voting power of the shares of our common stock entitled to vote at the Special Meeting as of the Record Date must be present in person virtually or represented by proxy at the Special Meeting in order to hold the Special Meeting and conduct business. This presence is called a quorum. Your shares are counted as present at the Special Meeting if you are present and vote in person virtually at the Special Meeting or if you have properly submitted a proxy.
Q: How are abstentions and broker non-votes treated?
A: Abstentions (i.e., shares present at the Special Meeting and marked “abstain”) are deemed to be shares presented or represented by proxy and entitled to vote, and are counted for purposes of determining whether a quorum is present. Abstentions have no effect on Proposal One, Proposal Two or Proposal Three.
A broker non-vote occurs when the beneficial owner of shares fails to provide the broker, bank or other nominee that holds the shares with specific instructions on how to vote on any “non-routine” matters brought to a vote at the stockholders meeting. In this situation, the broker, bank or other nominee will not vote on the “non-routine” matter. Broker non-votes are counted for purposes of determining whether a quorum is present and have no effect on the outcome of the matters voted upon.
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Note that if you are a beneficial holder, brokers and other nominees will be entitled to vote your shares on “routine” matters without instructions from you. The only proposal that would be considered “routine” in such event is the proposal for Reverse Stock Split Proposal (Proposal One). A broker or other nominee will not be entitled to vote your shares on any “non-routine” matters, absent instructions from you. “Non-routine” matters include proposals other than Proposal One, such as the ELOC Proposal and the Note Conversion Proposal. Accordingly, we encourage you to provide voting instructions to your broker or other nominee, regardless of whether or not you plan to attend the meeting.
Q: What is the vote required for each proposal?
A: The votes required to approve each proposal are as follows:
• Proposal One: Approval will be obtained if the number of votes cast “FOR” the proposal at the Special Meeting exceeds the number of votes “AGAINST” the proposal.
• Proposal Two: Approval will be obtained if the number of votes cast “FOR” the proposal at the Special Meeting exceeds the number of votes “AGAINST” the proposal.
• Proposal Three: Approval will be obtained if the number of votes cast “FOR” the proposal at the Special Meeting exceeds the number of votes “AGAINST” the proposal.
Q: If I submit a proxy, how will it be voted?
A: When proxies are properly dated, executed and returned, the shares represented by such proxies will be voted at the Special Meeting in accordance with the instructions of the stockholder. If no specific instructions are given, the shares will be voted in accordance with the recommendations of our board of directors as described above. If any matters not described in the Proxy Statement are properly presented at the Special Meeting, the proxy holders will use their own judgment to determine how to vote your shares. If the Special Meeting is postponed or adjourned, the proxy holders can vote your shares on the new meeting date as well, unless you have revoked your proxy instructions, as described below under “Can I change my vote or revoke my proxy?”
Q: What should I do if I get more than one proxy card or voting instruction form?
A: Stockholders may receive more than one set of voting materials, including multiple copies of the proxy materials, proxy cards or voting instruction forms. For example, stockholders who hold shares in more than one brokerage account may receive separate sets of proxy materials for each brokerage account in which shares are held. Stockholders of record whose shares are registered in more than one name will receive more than one set of proxy materials. You should vote in accordance with all of the proxy cards and voting instruction forms you receive relating to our Special Meeting to ensure that all of your shares are voted and counted.
Q: Can I change my vote or revoke my proxy?
A: You may change your vote or revoke your proxy at any time prior to the taking of the vote or the polls closing at the Special Meeting.
If you are the stockholder of record, you may change your vote by:
• granting a new proxy bearing a later date (which automatically revokes the earlier proxy) using any of the methods described above (and until the applicable deadline for each method);
• providing a written notice of revocation to HCW Biologics’ Secretary at HCW Biologics Inc., 2929 N. Commerce Parkway, Miramar, Florida 33025, prior to your shares being voted, or
• participating in the Special Meeting and voting electronically online at www.virtualshareholdermeeting.com/HCWB2025SM. Participation alone at the Special Meeting will not cause your previously granted proxy to be revoked unless you specifically vote during the meeting online at www.virtualshareholdermeeting.com/HCWB2025SM.
Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to revoke a proxy, you must contact that firm to revoke any prior voting instructions.
Q: How can I participate in the virtual Special Meeting?
A: There is no physical location for the Special Meeting. Stockholders of record as of the close of business on the Record Date are entitled to participate virtually in the Special Meeting, including to vote, ask questions and view the list of registered stockholders as of the record date during the Special Meeting by visiting www.virtualshareholdermeeting.com/HCWB2025SM.
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To participate and vote in the Special Meeting, you will need the control number included on your proxy card or voting instruction form.
We are committed to ensuring, to the extent possible, that stockholders will be given the same participation rights that they would be given if they attended an in-person meeting. We will endeavor to answer as many stockholder-submitted questions as time permits that comply with the Special Meeting rules of conduct. We reserve the right to edit profanity or other inappropriate language and to exclude questions regarding topics that are not pertinent to meeting matters or Company business. If we receive substantially similar questions, we may group such questions together and provide a single response to avoid repetition.
The meeting webcast will begin promptly at 10:00 a.m., Eastern Time. Online check-in will begin at 9:45 a.m., Eastern Time, and we encourage you to allow ample time for check-in procedures. If you experience technical difficulties during the check-in process or during the meeting, please call the technical support number provided on the log-in page of the virtual meeting. Additional information regarding the rules and procedures for participating in the Special Meeting will be set forth in our meeting rules of conduct, which stockholders can view during the meeting at the meeting website. Regardless of whether you plan to participate in the Special Meeting, it is important that your shares be represented and voted at the Special Meeting. Accordingly, we encourage you to vote in advance of the Special Meeting. Please be aware that participating in the Special Meeting will not, by itself, revoke a proxy. See, “Can I change my vote or revoke my proxy?” above for more details.
Q: How do I submit questions during the meeting?
A: Stockholders may submit questions during the Special Meeting by visiting www.virtualshareholdermeeting.com/HCWB2025SM and using their 16-digit control number to enter the meeting. Questions may be submitted by typing them into the text box provided.
Q: Is there a list of stockholders entitled to vote at the Special Meeting?
A: For a period of ten (10) days ending on the day before the meeting, the names of stockholders of record entitled to vote will be available for inspection by stockholders for any purpose germane to the meeting between the hours of 9:00 a.m. and 5:00 p.m., local time, at our offices located at 2929 N. Commerce Parkway, Miramar, Florida 33025. Please send a written request to our Secretary at HCW Biologics Inc., 2929 N. Commerce Parkway, Miramar, Florida 33025, or email legal@HCWBiologics.com to schedule an appointment. This list will also be available for inspection during the Special Meeting at www.virtualshareholdermeeting.com/HCWB2025SM.
Q: Who will tabulate the votes?
A: A representative of the Company will serve as the Inspector of Elections and will tabulate the votes at the Special Meeting.
Q: Where can I find the voting results of the Special Meeting?
A: We will announce preliminary voting results at the Special Meeting. We will also disclose voting results on a Current Report on Form 8-K that we will file with the SEC within four business days after the Special Meeting.
Q: I share an address with another stockholder, and we received only one paper copy of the proxy materials. How may I obtain an additional copy of the proxy materials?
A: The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements we deliver a single copy of the Notice of Internet Availability and, if applicable, our proxy materials to multiple stockholders who share the same address, unless we have received contrary instructions from one or more of such stockholders. Please see the section titled “Householding” for information on how to obtain additional copies of proxy materials.
Q: What if I have questions about my HCW Biologics shares or need to change my mailing or email address?
A: You may contact our transfer agent, Equiniti Trust Company, LLC, by telephone at (800) 937-5449, through its website at www.equiniti.com or by U.S. mail at 55 Challenger Road, 2nd Floor, Ridgefield Park, New Jersey 07660, if you have questions about your HCW Biologics shares or need to change your mailing or email address.
Q: What if I need to change my email address?
A: If you need to change the email address that we use to mail proxy materials to you or if you wish to sign up to receive future mailings via email, please go to the website provided on your proxy card or voting instruction card, to request to receive materials solely by electronic delivery in the future and supply the appropriate email address.
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Q: Who is soliciting my proxy and paying for the expense of solicitation?
A: The proxy for the Special Meeting is being solicited on behalf of our board of directors. We will pay the cost of preparing and distributing these proxy materials and soliciting votes. We may, on request, reimburse brokerage firms and other nominees for their expenses in forwarding proxy materials to beneficial owners. In addition to soliciting proxies electronically, we expect that our directors, officers and employees may solicit proxies in person or by telephone, mailings, emails or otherwise. None of these individuals will receive any additional or special compensation for doing this, although we may reimburse these individuals for their reasonable out-of-pocket expenses. We expect to retain Advantage Proxy to solicit votes on behalf of our board of directors. If you choose to access the proxy materials or vote via the internet or by phone, you are responsible for any internet access or phone charges you may incur.
PROPOSAL ONE:
APPROVAL OF AMENDMENT TO THE CHARTER TO EFFECT ONE OR MORE REVERSE STOCK SPLITS OF THE COMMON STOCK AT THE DISCRETION OF THE BOARD OF DIRECTORS
General
We are asking stockholders to approve a proposed amendment to our Certificate of Incorporation ( the “Charter”) to implement, at the discretion of the Board at any time prior to the one-year anniversary of the Special Meeting, one or more reverse stock splits of the outstanding shares of our Common Stock in an aggregate range of not less than one-for-twenty (1:20) shares and not more than one-for-fifty (1:50) shares, (the “Reverse Stock Split Proposal”). The implementation of a Reverse Stock Split will not reduce the total number of authorized shares of our Common Stock.
The Board has unanimously approved and declared advisable the Reverse Stock Split Proposal and recommended that our stockholders approve one or more amendments to the Charter, at the discretion of our Board, to effect this proposal (each, a “Reverse Split Certificate”).
If stockholders approve this proposal, then our Board will cause one or more Reverse Split Certificates to be filed with the Delaware Secretary of State and a Reverse Stock Split to be effected only if the Board determines that a Reverse Stock Split would be in the best interests of the Company and its stockholders. The Board also may determine in its discretion not to effect a Reverse Stock Split and not to file the Reverse Split Certificate(s). No further action on the part of stockholders will be required to either implement or abandon the Reverse Stock Split Proposal.
The Reverse Split Certificate(s) will effect a reverse stock split of the outstanding shares of our Common Stock at an aggregate reverse stock split ratio ranging from 1-for-20 to 1-for-50, as determined by the Board. We are proposing that the Board have the discretion to select the Reverse Stock Split ratio from within this range, rather than proposing that stockholders approve a specific ratio at this time, in order to give the Board the flexibility to implement a Reverse Stock Split at a ratio that reflects the Board’s then-current assessment of the factors described below under “Criteria to be Used for Determining Whether to Implement Reverse Stock Split.” We believe that enabling the Board to set the ratio of the Reverse Stock Split within the stated range is in the best interests of the Company and its stockholders because it will provide us with the flexibility to implement the Reverse Stock Split in a manner designed to maximize the anticipated benefits for the Company and its stockholders and because it is not possible to predict market conditions at the time a reverse stock split would be implemented.
As of the Record Date, there were 44,544,996 shares of our Common Stock outstanding. Based on such number of shares of Common Stock outstanding, immediately following the effectiveness of a Reverse Stock Split (without giving effect to the issuance of whole shares in lieu of fractional shares), we will have, depending on the Reverse Stock Split ratio selected by the Board, outstanding shares of Common Stock as illustrated in the tables under the caption “—Principal Effects of a Reverse Stock Split—General.”
All holders of our Common Stock will be affected equally by a Reverse Stock Split.
No fractional shares of our Common Stock will be issued as a result of a Reverse Stock Split. Instead, any stockholders who would have been entitled to receive a fractional share as a result of a Reverse Stock Split will receive in lieu thereof one additional whole share of our Common Stock; provided that, whether or not fractional shares would be issuable as a result of a Reverse Stock Split shall be determined on the basis of (a) the total number of shares of our Common Stock that were outstanding immediately prior to the effective time of the Reverse Stock Split (the “Effective Time”) and (b) the aggregate number of shares of our Common Stock after the Effective Time into which the shares of our Common Stock have been reclassified; and with respect to holders of shares of our Common Stock in book-entry form in the records of the Company’s transfer agent that were outstanding immediately prior to the Effective Time, any holder who would otherwise be entitled to a fractional share of our Common Stock as a result of a Reverse Stock Split, following the Effective Time, shall be entitled to receive one additional share of our Common Stock automatically and without any action by the holder.
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Each holder of shares of our Common Stock will hold the same percentage of the outstanding shares of our Common Stock immediately following a Reverse Stock Split as that stockholder held immediately prior to the Reverse Stock Split, except to the extent that the Reverse Stock Split results in stockholders receiving whole shares in lieu of fractional shares. The par value of our Common Stock will continue to be $0.0001 per share (see “—Principal Effects of a Reverse Stock Split—Effect of Reverse Stock Split on Stated Capital”).
Background and Reasons for the Reverse Stock Split Proposal
The Board believes that effecting one or more Reverse Stock Splits would help us to:
• maintain the listing of our Common Stock on Nasdaq;
• increase the per share price of our Common Stock;
• maintain the marketability and liquidity of our Common Stock; and
• provide other potential benefits.
Maintain Our Listing on Nasdaq
One purpose for effectuating a Reverse Stock Split, should the Board choose to effect one, would be to maintain the listing of our Common Stock on Nasdaq. Our Common Stock is listed on Nasdaq under the symbol “HCWB.”
On August 6, 2024, we received a deficiency letter from The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, because the bid price of our Common Stock closed below $1.00 per share for 30 consecutive business days, we were no longer in compliance with Nasdaq’s minimum bid price rule, which is a requirement for continued listing on Nasdaq (the “Minimum Bid Price Rule”). In accordance with Listing Rule 5810(c)(3)(A), we were provided with 180 calendar days to regain compliance with the Minimum Bid Price Rule.
On February 5, 2025, we received a written notice (the “Notice”) from Nasdaq notifying us that we failed to regain compliance with the Minimum Bid Price Rule and were subject to delisting. The Company was previously granted a hearing before a Nasdaq Hearings Panel (the “Panel”), to appeal a prior Nasdaq staff determination that our common stock was subject to delisting for failure to regain compliance with the market value of listed securities (“MVLS”) threshold of $50,000,000 required for continued listing on the Nasdaq Global Market under Nasdaq Listing Rule 5450(b)(3)(A), which stayed any delisting action pending the issuance of the Panel’s determination. The Panel hearing was held on February 13, 2025, and we are awaiting the Panel’s decision.
As of the Record Date, the closing price of one share of our Common Stock was $0.39. A Reverse Stock Split, if effected, should have the immediate effect of increasing the price of our Common Stock as reported on Nasdaq, which we believe would reduce the risk that our Common Stock will be delisted from Nasdaq.
Our Board believes that one or more Reverse Stock Splits are necessary to maintain our listing on Nasdaq. Accordingly, the Board recommended that our stockholders approve the Reverse Split Proposal and directed that it be submitted to our stockholders for approval at the Special Meeting. Failure to approve the Reverse Stock Split Proposal may have serious, adverse effects on the Company and its stockholders.
Increase the Per Share Price of Common Stock
If the Board chooses to effect a Reverse Stock Split, we believe it would increase the per share price of our Common Stock. In determining to seek authorization for this proposal, our Board considered that, by effectively condensing a number of pre-split shares of our Common Stock into one share of our Common Stock, the market price of a post-split share should generally be greater than the current market price of a pre-split share.
Maintain the Marketability and Liquidity of our Common Stock
The Board believes that the increased market price of our Common Stock expected as a result of implementing one or more Reverse Stock Splits could improve the marketability and liquidity of our Common Stock and encourage interest and trading in our Common Stock. For example, certain practices and policies favor higher-priced securities listed on a national securities exchange, like Nasdaq, over lower-priced securities quoted on the over-the-counter markets:
• Stock Price Requirements: Many brokerage firms have internal policies and practices that have the effect of discouraging individual brokers from recommending lower-priced securities to their clients. Many institutional investors have policies prohibiting them from holding lower-priced securities in their portfolios, which reduces the number of potential purchasers of our Common Stock. Investment funds may also be reluctant to invest in lower-priced securities.
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• Stock Price Volatility: A higher stock price may increase the acceptability of our Common Stock to a number of long-term investors who may not find our Common Stock attractive at its current prices due to the trading volatility often associated with securities below certain prices. Moreover, the analysts at many brokerage firms do not monitor the trading activity or otherwise provide coverage of lower-priced securities.
• Transaction Costs: Investors may be dissuaded from purchasing securities below certain prices because brokers’ commissions, as a percentage of the total transaction value, can be higher for lower-priced securities.
• Access to Capital Markets: If our appeal of the Nasdaq staff determination to delist our common stock is not successful or we are unable to regain compliance with the Minimum Bid Price Rule and our Common Stock is delisted from Nasdaq, investor demand for additional shares of our Common Stock would be limited, thereby preventing us from accessing the public equity markets as a strategy to raise additional capital.
We believe that Reverse Stock Split(s), if effected, could increase analyst and broker interest in our Common Stock by avoiding these internal policies and practices. Increasing visibility of our Common Stock among a larger pool of potential investors could result in higher trading volumes. We also believe that one or more Reverse Stock Splits may make our Common Stock a more attractive and cost-effective investment for many investors, which could enhance the liquidity of our Common Stock for our stockholders. These increases in visibility and liquidity could also help facilitate future financings and give management more flexibility to focus on executing our business strategy, which includes the strategic management of authorized capital for business purposes.
In evaluating whether to seek stockholder approval for the Reverse Stock Split Proposal, our Board took into consideration negative factors associated with reverse stock splits. These factors include the negative perception of reverse stock splits that investors, analysts and other stock market participants may hold; the fact that the stock prices of some companies that have effected reverse stock splits have subsequently declined, sometimes significantly, following their reverse stock splits; the possible adverse effect on liquidity that a reduced number of outstanding shares could cause; and the costs associated with implementing a reverse stock split.
Accordingly, after taking into account the negative factors associated with reverse stock splits and based on the positive factors discussed herein, the Board believes that being able to effect one or more Reverse Stocks Split is in the best interests of the Company and its stockholders.
Criteria to be Used for Determining Whether to Implement Reverse Stock Split
In determining whether and when to effect a Reverse Stock Split and which Reverse Stock Split ratio to implement, if any, following receipt of stockholder approval of this proposal, the Board may consider factors such as:
• whether the Panel grants us additional time to regain compliance with the Minimum Bid Price Rule;
• the historical trading price and trading volume of our Common Stock;
• the then-prevailing trading price and trading volume of our Common Stock and the expected impact of a Reverse Stock Split on the trading market for our Common Stock in the short- and long-term;
• the continued listing requirements for our Common Stock on Nasdaq or other applicable exchange and our ability to maintain the listing of our Common Stock on Nasdaq;
• actual and forecasted results of operations, and the likely effect of these results on the market price of our Common Stock;
• the projected impact of a Reverse Stock Split ratio on trading liquidity in our Common Stock;
• the number of shares of our Common Stock outstanding and the potential devaluation of our market capitalization as a result of a Reverse Stock Split; and
• prevailing general market, industry and economic conditions.
Certain Risks and Potential Disadvantages Associated with a Reverse Stock Split
We cannot assure you that a Reverse Stock Split will increase the price of our Common Stock.
We expect that a Reverse Stock Split will increase the market price of our Common Stock. However, the effect of a Reverse Stock Split on the market price of our Common Stock cannot be predicted with any certainty, and the history of reverse stock splits for other companies of similar size to us is varied, particularly because investors may view a reverse stock split negatively.
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It is possible that the per share price of our Common Stock after a Reverse Stock Split will not increase in the same proportion as the reduction in the number of outstanding shares of our Common Stock following the Reverse Stock Split, and a Reverse Stock Split may not result in a per share price that would attract investors who do not trade in lower-priced securities. In addition, we cannot assure you that our Common Stock will be more attractive to investors. Even if we implement one or more Reverse Stock Splits, the market price of our Common Stock may decrease due to factors unrelated to the Reverse Stock Split(s), including our future performance. If a Reverse Stock Split is consummated and the trading price of our Common Stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of the Reverse Stock Split.
A Reverse Stock Split may decrease the liquidity of our Common Stock and result in higher transaction costs.
A Reverse Stock Split may decrease the liquidity of our Common Stock because fewer shares would be outstanding after the Reverse Stock Split. In addition, if the Board implements a Reverse Stock Split, more stockholders may own “odd lots” of fewer than 100 shares of our Common Stock, which may be more difficult to sell. Brokerage commissions and other costs of transactions in odd lots are generally higher than the costs of transactions of more than 100 shares or multiples of 100 shares of our Common Stock. Accordingly, a Reverse Stock Split may not achieve the desired results of increasing marketability of our Common Stock as described above.
If the Reverse Stock Split Proposal is approved and effected, the resulting per-share market price may not attract institutional investors or investment funds and may not satisfy the investing guidelines of such investors and, consequently, the trading liquidity of our Common Stock may not improve.
While the Board believes that a higher stock price may help generate investor interest, there can be no assurance that a Reverse Stock Split will result in a per-share market price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our Common Stock may not necessarily improve.
A decline in the market price of our Common Stock after a Reverse Stock Split is approved and effected may result in a greater percentage decline than would occur in the absence of the Reverse Stock Split.
If the Reverse Stock Split Proposal is approved and a Reverse Stock Split is effected and the market price of our Common Stock declines, the percentage decline may be greater than would occur in the absence of the Reverse Stock Split. The market price of our Common Stock will, however, also be based upon our performance and other factors, which are unrelated to the number of shares of our Common Stock outstanding.
Effective Time
The Effective Time of a Reverse Stock Split, if the Reverse Stock Split Proposal is approved by stockholders and implemented by us, will be the date and time that is determined by the Board, but will be no later than the one-year anniversary of the Special Meeting.
If, at any time prior to the filing of a Reverse Split Certificate with the Delaware Secretary of State, the Board, in its discretion, determines that it is in the best interests of the Company and its stockholders to delay the filing of the Reverse Split Certificate or to abandon any Reverse Stock Split, that Reverse Stock Split may be delayed or abandoned, without any further action by our stockholders.
At the Effective Time, the Reverse Stock Split will combine, automatically and without any action on the part of us or our stockholders, the shares of our Common Stock outstanding immediately prior thereto into a lesser number of new shares of our Common Stock in accordance with the Reverse Stock Split ratio determined by the Board within the limits set forth in this proposal, and will round any fractional shares up to the nearest whole share.
Fractional Shares
Stockholders will not receive fractional shares of our Common Stock in connection with a Reverse Stock Split. Instead, stockholders who otherwise would be entitled to receive fractional shares because they hold a number of shares not evenly divisible by the ratio of the Reverse Stock Split will automatically be entitled to receive an additional share of our Common Stock. In other words, any fractional share will be rounded up to the nearest whole number. Shares of our Common Stock held in registered form and shares of our Common Stock held in “street name” (that is, through a broker) for the same stockholder will be considered held in separate accounts and will not be aggregated when effecting a Reverse Stock Split.
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Principal Effects of a Reverse Stock Split
General
After the Effective Time, the number of our outstanding shares of our Common Stock will decrease at the Reverse Stock Split ratio of not less than 1-for-20 and not more than 1-for-50. A Reverse Stock Split would be effected simultaneously for all shares of our Common Stock at the same ratio for all shares, resulting in each stockholder owning fewer shares of common stock. The Reverse Stock Split will affect all of our stockholders uniformly and will not affect any stockholder’s percentage ownership interest in the Company, except to the extent that the Reverse Stock Split results in any of our stockholders receiving whole shares in lieu of fractional shares as described above. Voting rights and other rights and preferences of the holders of our Common Stock will not be affected by a Reverse Stock Split. For example, a holder of 2% of the voting power of the outstanding shares of common stock immediately prior to the Reverse Stock Split would continue to hold 2% of the voting power of the outstanding shares of our Common Stock immediately after the Reverse Stock Split. The number of stockholders of record will not be affected by a Reverse Stock Split. A Reverse Stock Split would not affect our securities law reporting and disclosure obligations, and we would continue to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”).
The principal effects of a Reverse Stock Split will be that:
• each twenty to fifty shares of our Common Stock owned by a stockholder (depending on the Reverse Stock Split ratio selected by the Board), will be combined into one new share of our Common Stock;
• no fractional shares of our Common Stock will be issued in connection with a Reverse Stock Split; instead, any fractional shares resulting from the Reverse Stock Split will round up to the next whole share;
• proportionate adjustments will be made to the per share exercise price and the number of shares issuable upon the exercise of warrants and all then-outstanding awards under all of the Company’s equity plans;
• the number of stockholders owning “odd lots” of less than 100 shares of our Common Stock may increase; and
• the number of shares then reserved for issuance under the Company’s equity plans will be proportionately reduced.
The following table contains approximate information, based on share information as of February 18, 2025, showing the impact of a Reverse Stock Split at different ratios:
1 Issued and outstanding shares include 6,717,000 shares of our Common Stock issued in an equity financing on November 20, 2024.
2 The conversion of the Senior Secured Notes is subject to stockholder approval, but if approved, at least $6,580,000 of outstanding principal will convert to shares of our Commons Stock at a conversion price of $0.65 per share.
3 Shares issuable under outstanding equity awards, as reported as of December 31, 2023.
4 Shares reserved for future issuance under the Company’s 2021 Equity Incentive Plan, as reported as of December 31, 2023.
5 Consists of shares of Common Stock authorized but unissued and unreserved for future issuance.
As illustrated in the table above, a Reverse Stock Split will not result in a reduction of the total number of shares of our Common Stock that we are authorized to issue. The par value of our Common Stock would remain unchanged at $0.0001 per share.
After a Reverse Split Certificate is effective, our Common Stock will have a new Committee on Uniform Securities Identification Procedures, or CUSIP number, a number used to identify our Common Stock.
Our Common Stock is currently registered under Section 12(b) of the Exchange Act, and we are subject to the periodic reporting and other requirements of the Exchange Act. The implementation of a Reverse Stock Split will not affect the registration of our Common Stock under the Exchange Act. Our Common Stock would continue to be listed on Nasdaq under the symbol “HCWB” immediately following the Reverse Stock Split.
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Effect of Reverse Stock Split on Stated Capital
Following a Reverse Stock Split, the par value of our Common Stock will remain $0.0001 per share. As a result of the Reverse Stock Split, the stated capital on our balance sheet attributable to Common Stock (subject to a minor adjustment in respect of the treatment of fractional shares) and the additional paid-in capital account will, in total, not change due to the Reverse Stock Split. However, the allocation between the stated capital attributable to our Common Stock and the additional paid-in capital on our balance sheet will change because there will be fewer shares of Common Stock outstanding. The stated capital attributable to Common Stock will decrease, and in turn, the stated capital attributable to the additional paid-in capital will increase. The net income or loss per share of Common Stock will increase because there will be fewer shares of Common Stock outstanding. A Reverse Stock Split would be reflected retroactively in our consolidated financial statements. We do not anticipate that any other accounting consequences would arise as a result of a Reverse Stock Split.
Shares Held in Book-Entry and Through a Broker
The combination of, and reduction in, the number of outstanding shares of our Common Stock as a result of a Reverse Stock Split will occur automatically at the Effective Time without any additional action on the part of our stockholders.
Upon a Reverse Stock Split, we intend to treat stockholders holding shares of our Common Stock in “street name” (that is, through a broker) in the same manner as registered stockholders whose shares of our Common Stock are registered in their names. Brokers will be instructed to effect the Reverse Stock Split for their beneficial holders holding shares of our Common Stock in “street name;” however, these brokers may apply their own specific procedures for processing the Reverse Stock Split. If you hold your shares of our Common Stock with a broker, and you have any questions in this regard, we encourage you to contact your holder of record.
If you hold registered shares of our Common Stock in a book-entry form, you do not need to take any action to receive your post-Reverse Stock Split shares of Common Stock in registered book-entry form. If you are entitled to post-Reverse Stock Split shares of our Common Stock, a transaction statement will automatically be sent to your address of record as soon as practicable after the Effective Time indicating the number of post-Reverse Stock Split shares of our Common Stock you hold.
Effects on Equity Compensation Plans and Awards and Convertible Securities
If a Reverse Stock Split is implemented, proportionate adjustments would generally be required to be made with regard to:
• the number of shares deliverable upon vesting and settlement of outstanding options under the Plan;
• the number of shares reserved for issuance under the Plan; and
• the per share conversion price, and the number of shares issuable upon conversion of, outstanding convertible securities entitling the holders to purchase or convert into, or otherwise acquire shares of our Common Stock.
In the case of options, convertible securities or other rights to acquire shares of our Common Stock, these adjustments would result in approximately the same aggregate price required under such options, convertible securities or other rights upon exercise, conversion, or settlement, and approximately the same value of shares of Common Stock being delivered upon such exercise, conversion, or settlement, immediately following a Reverse Stock Split as was the case immediately preceding the Reverse Stock Split.
The number of shares of our Common Stock issuable upon exercise or vesting of outstanding equity awards and options and the exercise or purchase price related thereto, if any, would be equitably adjusted in accordance with the terms of the Plan, as applicable, or such stock option grants, as the case may be, which may include rounding the number of shares of our Common Stock issuable down to the nearest whole share or the payment of cash for fractional shares.
Interest of Certain Persons in Matters to be Acted Upon
No officer or director has any substantial interest, direct or indirect, by security holdings or otherwise, in any Reverse Stock Split that is not shared by all of our other stockholders.
Reservation of Right to Delay the Filing of the Reverse Split Certificate, or Abandon the Reverse Stock Split
We reserve the right to delay the filing of the Reverse Split Certificate or abandon any Reverse Stock Split and at any time before the Effective Time, even if the Reverse Stock Split Proposal has been approved by stockholders at the Special Meeting. By voting in favor of the Reverse Stock Split Proposal, you are also expressly authorizing the Board to delay, until the one-year anniversary of the Special Meeting, or abandon any Reverse Stock Split if the Board determines that such action is in the best interests of the Company and its stockholders.
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No Going Private Transaction
Notwithstanding the decrease in the number of outstanding shares following a Reverse Stock Split, our Board does not intend for this transaction to be the first step in a “going private transaction” within the meaning of Rule 13e-3 of the Exchange Act.
No Appraisal Rights
Under Delaware law, the Charter and our Bylaws, stockholders have no rights to exercise dissenters’ rights of appraisal with respect to a Reverse Stock Split.
Material U.S. Federal Income Tax Consequences of a Reverse Stock Split
The following summary describes, as of the date of this proxy statement, certain U.S. federal income tax consequences of a Reverse Stock Split to holders of our Common Stock. This summary addresses the tax consequences only to a U.S. holder, which is a beneficial owner of our Common Stock that is either:
• an individual citizen or resident of the United States;
• a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia;
• an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
• a trust, if: (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons has the authority to control all of its substantial decisions or (ii) it was in existence before August 20, 1996 and a valid election is in place under applicable Treasury regulations to treat such trust as a U.S. person for U.S. federal income tax purposes.
This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations, administrative rulings and judicial authority, all as in effect as of the date of this proxy statement. Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material effect on the U.S. federal income tax consequences of a Reverse Stock Split.
This summary does not address all of the tax consequences that may be relevant to any particular investor, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of taxpayers or that are generally assumed to be known by investors. This summary also does not address the tax consequences to (i) persons that may be subject to special treatment under U.S. federal income tax law, such as banks, insurance companies, thrift institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, U.S. expatriates, persons subject to the alternative minimum tax, persons whose functional currency is not the U.S. dollar, partnerships or other pass-through entities, traders in securities that elect to mark to market and dealers in securities or currencies, (ii) persons that hold shares of our Common Stock as part of a position in a “straddle” or as part of a “hedging transaction,” “conversion transaction” or other integrated investment transaction for federal income tax purposes or (iii) persons that do not hold shares of our Common Stock as “capital assets” (generally, property held for investment). This summary does not address backup withholding and information reporting. This summary does not address U.S. holders who beneficially own shares of our Common Stock through a “foreign financial institution” (as defined in Code Section 1471(d)(4)) or certain other non-U.S. entities specified in Code Section 1472. This summary does not address tax considerations arising under any state, local or foreign laws, or under federal estate or gift tax laws.
If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of shares of our Common Stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Partnerships that hold shares of our Common Stock, and partners in such partnerships, should consult their own tax advisors regarding the U.S. federal income tax consequences of a Reverse Stock Split.
Each holder should consult his, her or its own tax advisors concerning the particular U.S. federal tax consequences of a Reverse Stock Split, as well as the consequences arising under the laws of any other taxing jurisdiction, including any foreign, state, or local income tax consequences.
General Tax Treatment of a Reverse Stock Split
A Reverse Stock Split is intended to qualify as a “reorganization” under Section 368 of the Code that should constitute a “recapitalization” for U.S. federal income tax purposes. Assuming the Reverse Stock Split qualifies as a reorganization, a U.S. holder generally will not recognize gain or loss upon the exchange of share of our common stock for a lesser number of shares of common stock, based upon the Reverse Stock Split ratio. A U.S. holder’s aggregate tax basis in the lesser number of shares of our Common Stock ordinary shares received in the Reverse Stock Split will be the same such U.S.
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holder’s aggregate tax basis in the shares of our Common Stock that such U.S. holder owned immediately prior to the Reverse Stock Split. The holding period for the shares of our Common Stock received in a Reverse Stock Split will include the period during which a U.S. holder held the shares of our Common Stock that were surrendered in the Reverse Stock Split. The United States Treasury regulations provide detailed rules for allocating the tax basis and holding period of the shares of our Common Stock surrendered to the shares of our Common Stock received pursuant to the Reverse Stock Split. U.S. holders of shares of our Common Stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.
THE FOREGOING IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF A REVERSE STOCK SPLIT, AND DOES NOT CONSTITUTE A TAX OPINION. EACH HOLDER OF SHARES OF OUR COMMON STOCK SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF A REVERSE STOCK SPLIT TO THEM AND FOR REFERENCE TO APPLICABLE PROVISIONS OF THE CODE.
Vote Required
Stockholders can vote FOR, AGAINST or ABSTAIN on Proposal One.
The affirmative vote of the majority of votes cast on the proposal is required to approve Proposal One. Proxies solicited by the Board will be voted for approval of this proposal, unless otherwise specified. If stockholder approval for this proposal is not obtained then the Reverse Stock Split will not be effected.
Recommendation of the Board
The Board recommends a vote FOR Proposal One.
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PROPOSAL TWO
APPROVAL OF THE ISSUANCE OF SHARES OF THE
COMPANY’S COMMON STOCK PURSUANT TO AN EQUITY LINE OF CREDIT WITH
SQUARE GATE.
General Information About the Equity Line of Credit.
The Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with Square Gate Capital Master Fund, LLC – Series 4 (“Square Gate”), pursuant which Square Gate agreed to purchase, from time to time at the Company’s election, up to $40,000,000 in shares of our common stock, subject to certain limitations (the “Equity Line of Credit” or “ELOC”). Copies of the Purchase Agreement and Registration Rights Agreement are attached hereto as Appendix A.
Under the applicable Nasdaq rules, in no event may we issue any shares of our Common Stock pursuant to the ELOC if the issuance of such shares of Common Stock would exceed 19.99% of the shares of our Common Stock outstanding immediately prior to the execution of the Purchase Agreement (the “Exchange Cap”), unless we obtain stockholder approval to issue shares of our Common Stock in excess of the Exchange Cap. In any event, we may not issue any shares of our Common Stock under the Purchase Agreement if such issuance or sale would breach any applicable rules or regulations of Nasdaq.
The Company may be limited in its ability to draw down on the ELOC and issue shares of our Common Stock under the Purchase Agreement unless and until the stockholders approve the issuance of shares in excess of 19.99%.
In order to gain compliance with the minimum stockholders’ equity of $2,500,000 required for listing on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(1) (the “Minimum Stockholder Equity Rule”), the Company may need to draw down on the ELOC and issue shares of our Common Stock under the Purchase Agreement in excess of the Exchange Cap.
Why Does the Company Need Stockholder Approval?
Our Common Stock is listed on Nasdaq and, as such, we are subject to the Nasdaq Stock Market Rules. Nasdaq Stock Market Rule 5635(d) is referred to as the “Nasdaq 20% Rule.” In order to comply with the Nasdaq 20% Rule and to satisfy conditions under the Purchase Agreement, we are seeking stockholder approval to permit the potential issuance of more than 19.99% of the outstanding shares of our Common Stock in accordance with the Purchase Agreement.
The Nasdaq 20% Rule requires that an issuer obtain stockholder approval prior to certain issuances of Common Stock or securities convertible into or exchangeable for Common Stock at a price less than the greater of market price or book value of such securities (on an as exercised basis) if such issuance equals 20% or more of our Common Stock or voting power of the issuer outstanding before the transaction. Upon entering into the Purchase Agreement, we could not issue or sell any shares of Common Stock, and Square Gate could not purchase or acquire any shares of our Common Stock pursuant to the Purchase Agreement, to the extent that after giving effect thereto, the aggregate number of shares of our Common Stock that would be issued pursuant to the Purchase Agreement and the transactions contemplated hereby would exceed 19.99% of the shares of our Common Stock issued and outstanding immediately prior to the execution of the Purchase Agreement) which number of shares is to be reduced, on a share-for-share basis, by the number of shares of our Common Stock issued or issuable pursuant to any transaction or series of transactions that may be aggregated with the transactions contemplated by the Purchase Agreement under applicable rules of the trading market (such maximum number of shares, the “Exchange Cap”), unless the Company’s stockholders approved the issuance of Common Stock in excess of the Exchange Cap in accordance with the applicable rules of the trading market. While the Company is asking the stockholders to approve the issuance of all of the shares available under the Purchase Agreement, the Company may not need to issue and sell all such shares.
To meet the Nasdaq 20% Rule, we need stockholder approval under the listing rules of Nasdaq to remove the Exchange Cap provisions in the Purchase Agreement to permit the potential issuance of more than 20% of our outstanding Common Stock in accordance with the terms of the Purchase Agreement.
What is the Effect on Current Stockholders if Proposal Two is Approved?
If our stockholders approve this proposal, we will be able to eliminate the Exchange Cap in the Purchase Agreement and therefore have the option to issue the maximum number of shares of common stock issuable under the Purchase Agreement which would exceed 19.99% of the issued and outstanding shares of our Common Stock as of the date we executed the Purchase Agreement. This would allow the Company flexibility in accessing the equity line of credit to pursue its business growth, current announced partnerships and collaborations and maintain compliance with the Nasdaq Minimum Shareholder Equity Rule if other sources of capital are insufficient to fulfill these goals. If stockholders approve the Proposal Two, the rights or privileges of our existing stockholders will not be affected, except that the economic and voting interests of each of our existing stockholders will be significantly diluted should we choose to require Square Gate to purchase those shares pursuant to the Purchase Agreement.
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Although the number of shares of our Common Stock that our existing stockholders own will not decrease, the shares of our Common Stock owned by our existing stockholders will represent a smaller percentage of our total outstanding shares of our Common Stock after any such issuance.
What is the Effect on Current Stockholders if the Proposal Two is NOT approved?
If our stockholders do not approve this Proposal Two, we may be limited in the amount of money we can draw down on the line of credit under the Purchase Agreement. We are not seeking the approval of our stockholders to authorize our entry into the Purchase Agreement and related transaction documents. The failure of our stockholders to approve the proposal may result in our inability to take full advantage of the new equity line of credit and severely limit the Company’s ability to grow and/or maintain compliance with the Nasdaq Minimum Stockholder Equity Rule. Accordingly, if the Company is limited in the number of shares it can issue under the equity line of credit, dilution to stockholders will be limited and have the effect of limiting the Company’s growth potential and ability to maintain its Nasdaq listing with no additional capital under the ELOC.
Required Vote
In accordance with Delaware law, approval of Proposal Two requires the affirmative vote of a majority of the shares of common stock present or represented by proxy and entitled to vote on this proposal at the Special Meeting. As a result, abstentions will have the same effect as votes against this proposal.
Recommendation of the Board
The Board recommends a vote FOR Proposal Two.
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PROPOSAL THREE
APPROVAL OF THE
NOTE CONVERSION TRANSACTION
We are asking our stockholders to approve, for purposes of complying with applicable Nasdaq listing rules, the issuance of shares of our Common Stock upon conversion of up to $6,905,000 of the principal amount of notes previously issued to noteholders, including certain officers, directors and stockholders of the Company (the “Noteholders”) pursuant to that certain Amended and Restated Note Purchase Agreement dated July 2, 2024, as amended by the First Amendment to Amended and Restated Senior Secured Note Purchase Agreement dated September 30, 2024, and as it may be further amended in accordance with the Principal Terms for Conversion Amendment, which has been approved in principle by the Board of Directors and the Noteholders and set forth on Appendix B attached hereto (the “Principal Terms”) and such additional terms and conditions not materially inconsistent with such Principal Terms our Board may hereafter approve (the “Note Conversion”). As of the Record Date, assuming stockholders approve this Proposal Three, and based on the assumptions below, if all $6,905,000 principal amount of notes held by the Noteholders are converted to shares of Common Stock pursuant to the Principal Terms for Conversion, such shares of Common Stock would represent approximately 19.26% of the outstanding shares of our Common Stock as of the Record Date if they were outstanding on such date.
We are seeking stockholder approval of Proposal Three because certain of the Noteholders are also officers, directors and/or stockholders of the Company. The stockholders who are also Noteholders will abstain from voting on Proposal Three.
Summary of Secured Note Financing and Proposed Conversion Terms
On March 31, 2024, the Company entered into a Note Purchase Agreement with certain Noteholders, pursuant to which the Company could issue secured notes up to an aggregate principal amount up to $10.0 million (“Secured Notes”).
As of July 2, 2024, existing investors in Secured Notes unanimously agreed to an Amended and Restated Note Purchase Agreement and related documents (“Amended and Restated Note Purchase Agreement”). On September 27, 2024, existing investors approved an amendment to the Amended and Restated Note Purchase Agreement which extended the last closing date to October 31, 2024. No other terms were changed. Under the terms of the Amended and Restated Note Purchase Agreement, the Secured Notes continue to bear interest at a rate of 9% per annum, payable quarterly in arrears. The Secured Notes will mature on August 30, 2026 (the “Maturity Date”), on which date the principal balance, accrued but unpaid interest and other amounts owed under the terms of the Amended and Restated Note Purchase Agreement shall be due and payable. The Company pledged its equity ownership interest in Wugen, Inc., which is 2,174,311 shares of Wugen, Inc. common stock, which was equivalent to a 5.6% ownership stake in that company’s fully-diluted stock as of September 30, 2024 (“Pledged Collateral”). The Pledged Collateral is to be held and released according to the terms of the Escrow Agreement, as security for the Secured Notes.
As of October 31, 2024, the Company had received approximately $6.9 million in funding from the issuance of Secured Notes. Investors included Dr. Hing C. Wong, Founder and Chief Executive Officer, who invested $2.4 million; Rebecca Byam, Chief Financial Officer, who invested $220,000; Lee Flowers, Senior Vice President of Business Development, who invested $25,000; Scott T. Garrett, the Chairman of the Company’s board of directors, who invested $140,000; Gary M. Winer, a member of our board of directors, who invested $60,000; Rick S. Greene, a member of the board of directors, who invested $25,000, as well as unrelated parties.
The Secured Notes have a Mandatory Prepayment provision, according to which the Company is required to prepay the Secured Notes before the Maturity Date under certain circumstances. In the event of a Mandatory Prepayment, Secured Notes may receive a bonus payment based on the gross proceeds of the sale of the Pledged Collateral. If the Secured Notes are repaid on the Maturity Date, holders will receive a fixed bonus payment in addition to payment of outstanding principal and accrued and unpaid interest. If a bonus payment is paid, then there is no prepayment penalty. The Amended and Restated Note Purchase Agreement also contains default provisions, according to which, following an event of default, the Company may be required to distribute the Pledged Collateral to the Noteholders on a pro rata basis based on a $10.0 million issuance of Secured Notes, in full satisfaction of the indebtedness evidenced by the Secured Notes. In other words, 69.05% of the total Wugen shares are security for the Senior Secured Notes and would be transferred in the event of a default, pro rata, to the Holders.
Amended terms of the Amended and Restated Note Purchase Agreement included a conversion feature, which would give Noteholders a right to convert the outstanding indebtedness to shares of the our Common Stock under certain conditions, subject to final documentation. The holders of the Secured Notes have no obligation to exercise the conversion option, however, if the holders of the majority of principal of Secured Notes outstanding choose to do so, then all the holders of Secured Notes must do so.
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Under the Principal Terms for Conversion, as more fully set forth in Appendix B, [Noteholders and the Company will agree that at least $6,580,000 principal amount of the Secured Notes will be converted into shares of our Common Stock at a conversion price of $0.65 per share. As part of the conversion, the Company will issue warrants to purchase shares of our Common Stock to the converting Noteholders for up to an additional $3,290,000 of shares of our Common Stock, at an exercise price of $0.65 per share (as these amounts may be adjusted to account for a Reverse Stock Split or similar transaction). Upon conversion, converting Noteholders would be subject to a lock-up period of 180 days from the date of conversion. Further, the Escrow Agreement will be amended such that the proceeds from the Pledged Collateral will be allocated among the Company and the converting Noteholders. Specifically, assuming $6,580,000 principal amount of Secured Notes will be converted, upon a sale of the Pledged Collateral, converting Noteholders will have the right to receive their pro rata share of 49.11% of the net proceeds received in such sale. The Company will retain the remaining 50.89% of proceeds upon the sale of the Pledged Collateral (subject to the rights of any non-converting Noteholders in such proceeds as collateral for repayment of their Notes). As described below, conversion of principal amount of the Secured Notes will result in a dollar-for-dollar increase in stockholders’ equity (partially offset by the carrying value of 49.11% of the Company’s investment in the Pledged Collateral the proceeds of which will be paid to converting Noteholders of approximately $785,000), contributing to the Company’s plan to gain compliance with the Nasdaq Minimum Shareholder Equity Rule and to maintaining listing of the our Common Stock on Nasdaq.
Possible Effects if Proposal Three is Approved
If our stockholders approve Proposal Three, we would be able to convert up to approximately $6.6 million principal amount of debt to stockholders equity by issuance of shares of our Common Stock and warrants to purchase shares of our Common Stock, and agreeing that a portion of the proceeds from the Pledged Collateral will be paid to the converting Noteholders, thus increasing the Company’s stockholders’ equity by up to approximately $5.8 million, significantly contributing to the Company gaining compliance with the Nasdaq Minimum Shareholder Equity Rule. After the 180-day lock-up period for converting Noteholders expires, shares of our Common Stock that would be issuable to the Noteholders in connection with the conversion of the Notes would have the same rights and privileges as the shares of our currently authorized Common Stock. The issuance of such shares will not affect the rights of the holders of outstanding Common Stock, but such issuance will have a dilutive effect on our existing stockholders, including on the voting power and economic rights of our existing stockholders, and may result in a decline in the price of our Common Stock or in greater price volatility. The carrying value of the Pledged Collateral is $1.6 million. Wugen is a private company and there is currently no market for its stock. It is uncertain whether or if Wugen will have a liquidity event that will allow the Pledged Collateral to be sold and proceeds to be distributed. In addition, these shares are subject to certain standard lock-up provisions which will remain in place in the event there is a transaction that requires such a lock-up period, such as an IPO.
Possible Effects if Proposal Three is Not Approved
If our stockholders do not approve this proposal and we are not able to issue shares of our Common Stock in connection with the conversion of the Notes, we would be required to make repayments of the Notes in cash and the Pledged Collateral would continue to be held in escrow to secure such repayments. In addition, if our stockholders do not approve this proposal and we are not able to issue shares of our Common Stock to the Noteholders, the Company will not be able to increase its stockholders’ equity by the principal amount of the Notes intended to be converted, which is an important part of the Company’s plan to gain and retain continued compliance with applicable Nasdaq listing rules, including the Minimum Stockholder Equity Rule.
Executive Officer and Director Interest
Four out of our five directors and certain of our executive officers are also Noteholders and stockholders of the Company, as set forth in the table below.
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All of the Noteholders who are also stockholders will abstain from voting on Proposal Three.
Vote Required
Assuming that a quorum is present at the Special Meeting, approval of Proposal Three requires the affirmative vote of the majority of the votes cast (meaning the number of shares voted “for” the proposal must exceed the number of shares voted “against” the proposal); provided, however, that the vote of any shares of our Common Stock issued to Noteholders will not be counted in determining whether or not this proposal is approved. Any shares that are not voted on the proposal for any reason, including abstentions and Broker Non-Votes, will not be counted as votes cast and accordingly will not affect the outcome of the proposal, but such votes will be counted for purposes of determining the presence or absence of a quorum.
SINCE FOUR OF FIVE DIRECTORS ARE ALSO NOTEHOLDERS, OUR BOARD ABSTAINS FROM MAKING A RECOMMENDATION WITH RESPECT TO PROPOSAL THREE.
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HOUSEHOLDING
Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of our documents, including this proxy statement, may have been sent to multiple stockholders in your household if you have requested paper copies thereof. We will promptly deliver a separate copy of either document to you upon written or oral request to HCW Biologics Inc., 2929 N. Commerce Parkway, Miramar, Florida 33025, Attention: Corporate Secretary or (954) 842-2024 X205. If you want to receive separate copies of the proxy statement in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker or other nominee record holder, or you may contact us at the above address and phone number.
OTHER MATTERS
Our board of directors does not presently intend to bring any other business before the Special Meeting and, so far as is known to our board of directors, no matters are to be brought before the Special Meeting except as specified in the Notice of Special Meeting of Stockholders. As to any business that may arise and properly come before the Special Meeting, however, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance with the judgment of the persons voting such proxies.
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Appendix A
EQUITY PURCHASE AGREEMENT
THIS EQUITY PURCHASE AGREEMENT (this “Agreement”) is entered into as of February 20, 2025 (the “Execution Date”), by and between HCW Biologics Inc., a corporation incorporated in the State of Delaware (the “Company”), and Square Gate Capital Master Fund, LLC – Series 4, a series limited liability company organized in the State of Delaware (the “Investor”).
RECITALS
WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to Twenty Million Dollars ($20,000,000.00) of the Company’s Common Stock (as defined below);
NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Investor hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 RECITALS. The parties acknowledge and agree that the recitals set forth above are true and correct and are hereby incorporated in and made a part of this Agreement.
Section 1.2 DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings specified or indicated (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
“Affiliate” shall have the meaning set forth in Section 3.5.
“Agreement” shall have the meaning specified in the preamble hereof.
“Available Amount” means, initially, the Maximum Commitment Amount, which amount shall be reduced by the Investment Amount following each successful Closing, each time the Investor purchases Put Shares.
“Average Daily Trading Volume” shall mean the average trading volume of the Common Stock on the applicable Trading Days.
“Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
“Claim Notice” shall have the meaning specified in Section 9.3(a).
“Clearing Costs” shall mean all of the Investor’s broker and Transfer Agent fees and trading commissions, which shall not exceed $0.01 per share.
“Clearing Date” shall be the date on which the Investor receives the Put Shares as DWAC Shares in its brokerage account.
“Closing” shall mean one of the closings of a purchase and sale of Common Stock pursuant to Section 2.3.
“Closing Certificate” shall mean the closing “Officer’s Certificate” of the Company in the form of Exhibit B hereto.
“Closing Date” shall mean the date of any Closing hereunder.
“Commitment Period” shall mean the period commencing on the Execution Date, and ending on the earlier of (i) the date on which the Investor shall have purchased Put Shares pursuant to this Agreement equal to the Maximum Commitment Amount, (ii) February 20, 2028, (ii) provided that the Registration Statement shall have been previously declared effective by the SEC, the written notice of termination by the Company to the Investor (which shall not occur at any time that the Investor holds any of the Put Shares), or (iii) written notice of termination by the Investor to the Company pursuant to Section 6.1 or Section 6.4.
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“Commitment Shares” means Common Stock issued by the Company to the Investor pursuant to Section 6.4.
“Common Stock” means the common stock of the Company, having a par value per share of $0.0001, and any shares of any other class of common stock of the Company whether now or hereafter authorized, having the right to participate in the distribution of dividends (as and when declared) and assets (upon liquidation of the Company).
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Company” shall have the meaning specified in the preamble to this Agreement.
“Confidential Information” means any information disclosed by either party to this Agreement, or their Affiliates, agents, or representatives, to the other party to this Agreement, either directly or indirectly, in writing, orally or by inspection of tangible objects (including, without limitation, documents, formulae, business information, trade secrets, technology, strategies, prototypes, samples, plant, and equipment), which may or may not be designated as “Confidential,” “Proprietary” or some similar designation. Information communicated orally shall be considered Confidential Information. Confidential Information may also include information disclosed by third parties. Confidential Information shall not, however, include any information which (i) was publicly known and made generally available in the public domain prior to the time of disclosure by the disclosing party; (ii) becomes publicly known and made generally available after disclosure by the disclosing party to the receiving party through no fault, action or inaction of the receiving party; (iii) is already in the possession of the receiving party at the time of disclosure by the disclosing party as shown by the receiving party’s files and records immediately prior to the time of disclosure; (iv) is obtained by the receiving party from a third party without a breach of such third party’s obligations of confidentiality; (v) is independently developed by the receiving party without use of or reference to the disclosing party’s Confidential Information, as shown by documents and other competent evidence in the receiving party’s possession; or (vi) is required by law to be disclosed by the receiving party, provided that the receiving party gives the disclosing party prompt written notice of such requirement prior to such disclosure and assistance in obtaining an order protecting the information from public disclosure.
“Current Report” shall have the meaning set forth in Section 6.3.
“Custodian” means any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law.
“Damages” shall mean any loss, claim, damage, liability, cost, and expense (including, without limitation, reasonable attorneys’ fees and disbursements and costs and expenses of expert witnesses and investigation).
“Dispute Period” shall have the meaning specified in Section 9.3(a).
“Disqualification Event” shall have the meaning specified in Section 4.27.
“DTC” shall mean The Depository Trust Company, or any successor performing substantially the same function for the Company.
“DTC/FAST Program” shall mean the DTC’s Fast Automated Securities Transfer Program.
“DWAC” shall mean Deposit Withdrawal at Custodian as defined by the DTC.
“DWAC Eligible” shall mean that (a) the Common Stock is eligible at DTC for full services pursuant to DTC’s operational arrangements, including, without limitation, transfer through DTC’s DWAC system, (b) the Company has been approved (without revocation) by the DTC’s underwriting department, (c) the Transfer Agent is approved as an agent in the DTC/FAST Program, (d) the Commitment Shares or Put Shares, as applicable, are otherwise eligible for delivery via DWAC, and (e) the Transfer Agent does not have a policy prohibiting or limiting delivery of the Put Shares or Commitment Shares, as applicable, via DWAC.
“DWAC Shares” means shares of Common Stock that are (i) issued in electronic form, (ii) freely tradable and transferable and without restriction on resale and (iii) timely credited by the Company to the Investor’s or its designee’s specified DWAC account with DTC under the DTC/FAST Program, or any similar program hereafter adopted by DTC performing substantially the same function.
“Eligible Market” means the Principal Market or any nationally recognized exchange upon which the Common Stock is listed.
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“Environmental Laws” shall have the meaning set forth in Section 4.14.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Execution Date” shall have the meaning set forth in the preamble to this Agreement.
“FINRA” shall mean the Financial Industry Regulatory Authority, Inc.
“Indemnified Party” shall have the meaning specified in Section 9.2.
“Indemnifying Party” shall have the meaning specified in Section 9.2.
“Indemnity Notice” shall have the meaning specified in Section 9.3(b).
“Intellectual Property” shall mean all trademarks, trademark applications, trade names, service marks, service mark registrations, service names, patents, patent applications, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights.
“Investment Amount” shall mean the dollar value equal to the amount of Put Shares referenced in the Put Notice multiplied by the Purchase Price minus the Clearing Costs.
“Investor” shall have the meaning specified in the preamble to this Agreement.
“Issuer Covered Person” shall have the meaning specified in Section 4.27.
“Lien” means a lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right, or any other restriction.
“Material Adverse Effect” shall mean any effect on the business, operations, properties, or financial condition of the Company and/or the Subsidiaries that is material and adverse to the Company and/or the Subsidiaries and/or any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company and/or the Subsidiaries to enter into and/or perform its obligations under any Transaction Document and which shall be deemed to include any investigation of the Company, its directors or its officers by the SEC.
“Maximum Commitment Amount” shall mean up to Forty Million Dollars ($40,000,000.00), which amount shall initially be Twenty Million Dollars ($20,000,000) (the “Initial Amount”), and upon utilizing the entire Initial Amount, the Company shall have the right to an additional amount equal to the lesser of (x) Twenty Million Dollars ($20,000,000) or (y) an amount equal to one hundred percent (100%) of the Company’s market capitalization as of such date.
“Maximum Put Amount” shall mean the least of (i) one hundred percent (100%) of the Average Daily Trading Volume over the five (5) Trading Days preceding the applicable Put Date, (ii) thirty percent (30%) of the daily trading volume on the applicable Put Date, and (iii) the quotient (rounded up or down to the nearest whole number) obtained by dividing (x) Five Hundred Thousand Dollars ($500,000) by (y) the closing price on the applicable Put Date (in each case to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction during the applicable period).
“Person” shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.
“Principal Market” shall mean The Nasdaq Global Market or The Nasdaq Capital Market.
“Purchase Price” shall mean ninety-eight percent (98%) of the lowest daily VWAP of the Common Stock on the Principal Market during the Valuation Period.
“Put” shall mean the right of the Company to require the Investor to purchase Common Stock at the Purchase Price, subject to the terms and conditions of this Agreement.
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“Put Date” shall mean any Trading Day during the Commitment Period that a Put Notice is deemed delivered pursuant to Section 2.2(b).
“Put Notice” shall mean a written notice, substantially in the form of Exhibit A hereto, addressed to the Investor and setting forth the amount of Put Shares which the Company intends to require the Investor to purchase pursuant to the terms of this Agreement.
“Put Shares” shall mean all shares of Common Stock issued, or that the Company shall be entitled to issue, per any applicable Put Notice in accordance with the terms and conditions of this Agreement.
“Registration Rights Agreement” means that agreement in the form attached hereto as Exhibit D.
“Registration Statement” shall have the meaning specified in Section 6.3.
“Regulation D” shall mean Regulation D promulgated under the Securities Act.
“Rule 144” shall mean Rule 144 promulgated under the Securities Act or any similar provision then in force under the Securities Act.
“SEC” or “Commission” shall mean the United States Securities and Exchange Commission.
“SEC Documents” shall have the meaning specified in Section 4.5.
“Securities” means, collectively, the Put Shares and the Commitment Shares.
“Securities Act” shall mean the Securities Act of 1933, as amended.
“Stockholder Approval” means such approval as may be required by the applicable rules and regulations of the Nasdaq Stock Market (or any successor entity), including, without limitation Rule 5635, from the stockholders of the Company, or board of directors in lieu thereof, with respect to issuance of the Put Shares in excess of 19.99% of the Company’s outstanding shares.
“Short Sales” shall mean all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act or any hedging transaction that establishes a net short position with respect to the Common Stock.
“Subsidiary” or “Subsidiaries” means any Person the Company wholly-owns or controls, or in which the Company, directly or indirectly, owns a majority of the voting stock or similar voting interest, in each case that would be disclosable pursuant to Item 601(b)(21) of Regulation S-K promulgated under the Securities Act.
“Third Party Claim” shall have the meaning specified in Section 9.3(a).
“Trading Day” means any full trading day (beginning at 9:30:01 a.m., New York City time, and ending at 4:00 p.m., New York City time) on the Principal Market or, if the Common Stock is then listed on an Eligible Market, on such Eligible Market.
“Transaction Documents” shall mean this Agreement, the Registration Rights Agreement, the Transfer Agent Instruction Letter, and all schedules and exhibits hereto and thereto.
“Transfer Agent” shall mean Equiniti Trust Company, LLC, the current transfer agent of the Company, and any successor transfer agent of the Company.
“Transfer Agent Instruction Letter” means the letter from the Company to the Transfer Agent which instructs the Transfer Agent to issue the Put Shares and the Commitment Shares pursuant to the Transaction Documents, in the form of Exhibit C attached hereto.
“Valuation Period” shall mean the period of three (3) consecutive Trading Days immediately following the applicable Put Date.
“VWAP” means, for the Common Stock as of any Trading Day, the dollar volume-weighted average price for the Common Stock on the Principal Market (or, if the Common Stock is then listed on an Eligible Market, on such Eligible Market) during the period beginning at 9:30:01 a.m., New York City time, or such other time publicly announced by the Principal Market (or by such Eligible Market, as applicable) as the official open (or commencement) of trading on the Principal Market (or on such Eligible Market, as applicable) on such Trading Day, and ending at 4:00 p.m., New York City time, or such other time publicly announced by the Principal Market (or by such Eligible Market, as applicable) as the official close of trading on the Principal Market (or on such Eligible Market, as applicable) on such Trading Day, as reported by Bloomberg, L.P. (or, if not reported on Bloomberg, L.P., another reporting service reasonably agreed to by the parties). All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination, recapitalization, or other similar transaction during such period.
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ARTICLE II
PURCHASE AND SALE OF COMMON STOCK
Section 2.1 PUTS. Subject to the terms and conditions set forth herein (including, without limitation, the provisions of Article VII), the Company shall have the right, but not the obligation, to direct the Investor, to process a Put by its delivery to the Investor of a Put Notice from time to time during the Commitment Period, to purchase Put Shares, provided that notwithstanding any other terms of this Agreement, in each instance unless waived by the Investor in its sole discretion, (i) the Put Shares are not more than the Maximum Put Amount for any Put, (ii) the aggregate Investment Amount of all Puts shall not exceed the Maximum Commitment Amount, (iii) at least one (1) Trading Day has lapsed since the most recent Valuation Period has ended, and (iv) all Common Stock resulting from prior submitted Put Notices for Puts has been delivered.
Section 2.2 MECHANICS.
(a) PUT NOTICE. At any time and from time to time during the Commitment Period, except as provided in this Agreement, the Company may cause a Put by delivering a Put Notice to the Investor via email, subject to satisfaction of the conditions set forth in Section 2.1, Section 7.1 and otherwise provided in this Agreement. The Company shall deliver, or cause to be delivered, the Put Shares as DWAC Shares to the Investor as required pursuant to Section 2.3(a).
(b) DATE OF DELIVERY OF PUT NOTICE. A Put Notice shall be deemed delivered on a Trading Day if it is received by e-mail by the Investor if such notice is received on or after 4:00 p.m. New York City Time and prior to 6:30 p.m. New York City Time on such Trading Day (“Put Notice Delivery Window”). If a Put Notice is not received by the Investor during a Put Notice Delivery Window, the Investor in its sole discretion may choose to deem such Put Notice to have been delivered on the Trading Day in which it was received by notice to the Company no later than 8:00 p.m. New York City Time on the Trading Day it was received. If (i) the Investor does not provide notice of such acceptance, or (ii) unless waived by the Investor, if the closing price of the Common Stock on the Principal Market (or on such Eligible Market, as applicable) on the Trading Day the Put Notice is received is less than $0.10 per share (which shall be automatically adjusted and fixed at $0.50 following the first reverse stock split or other similar transaction following the date hereof), the Put Notice will be deemed withdrawn.
Section 2.3 CLOSINGS.
(a) TIMING. The Clearing Date of a Put shall occur on the Trading Day following the delivery of the applicable Put Notice in accordance with Section 2.2(b), whereby the Company shall deliver, or cause to be delivered the Put Shares as DWAC shares to the Investor not later than 9:30 a.m. (New York City Time) (the “Share Delivery Deadline”). The Closing of a Put shall occur two (2) Trading Days following the end of the Valuation Period. In addition, on or prior to any such Closing or on the date of the delivery of the applicable Put Notice, as required pursuant to Section 7.1, each of the Company and the Investor shall deliver to each other all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. In addition to any other rights available to the Investor, if the Company fails to cause the Transfer Agent to transmit to the Investor Put Shares pursuant to a Put Notice before the applicable Share Delivery Deadline, the Investor may elect to deem such Put Notice rescinded. Payment of the Investment Amount related to any Put Notice shall be made by the Investor by wire transfer of immediately available funds to an account designated by the Company not later than two (2) Trading Days following the end of the applicable Valuation Period, as may be adjusted for any credit of a Cover Price available to the Investor in accordance with Section 2.3(b).
(b) COMPENSATION FOR FAILURE TO TIMELY DELIVER PUT SHARES. In addition to any other rights available to the Investor, if the Company fails to cause the Transfer Agent to transmit to the Investor Put Shares pursuant to a Put Notice before the applicable Share Delivery Deadline, and if after such Share Delivery Deadline the Investor purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Investor of such Put Shares that the Investor anticipated receiving from the Company in respect of such Put Notice, then the Company shall, within two (2) Trading Days after the Investor’s request, which such request shall be made within two (2) Trading Days following the Share Delivery Deadline, either (i) pay cash to the Investor in an amount equal to the Investor’s total purchase price (including brokerage commissions, if any) for the Common Stock so purchased (the “Cover Price”), at which point the Company’s obligation to deliver such Put Shares shall terminate, (ii) promptly honor its obligation to deliver to the Investor such Put Shares as DWAC Shares and pay cash to the Investor in an amount equal to the excess (if any) of the Cover Price over the total Investment Amount paid by the Investor in connection with such Put Notice, or (iii) be deemed to have accepted notice that such Cover Price shall be credited as the Investment Amount to be paid in respect of one or more subsequent Put Notices, in the discretion of the Investor.
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The Investor shall provide the Company with written notice indicating the amounts payable to the Investor in respect of the Cover Price and evidence of the amount of such amounts payable. Nothing herein shall limit the Investor’s right to pursue a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock in connection with a Put Notice.
(c) RETURN OF SURPLUS. If the value of the Put Shares delivered to the Investor causes the Company to exceed the Maximum Commitment Amount, then the Investor shall return to the Company the surplus amount of Put Shares associated with such Put, and the Purchase Price with respect to such Put shall be reduced by any Clearing Costs incurred related to the return of such Put Shares.
(d) RESALES DURING VALUATION PERIOD. The parties acknowledge and agree that during a Valuation Period, the Investor may contract for, or otherwise effect, the resale of the subject purchased Put Shares to third-parties.
Section 2.4 OPTIONAL ADDITIONAL PUT SHARES. Following the Put Date in respect of any Put, the Company and Investor may agree to increase the amount of Put Shares relating to such Put up to an amount not to exceed Three Million Dollars ($3,000,000.00). Such mutual agreement, if any, must be made after the relevant Put Notice is delivered but before 4:00 p.m. New York City time on the last Trading Day of the applicable Valuation Period. Following any such agreement, the Company agrees that it shall deliver, or cause to be delivered any such additional Put Shares as DWAC Shares to the Investor on the Trading Day following the date the Company and the Investor shall have agreed to such increase by 9:30 a.m. New York City time. A failure to deliver such additional Put Shares by such time shall entitle the Investor to the rights set forth in Section 2.3(b) in respect of such failure.
Section 2.5 UPSIZED FACILITY OPTION. Upon utilizing the entire Initial Amount, provided that no event of default by the Company has occurred under the Transaction Documents or such event of default has been waived by the Investor, the Company shall have the right to an increase of the amount of the Maximum Commitment Amount by the lesser of (x) Twenty Million Dollars ($20,000,000) or (y) an amount equal to one hundred percent (100%) of the Company’s market capitalization as of such date (the “Upsized Facility Option”). In the event that the Company exercises the Upsized Facility Option, it shall file an additional registration statement in accordance with the terms and conditions set forth in the Registration Rights Agreement registering the additional Put Shares covered by the Upsized Facility Option.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that as of the Execution Date, each date a Put Notice is submitted and at each Closing Date:
Section 3.1 INTENT. The Investor is acquiring the Shares for its own account, for investment purposes and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered under or exempt from the registration requirements of the Securities Act; provided, however, that by making the representations herein, the Investor does not agree, or make any representation or warranty, to hold any of the Shares for any minimum or other specific term and reserves the right to dispose of the Shares at any time in accordance with, or pursuant to, a registration statement filed pursuant to the Registration Rights Agreement or an applicable exemption under the Securities Act and in compliance with all applicable federal and state securities laws. The Investor does not presently have any agreement or understanding, directly or indirectly, with any Person to sell or distribute any of the Shares.
Section 3.2 NO LEGAL ADVICE FROM THE COMPANY. The Investor acknowledges that it has had the opportunity to review this Agreement and the transactions contemplated by this Agreement with its own legal counsel and investment and tax advisors. Except with respect to the representations, warranties and covenants contained in this Agreement, the Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction.
Section 3.3 ACCREDITED INVESTOR. The Investor is an accredited investor as defined in Rule 501(a)(3) of Regulation D, and the Investor has such experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Securities. The Investor acknowledges that an investment in the Securities is speculative and involves a high degree of risk.
Section 3.4 AUTHORITY. The Investor has the requisite power and authority to enter into and perform its obligations under this Agreement and the other Transaction Documents and to consummate the transactions contemplated hereby and thereby.
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The execution and delivery of this Agreement and the other Transaction Documents and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action and no further consent or authorization of the Investor is required. Each Transaction Document to which it is a party has been duly executed by the Investor, and when delivered by the Investor in accordance with the terms hereof, will constitute the valid and binding obligation of the Investor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.
Section 3.5 NOT AN AFFILIATE. To the Investor’s knowledge, the Investor is not an officer, director, or “affiliate” (as such term is defined in Rule 405 of the Securities Act) of the Company.
Section 3.6 ORGANIZATION AND STANDING. The Investor is an entity duly formed, validly existing and in good standing under the laws of the jurisdiction of its formation with full right, limited liability company power and authority to enter into and to consummate the transactions contemplated by this Agreement and the other Transaction Documents.
Section 3.7 ABSENCE OF CONFLICTS. The execution and delivery of this Agreement and the other Transaction Documents, and the consummation of the transactions contemplated hereby and thereby and compliance with the requirements hereof and thereof, will not (a) violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Investor, (b) violate any provision of any indenture, instrument or agreement to which the Investor is a party or is subject, or by which the Investor or any of its assets is bound, or conflict with or constitute a material default thereunder, (c) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by the Investor to any third party, or (d) require the approval of any third-party (that has not been obtained) pursuant to any material contract, instrument, agreement, relationship or legal obligation to which the Investor is subject or to which any of its assets, operations or management may be subject.
Section 3.8 MANNER OF SALE. At no time was the Investor presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertisement regarding the Securities.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that, except as set forth in the disclosure schedules hereto, as of the Execution Date, each date a Put Notice is submitted and at each Closing Date:
Section 4.1 ORGANIZATION OF THE COMPANY. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is not in violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in a Material Adverse Effect and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.
Section 4.2 AUTHORITY. The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement and the other Transaction Documents. The execution and delivery of this Agreement and the other Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its board of directors or stockholders is required. Each of this Agreement and the other Transaction Documents has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.
Section 4.3 CAPITALIZATION. As of the Execution Date, the authorized capital stock of the Company is expected to be as set forth on Schedule 4.3. Except as set forth in the SEC Documents or on Schedule 4.3, the Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock purchase plans and pursuant to the conversion and/or exercise of Common Stock Equivalents outstanding as of the date of the most recently filed periodic report under the Exchange Act.
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No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as set forth in the SEC Documents or on Schedule 4.3, and except as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Investor) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. There are no stockholders’ agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.
Section 4.4 LISTING AND MAINTENANCE REQUIREMENTS. The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act, nor has the Company received any notification that the SEC is contemplating terminating such registration. Except as set forth on Schedule 4.4, the Company has not, in the twelve (12) months preceding the Execution Date, received notice from the Principal Market to the effect that the Company is not in compliance with the listing or maintenance requirements of such Principal Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.
Section 4.5 SEC DOCUMENTS; DISCLOSURE. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the one (1) year preceding the Execution Date (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Documents”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and other federal laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents when filed contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form and substance in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (a) as may be otherwise indicated in such financial statements or the notes thereto or (b) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments). The Company maintains a system of internal accounting controls appropriate for its size. There is no transaction, arrangement, or other relationship between the Company and an unconsolidated or other off balance sheet entity that is not disclosed by the Company in its financial statements or otherwise that would be reasonably likely to have a Material Adverse Effect. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company confirms that neither it nor any other Person acting on its behalf has provided the Investor or its agents or counsel with any information that it believes constitutes or might constitute material, non- public information. The Company understands and confirms that the Investor will rely on the foregoing representation in effecting transactions in securities of the Company.
Section 4.6 VALID ISSUANCES. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be validly issued, fully paid, and non-assessable, free, and clear of all Liens imposed by the Company, other than restrictions on transfer provided for in the Transaction Documents and under the Securities Act.
Section 4.7 NO CONFLICTS. The execution, delivery and performance of this Agreement and the other Transaction Documents by the Company, and the consummation by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Put Shares and the Commitment Shares, do not and will not: (a) result in a violation of the Company’s or any Subsidiary’s certificate or articles of incorporation, by-laws or other organizational or charter documents, (b) conflict with, or constitute a material default (or an event that with notice or lapse of time or both would become a material default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, instrument or any “lock-up” or similar provision of any underwriting or similar agreement to which the Company or any Subsidiary is a party, or (c) result in a violation of any federal, state or local law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any Subsidiary or by which any property or asset of the Company or any Subsidiary is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect), nor is the Company otherwise in violation of, conflict with or in default under any of the foregoing.
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The business of the Company is not being conducted in violation of any law, ordinance, or regulation of any governmental entity. The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or the other Transaction Documents (other than any SEC, FINRA or state securities filings that may be required to be made by the Company in connection with the issuance of the Commitment Shares or subsequent to any Closing or any registration statement that may be filed pursuant hereto); provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of Investor herein.
Section 4.8 NO MATERIAL ADVERSE CHANGE. No event has occurred that would have a Material Adverse Effect on the Company or any Subsidiary that has not been disclosed in subsequent SEC filings.
Section 4.9 LITIGATION AND OTHER PROCEEDINGS. Except as set forth on Schedule 4.9, there are no actions, suits, investigations, inquiries or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties, nor has the Company received any written or oral notice of any such action, suit, proceeding, inquiry or investigation, which would have a Material Adverse Effect or would require disclosure under the Securities Act or the Exchange Act. No judgment, order, writ, injunction or decree or award has been issued by or, to the knowledge of the Company, requested of any court, arbitrator or governmental agency which would have a Material Adverse Effect. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the SEC involving the Company, any Subsidiary, or any current or former director or officer of the Company or any Subsidiary.
Section 4.10 REGISTRATION RIGHTS. Except as set forth on Schedule 4.10, no Person (other than the Investor) has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company or any Subsidiary.
Section 4.11 INVESTOR’S STATUS. The Company acknowledges and agrees that the Investor is acting solely in the capacity of arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by the Investor or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investor’s purchase of the Securities. The Company further represents to the Investor that the Company’s decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives and advisors.
Section 4.12 NO GENERAL SOLICITATION; NO INTEGRATED OFFERING. Neither the Company, any Subsidiary, nor any of their respective Affiliates, nor any Person acting on their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Securities. Neither the Company, any Subsidiary, nor any of their respective Affiliates, nor any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the offer and sale of any of the Securities under the Securities Act, whether through integration with prior offerings or otherwise.
Section 4.13 INTELLECTUAL PROPERTY RIGHTS. The Company and each Subsidiary own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. None of the Company’s, nor any Subsidiary’s Intellectual Property has expired or terminated, or, by the terms and conditions thereof, could expire or terminate within three years from the date of this Agreement if such expiration or termination could reasonably be expected to have a Material Adverse Effect. The Company does not have any knowledge of any infringement by the Company and/or any Subsidiary of any material Intellectual Property of others, or of any such development of similar or identical trade secrets or technical information by others, and there is no claim, action or proceeding being made or brought against, or to the Company’s knowledge, being threatened against, the Company and/or any Subsidiary regarding the infringement of any Intellectual Property, which could reasonably be expected to have a Material Adverse Effect.
Section 4.14 ENVIRONMENTAL LAWS. To the Company’s knowledge, the Company and each Subsidiary (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its respective businesses and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where, in each of the three foregoing clauses, the failure to so comply could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
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Section 4.15 TITLE. Except as disclosed in the SEC Documents, the Company and each Subsidiary has good and marketable title in fee simple to all real property owned by it and good and marketable title in all personal property owned by it that is material to the business of the Company and each Subsidiary, in each case free and clear of all Liens and, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company or any Subsidiary and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company or any Subsidiary is held under valid, subsisting, and enforceable leases with which the Company is in compliance with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company or any Subsidiary.
Section 4.16 INSURANCE. The Company and each Subsidiary is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and each Subsidiary is engaged. Neither the Company, nor any Subsidiary has been refused any insurance coverage sought or applied for, and the Company has no reason to believe that it or any Subsidiary will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company, taken as a whole.
Section 4.17 REGULATORY PERMITS. The Company and each Subsidiary possesses all material certificates, authorizations and permits issued by the appropriate federal, state, or foreign regulatory authorities necessary to conduct its businesses, and neither the Company, nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization, or permit.
Section 4.18 TAX STATUS. The Company and each Subsidiary has made or filed all federal and state income and all other material tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.
Section 4.19 TRANSACTIONS WITH AFFILIATES. Except as set forth in the SEC Documents, none of the officers or directors of the Company or any Subsidiary, and to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of the lesser of (i) $120,000 or (ii) one percent of the average of the Company’s total assets at year-end for the last two completed fiscal years, other than for (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company or any Subsidiary and (iii) other employee benefits, including stock option agreements under any stock option plan of the Company.
Section 4.20 APPLICATION OF TAKEOVER PROTECTIONS. The Company and its board of directors have taken or will take prior to the Execution Date all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the articles of incorporation or the laws of the state of its incorporation which is or could become applicable to the Investor as a result of the transactions contemplated by this Agreement, including, without limitation, the Company’s issuance of the Securities and the Investor’s ownership of the Securities.
Section 4.21 FOREIGN CORRUPT PRACTICES. Neither the Company, any Subsidiary, nor to the knowledge of the Company, any agent or other Person acting on behalf of the Company or any Subsidiary, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by any Person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.
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Section 4.22 SARBANES-OXLEY. The Company is in compliance with all provisions of the Sarbanes-Oxley Act of 2002, as amended, which are applicable to it.
Section 4.23 CERTAIN FEES. Except as set forth in the disclosure schedule or in the Company’s SEC filings, no brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank, or other Person with respect to the transactions contemplated by the Transaction Documents. The Investor shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of any Persons for fees of a type contemplated in this Section 4.23 that may be due in connection with the transactions contemplated by the Transaction Documents.
Section 4.24 INVESTMENT COMPANY. The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
Section 4.25 ACCOUNTANTS. The Company’s accountants are set forth in the SEC Documents and, to the knowledge of the Company, such accountants are an independent registered public accounting firm as required by the Securities Act.
Section 4.26 NO MARKET MANIPULATION. Neither the Company, nor any Subsidiary has, and to its knowledge no Person acting on either of their behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company.
Section 4.27 NO DISQUALIFICATION EVENTS. None of the Company, any Subsidiary, any of their predecessors, any affiliated issuer, any director, executive officer, other officer of the Company or any Subsidiary participating in the offering contemplated hereby, any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of sale (each, an “Issuer Covered Person”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1) under the Securities Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3) under the Securities Act. The Company has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event.
Section 4.28 MONEY LAUNDERING. The Company and each Subsidiary is in compliance with, and has not previously violated, the USA PATRIOT ACT of 2001 and all other applicable U.S. and non-U.S. anti-money laundering laws and regulations, including, but not limited to, the laws, regulations and Executive Orders and sanctions programs administered by the U.S. Office of Foreign Assets Control, including, but not limited, to (i) Executive Order 13224 of September 23, 2001 entitled, “Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism” (66 Fed. Reg. 49079 (2001)); and (ii) any regulations contained in 31 CFR, Subtitle B, Chapter V.
Section 4.29 ILLEGAL OR UNAUTHORIZED PAYMENTS; POLITICAL CONTRIBUTIONS. Neither the Company, nor any Subsidiary has, nor, to the best of the Company’s knowledge (after reasonable inquiry of its officers and directors), any of the officers, directors, employees, agents or other representatives of the Company, any Subsidiary or any other business entity or enterprise with which the Company is or has been affiliated or associated, has, directly or indirectly, made or authorized any payment, contribution or gift of money, property, or services, whether or not in contravention of applicable law, (a) as a kickback or bribe to any Person or (b) to any political organization, or the holder of or any aspirant to any elective or appointive public office except for personal political contributions not involving the direct or indirect use of funds of the Company.
Section 4.30 SHELL COMPANY STATUS. The Company is not currently an issuer identified in Rule 144(i)(1)(i) under the Securities Act, is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, has filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable during the preceding 12 months, and, as of a date at least one year prior to the Execution Date, has filed current “Form 10 information” with the SEC (as defined in Rule 144(i)(3) of the Securities Act) reflecting its status as an entity that is no longer an issuer described in Rule 144(i)(1)(i) of the Securities Act.
Section 4.31 ABSENCE OF SCHEDULES. In the event that on the Execution Date, the Company does not deliver any disclosure schedule contemplated by this Agreement, the Company hereby acknowledges and agrees that (i) each such undelivered disclosure schedule shall be deemed to read as follows: “Nothing to Disclose”, and (ii) the Investor has not otherwise waived delivery of such disclosure schedule.
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ARTICLE V
COVENANTS OF INVESTOR
Section 5.1 COMPLIANCE WITH LAW; TRADING IN SECURITIES. The Investor’s trading activities with respect to the Common Stock will be in compliance with all applicable state and federal securities laws and regulations and the rules and regulations of FINRA and the Principal Market.
Section 5.2 SHORT SALES AND CONFIDENTIALITY. The Investor represents that, as of the Execution Date and for the 60 days prior thereto, it and its Affiliates have not been and are not “short” any Common Stock. Neither the Investor, nor any Affiliate of the Investor acting on its behalf or pursuant to any understanding with it, will in any manner whatsoever, directly or indirectly, (i) participate in or execute any Short Sales during the period from the Execution Date to the end of the Commitment Period or (ii) any hedging transaction that would create a net short position with respect to the shares of Common Stock. For the purposes hereof, and in accordance with Regulation SHO, the sale after delivery of a Put Notice of such number of shares of Common Stock reasonably expected to be purchased under a Put Notice shall not be deemed a Short Sale. The Investor shall, until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company in accordance with the terms of this Agreement, maintain the confidentiality of the existence and terms of this transaction and the information included in the Transaction Documents. The Investor agrees not to disclose any Confidential Information of the Company to any third party, except for attorneys, accountants, advisors who have a need to know such Confidential Information and are bound by confidentiality, and shall not use any Confidential Information for any purpose other than in connection with, or in furtherance of, the transactions contemplated hereby. The Investor acknowledges that the Confidential Information of the Company shall remain the property of the Company and agrees that it shall take all reasonable measures to protect the secrecy of any Confidential Information disclosed by the Company.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1 LISTING OF COMMON STOCK. The Company shall promptly secure the listing of all of the Put Shares and Commitment Shares to be issued to the Investor hereunder on the Principal Market (subject to official notice of issuance) and shall use commercially reasonable efforts to maintain, so long as the Common Stock shall be so listed, the listing of all such Put Shares and Commitment Shares from time to time issuable hereunder. The Company shall use its commercially reasonable efforts to continue the listing and trading of the Common Stock on the Principal Market (including, without limitation, maintaining sufficient net tangible assets) and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of FINRA and the Principal Market.. The Company shall not take any action that would reasonably be expected to result in the delisting or suspension of the Common Stock on the Principal Market. The Company shall promptly, and in no event later than the following Trading Day after receiving such notice, provide to the Investor copies of any notices it receives from any Person regarding the continued eligibility of the Common Stock for listing on the Principal Market. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 6.1. The Company shall take all action necessary to ensure that the Common Stock can be transferred electronically as DWAC Shares. If the Company receives a final non-appealable delisting notice from the Principal Market or if the Common Stock fails to be listed on an Eligible Market, then the Investor may terminate its obligations under this Agreement by written notice to the Company and may deem any outstanding Put Notice as withdrawn.
Section 6.2 OTHER EQUITY LINES. So long as this Agreement remains in effect, the Company covenants and agrees that it will not enter into any other equity line of credit agreement with any other party, without the Investor’s prior written consent, which consent may be granted or withheld in the Investor’s sole and absolute discretion.
Section 6.3 FILING OF CURRENT REPORT AND REGISTRATION STATEMENT. The Company agrees that it shall file a Current Report on Form 8-K, including certain Transaction Documents as exhibits thereto, with the SEC within the time required by the Exchange Act, relating to the transactions contemplated by, and describing the material terms and conditions of, such Transaction Documents (the “Current Report”). The Company shall permit the Investor to review and comment upon the pre-filing draft version of the Current Report at least two (2) Trading Days prior to its filing with the SEC, and the Company shall give reasonable consideration to all such comments. The Investor shall use its reasonable best efforts to comment upon the pre-filing draft version of the Current Report within one (1) Trading Day from the date the Investor receives it from the Company. The Company shall also file with the SEC a new registration statement on Form S-1 (the “Registration Statement”), the timing and terms of which shall be governed by Section 2 of the Registration Rights Agreement.
Section 6.4 COMMITMENT FEE; ISSUANCE OF COMMITMENT SHARES; FAILURE TO INCLUDE IN REGISTRATION STATEMENT.
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(a) In connection with the transactions contemplated by this Agreement, the Company shall pay to the Investor $150,000 (the “Commitment Fee”), which shall be in the form of shares of Common Stock. All shares of Common Stock issued by the Company to the Investor under this Section 6.4 shall be referred to as “Commitment Shares.” The Commitment Shares shall be issued as promptly as practicable after expiration of the Due Diligence Period (as defined in Section 10.6 below), unless the Investor has terminated this Agreement on or prior to such date (in which case, the Commitment Fee shall not be payable and the Commitment Shares shall not be issued) and the number of Commitment Shares to be issued to the Investor (the “Commitment Share Amount”) shall be equal to the quotient obtained by dividing (a) $150,000 by (b) the closing price of the Common Stock, using the closing price provided on the Principal Market, on the Trading Day immediately preceding the Execution Date (the “Commitment Share Reference Price”). For the avoidance of doubt, the Commitment Fee and Commitment Shares shall be fully earned as of the date of expiration of the Due Diligence Period (as defined in Section 10.6 below), unless the Investor has terminated this Agreement on or prior to such date, and the issuance of the Commitment Shares is not contingent upon any other event or condition, including, without limitation, the effectiveness of the Registration Statement or the Company’s submission of a Put Notice to the Investor and irrespective of any termination of this Agreement. For the purposes of clarity hereunder and without limiting the foregoing, there shall be no additional Commitment Fee in the event the Upsized Facility Option is exercised.
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(b) The Company shall include on the Registration Statement filed with the SEC, all Commitment Shares, provided that, in addition to all other remedies at law or in equity or otherwise under this Agreement, failure to do so will result in liquidated damages of $50,000.00, being immediately due and payable to the Investor at its election in the form of cash payment and the Investor may terminate its obligations under this Agreement by written notice to the Company.
Section 6.5 DUE DILIGENCE; CONFIDENTIALITY; NON-PUBLIC INFORMATION. The Investor shall have the right, from time to time as the Investor may reasonably deem appropriate, to perform reasonable due diligence on the Company during normal business hours. The Company, each Subsidiary and their respective officers and employees shall provide information and reasonably cooperate with the Investor in connection with any reasonable request by the Investor related to the Investor’s due diligence of the Company. The Company agrees not to disclose any Confidential Information of the Investor to any third party, except for attorneys, accountants, advisors who have a need to know such Confidential Information and are bound by confidentiality, and shall not use any Confidential Information for any purpose other than in connection with, or in furtherance of, the transactions contemplated hereby. The Company acknowledges that the Confidential Information of the Investor shall remain the property of the Investor and agrees that it shall take all reasonable measures to protect the secrecy of any Confidential Information disclosed by the Investor. The Company confirms that neither it nor any other Person acting on its behalf shall provide the Investor or its agents or counsel with any information that constitutes or might constitute material, non-public information, unless a simultaneous public announcement thereof is made by the Company in the manner contemplated by Regulation FD. In the event of a breach of the foregoing covenant by the Company or any Person acting on its behalf (as determined in the reasonable good faith judgment of the Investor), in addition to any other remedy provided herein or in the other Transaction Documents, the Investor, upon the advice of its counsel, shall have the right to make a public disclosure, in the form of a press release, public advertisement or otherwise, of such material, non-public information without the prior approval by the Company; provided the Investor shall have first provided notice to the Company that it believes it has received information that constitutes material, non-public information, and the Company shall have had at least twenty-four (24) hours to publicly disclose such material, non-public information prior to any such disclosure by the Investor, and the Company shall have failed to publicly disclose such material, non-public information within such time period. The Investor shall not have any liability to the Company, any Subsidiary, or any of their respective directors, officers, employees, stockholders, affiliates, or agents, for any such disclosure. The Company understands and confirms that the Investor shall be relying on the foregoing covenants in effecting transactions in securities of the Company.
Section 6.6 PURCHASE RECORDS. The Company shall maintain records showing the Available Amount at any given time and the date, Investment Amount and Put Shares for each Put, contained in the applicable Put Notice.
Section 6.7 TAXES. The Company shall pay any and all transfer, stamp or similar taxes that may be payable with respect to the issuance and delivery of any shares of Common Stock to the Investor made under this Agreement.
Section 6.8 USE OF PROCEEDS. The Company will use the net proceeds from the offering of Put Shares hereunder for the purposes described in the Registration Statement.
Section 6.9 OTHER TRANSACTIONS. The Company shall not enter into, announce or recommend to its stockholders any agreement, plan, arrangement or transaction in or of which the terms thereof would restrict, materially delay, conflict with or impair the ability or right of the Company to perform its obligations under the Transaction Documents, including, without limitation, the obligation of the Company to deliver the Put Shares and the Commitment Shares to the Investor in accordance with the terms of the Transaction Documents.
Section 6.10 INTEGRATION. In any case subject to the terms of the Registration Rights Agreement, from and after the Execution Date, neither the Company, nor or any of its Subsidiaries or Affiliates will, and the Company shall use its reasonable efforts to ensure that no Person acting on their behalf will, directly or indirectly, make any offers or sales of any security or solicit any offers to buy any security, under circumstances that would require registration of the offer and sale of any of the Securities under the Securities Act.
Section 6.11 TRANSACTION DOCUMENTS. On the Execution Date, the Company shall deliver to the Investor executed copies of all of the Transaction Documents.
Section 6.12 STANDSTILL. Unless waived by the Investor, notwithstanding any other provisions set forth in the Transaction Documents, the Company hereby covenants and agrees not to issue any shares of Common Stock or other securities (including debt securities) convertible or exercisable into shares of Common Stock or enter into agreement to sell such securities, including, without limitation, any “at the market” offerings, during each period (each, a “Standstill Period”) beginning (i) upon the submission of any Put Notice that has been accepted in accordance with the terms hereof and (ii) ending upon the later of (a) the Trading Day following the expiration of the applicable Valuation Period relating to such Put Notice, and (ii) close of the Trading Day on which the aggregate trading volume of the Common Stock over the Trading Days since issuance of such Put Notice shall have exceeded Five Hundred percent (500%) of the number of Put Shares sold pursuant to such Put Notice.
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Section 6.13 STOCKHOLDER APPROVAL. In addition, the Company shall hold a special meeting of stockholders (which may also be at the annual meeting of stockholders) at the earliest practicable date for the purpose of obtaining Stockholder Approval, with the recommendation of the Company’s Board of Directors that such proposal be approved, and the Company shall solicit proxies from its stockholders in connection therewith in the same manner as all other management proposals in such proxy statement and all management-appointed proxyholders shall vote their proxies in favor of such proposal.
ARTICLE VII
CONDITIONS TO DELIVERY OF PUT NOTICES AND CONDITIONS TO CLOSING
Section 7.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF INVESTOR TO PURCHASE PUT SHARES. The obligation of the Investor hereunder to purchase Put Shares is subject to the satisfaction of each of the following conditions:
(a) REGISTRATION STATEMENT. The Registration Statement, and any amendment or supplement thereto, shall be and remain effective for the resale by the Investor of the Put Shares and the Commitment Shares and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to such Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of such Registration Statement, either temporarily or permanently, or intends or has threatened to do so and (ii) no other suspension of the use of, or withdrawal of the effectiveness of, such Registration Statement or related prospectus shall exist. The Company shall have prepared and filed with the SEC a final and complete prospectus (the preliminary form of which shall be included in the Registration Statement) and shall have delivered to the Investor a true and complete copy thereof. Such prospectus shall be current and available for the resale by the Investor of all of the Securities covered thereby.
(b) ACCURACY OF THE COMPANY’S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company shall be true and correct in all material respects as of the Execution Date, each date a Put Notice is submitted, and as of the date of each Closing (except for representations and warranties under the first sentence of Section 4.3, which are specifically made as of the Execution Date and shall be true and correct in all respects as of the Execution Date).
(c) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied, and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company.
(d) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or adopted by any court or governmental authority of competent jurisdiction that prohibits or directly and materially adversely affects any of the transactions contemplated by the Transaction Documents, and no proceeding shall have been commenced that may have the effect of prohibiting or materially adversely affecting any of the transactions contemplated by the Transaction Documents.
(e) ADVERSE CHANGES. Since the date of filing of the Company’s most recent SEC Document, no event that had or is reasonably likely to have a Material Adverse Effect has occurred.
(f) NO SUSPENSION OF TRADING IN OR DELISTING OF THE COMMON STOCK. Trading of the Common Stock shall not have been suspended by the SEC, the Principal Market or FINRA, or otherwise halted for any reason, and the Common Stock shall have been approved for listing or quotation on and shall not have been delisted from the Principal Market. In the event of a suspension, delisting, or halting for any reason, of the trading of the Common Stock, as contemplated by this Section 7.1(f), the Investor shall have the right to return to the Company any remaining amount of Put Shares associated with such Put, and the Purchase Price with respect to such Put shall be reduced accordingly.
(g) BENEFICIAL OWNERSHIP LIMITATION. As of the date of the Closing for such issuance and sale, the number of Put Shares to be purchased by the Investor shall not exceed the number of such shares that, when aggregated with all other shares of Common Stock then beneficially owned or deemed beneficially owned by the Investor and its Affiliates, would result in the Investor and its Affiliates owning more than the Beneficial Ownership Limitation (as defined below), as determined in accordance with Section 13(d) of the Exchange Act and the regulations promulgated thereunder. For purposes of this Section 7.1(g), in the event that the amount of shares of Common Stock outstanding, as determined in accordance with Section 13(d) of the Exchange Act and the regulations promulgated thereunder, is greater on a Closing Date than on the date upon which the Put Notice associated with such Closing Date is given, the amount of shares of Common Stock outstanding on such Closing Date shall govern for purposes of determining whether the Investor, when aggregating all purchases of shares of Common Stock made pursuant to this Agreement, would own more than the Beneficial Ownership Limitation following such Closing Date. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable pursuant to a Put Notice. The Investor, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 7.1(g), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of Common Stock issuable pursuant to a Put Notice and the provisions of this Section 7.1(g) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company.
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(h) NO KNOWLEDGE. The Company shall have no knowledge of any event more likely than not to have the effect of causing the Registration Statement to be suspended or otherwise ineffective (which event is more likely than not to occur within the fifteen (15) Trading Days following the Trading Day on which such Put Notice is deemed delivered). The Company shall have no knowledge of any untrue statement (or alleged untrue statement) of a material fact or omission (or alleged omission) of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, in the Registration Statement, any effective registration statement filed pursuant to the Registration Rights Agreement or any post-effective amendment or prospectus which is a part of the foregoing, unless the Company has filed an amendment to the Registration Statement or made a filing pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC.
(i) NO VIOLATION OF SHAREHOLDER APPROVAL REQUIREMENT. The issuance of the Put Shares shall not violate the shareholder approval requirements of the Principal Market.
(j) OFFICER’S CERTIFICATE. On the date of delivery of each Put Notice, the Investor shall have received the Closing Certificate executed by an executive officer of the Company and to the effect that all the conditions to such Closing shall have been satisfied as of the date of each such certificate.
(k) DWAC ELIGIBLE. The Common Stock must be DWAC Eligible and not subject to a “DTC chill.”
(l) SEC DOCUMENTS. All reports, schedules, registrations, forms, statements, information, and other documents required to have been filed by the Company with the SEC pursuant to the reporting requirements of the Exchange Act (other than Forms 8-K) shall have been filed with the SEC within the applicable time periods prescribed for such filings under the Exchange Act.
(m) TRANSFER AGENT INSTRUCTION LETTER. The Transfer Agent Instruction Letter shall have been executed and delivered by the Company to the Transfer Agent and acknowledged and agreed to in writing by the Transfer Agent, and the Company shall have no knowledge of any fact or circumstance that would prevent the Transfer Agent from complying with the terms of the Transfer Agent Instruction Letter.
(n) BROKER APPROVAL. The Put Shares shall have been approved by the Investor’s prime broker or designated clearing firm for deposit to its account with the Depository Trust Company system.
(o) NO VIOLATION. No statute, regulation, order, guidance, decree, writ, ruling or injunction shall have been enacted, entered, promulgated, threatened or endorsed by any federal, state, local or foreign court or governmental authority of competent jurisdiction, including, without limitation, the SEC, which prohibits the consummation of or which would materially modify or delay any of the transactions contemplated by the Transaction Documents.
(p) LEGAL OPINION. The Company shall cause to be delivered to the Investor a written opinion or opinions of counsel reasonably satisfactory to the Investor, in form and substance reasonably satisfactory to the Investor and its counsel, relating to the availability and effectiveness of the Registration Statement, as supplemented by any prospectus supplement or amendment thereto, and regarding the Company’s compliance with the laws of the State of Delaware and the federal securities laws of the United States in the issuance, sale and registration of the Put Shares and Commitment Shares and entrance into the transaction documents.
(q) NO VARIABLE-RATE TRANSACTIONS. Without the prior written consent of the Investor, from any Put Date until the end of any Standstill Period the Company shall not enter into any Variable Rate Transaction or have in force and effect any existing Variable Rate Transaction. For purposes of this Agreement, “Variable Rate Transaction” means a transaction in which the Company (i) issues or sells any equity or debt securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock or Common Stock Equivalents either (A) at a conversion price, exercise price, exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the Common Stock at any time after the initial issuance of such equity or debt securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such equity or debt security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock (including, without limitation, any “full ratchet” or “weighted average” anti-dilution provisions, but not including any standard anti-dilution protection for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction), (ii) issues or sells any equity or debt securities, including without limitation, shares of Common Stock or Common Stock Equivalents, either (A) at a price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock (other than standard anti-dilution protection for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction), or (B) that are subject to or contain any put, call, redemption, buy-back, price-reset or other similar provision or mechanism (including, without limitation, a “Black-Scholes” put or call right, other than in connection with a “fundamental transaction”) that provides for the issuance of additional equity securities of the Company or the payment of cash by the Company, or (iii) enters into any agreement, including, but not limited to, an “equity line of credit” (other than with the Investor) or other continuous offering or similar offering of shares of Common Stock or Common Stock Equivalents, whereby the Company may sell shares of Common Stock or Common Stock Equivalents at a future determined price
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(r) NO NON-PUBLIC INFORMATION. Neither the Investor nor any of its agents or counsel shall be in possession of any information that constitutes or might constitute material, non-public information with respect to the Company.
(s) COMMITMENT SHARES ISSUED AS DWAC SHARES. Following the effectiveness of the Registration Statement any Common Stock issuable to the Investor pursuant to Section 6.4 shall have been credited by the Company’s transfer agent to the Investor’s or its designee’s account at DTC as DWAC Shares.
ARTICLE VIII
LEGENDS
Section 8.1 NO RESTRICTIVE STOCK LEGEND. No restrictive stock legend shall be placed on the share certificates representing the Put Shares.
Section 8.2 INVESTOR’S COMPLIANCE. Nothing in this Article VIII shall affect in any way the Investor’s obligations hereunder to comply with all applicable securities laws upon the sale of the Common Stock.
ARTICLE IX
NOTICES; INDEMNIFICATION
Section 9.1 NOTICES. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing, except for Put Notices which shall be delivered via email in accordance with Section 2.2 and, unless otherwise specified herein, shall be (a) personally served, (b) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (c) delivered by a nationally recognized overnight delivery service with charges prepaid, or (d) transmitted by hand delivery or e-mail as a PDF, addressed as set forth below or to such other address as such party shall have specified most recently by written notice given in accordance herewith. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (i) upon hand delivery or delivery by e-mail at the address designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (ii) on the first business day following the date of mailing by a nationally recognized overnight delivery service or on the fifth business day after deposited in the mail, in each case, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.
The addresses for such communications shall be:
If to the Company:
2929 North Commerce Parkway
Miramar, FL 33025
Attention: Hing C. Wong and Nicole Valdivieso, Esq.
E-mail: hingwong@hcwbiologics.com
and
legal@hcwbiologics.com
With a mandatory copy (which shall not constitute notice) to:
Clark Hill
130 East Randolph Street
Suite 3900
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Chicago, IL 60601
Attention: James F. Groth
Email: jgroth@clarkhill.com
If to the Investor:
Square Gate Capital Master Fund, LLC – Series 4
40 Wall Street, Floor 28, Suite 2728
New York, NY 10005
E-mail: eloc@squaregatecapital.com
Attention: Christopher Perugini, Managing Partner
with a mandatory copy to (that shall not constitute notice) to:
Lucosky Brookman LLP
101 Wood Avenue South
Woodbridge, NJ 08830
E-mail: sbrookman@lucbro.com
Attention: Seth Brookman
Either party hereto may from time to time change its address or e-mail for notices under this Section 9.1 by giving at least ten (10) days’ prior written notice of such changed address to the other party hereto.
Section 9.2 INDEMNIFICATION. The Company (an “Indemnifying Party”) agrees to indemnify and hold harmless the Investor along with its officers, directors, employees, and authorized agents and representatives, and each Person or entity, if any, who controls such party within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act or the rules and regulations thereunder (an “Indemnified Party”) from and against any and all Damages, joint or several, and any and all actions in respect thereof to which the Indemnified Party becomes subject to, resulting from, arising out of or relating to (i) any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of the Indemnifying Party contained in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any registration statement pursuant to the Registration Rights Agreement or any post-effective amendment thereof or supplement thereto, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in the light of the circumstances under which the statements therein were made, not misleading, or (iv) any material violation or alleged material violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law, as such Damages are incurred, except to the extent such Damages result primarily from the Indemnified Party’s failure to perform any covenant or agreement contained in this Agreement or the Indemnified Party’s negligence, recklessness, fraud, willful misconduct or bad faith in performing its obligations under this Agreement; provided, however, that the foregoing indemnity agreement shall not apply to any Damages of an Indemnified Party to the extent, but only to the extent, (a) arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made by an Indemnifying Party in reliance upon and in conformity with written information furnished to the Indemnifying Party by any Indemnified Party expressly for use in the Registration Statement, or any post-effective amendment thereof or supplement thereto, or (b) resulting from the gross negligence or willful misconduct of any Indemnified Party (as determined by a final non-appealable judgment of court having jurisdiction over such matter).
Section 9.3 METHOD OF ASSERTING INDEMNIFICATION CLAIMS. All claims for indemnification by any Indemnified Party under Section 9.2 shall be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which an Indemnified Party might seek indemnity under Section 9.2 is asserted against or sought to be collected from such Indemnified Party by a Person other than a party hereto or an Affiliate thereof (a “Third Party Claim”), the Indemnified Party shall deliver a written notification, enclosing a copy of all papers served, if any, and specifying the nature of and basis for such Third-Party Claim and for the Indemnified Party’s claim for indemnification that is being asserted under any provision of Section 9.2 against an Indemnifying Party, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such Third Party Claim (a “Claim Notice”) with reasonable promptness to the Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice with reasonable promptness after the Indemnified Party receives notice of such Third-Party Claim, the Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to such Third-Party Claim to the extent that the Indemnifying Party’s ability to defend has been prejudiced by such failure of the Indemnified Party. The Indemnifying Party shall notify the Indemnified Party as soon as practicable within the period ending fifteen(15) calendar days following receipt by the Indemnifying Party of either a Claim Notice or an Indemnity Notice (as defined below) (the “Dispute Period”) whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party under Section 9.2 and whether the Indemnifying Party desires, at its sole cost and expense, to defend the Indemnified Party against such Third Party Claim.
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(i) If the Indemnifying Party notifies the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Indemnified Party with respect to the Third Party Claim pursuant to this Section 9.3(a), then the Indemnifying Party shall have the right to defend, with counsel reasonably satisfactory to the Indemnified Party, at the sole cost and expense of the Indemnifying Party, such Third Party Claim by all appropriate proceedings, which proceedings shall be vigorously and diligently prosecuted by the Indemnifying Party to a final conclusion or will be settled at the discretion of the Indemnifying Party (but only with the consent of the Indemnified Party in the case of any settlement that provides for any relief other than the payment of monetary damages or that provides for the payment of monetary damages as to which the Indemnified Party shall not be indemnified in full pursuant to Section 9.2). The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that the Indemnified Party may, at the sole cost and expense of the Indemnified Party, at any time prior to the Indemnifying Party’s delivery of the notice referred to in the first sentence of this clause (i), file any motion, answer or other pleadings or take any other action that the Indemnified Party reasonably believes to be necessary or appropriate to protect its interests; and provided, further, that if requested by the Indemnifying Party, the Indemnified Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnifying Party in contesting any Third Party Claim that the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, any defense or settlement of any Third-Party Claim controlled by the Indemnifying Party pursuant to this clause (i), and except as provided in the preceding sentence, the Indemnified Party shall bear its own costs and expenses with respect to such participation. Notwithstanding the foregoing, the Indemnified Party may takeover the control of the defense or settlement of a Third-Party Claim at any time if it irrevocably waives its right to indemnity under Section 9.2 with respect to such Third-Party Claim.
(ii) If the Indemnifying Party fails to notify the Indemnified Party within the Dispute Period that the Indemnifying Party desires to defend the Third Party Claim pursuant to this Section 9.3(a), or if the Indemnifying Party gives such notice but fails to prosecute vigorously and diligently or settle the Third Party Claim, or if the Indemnifying Party fails to give any notice whatsoever within the Dispute Period, then the Indemnified Party shall have the right to defend, at the sole cost and expense of the Indemnifying Party, the Third Party Claim by all appropriate proceedings, which proceedings shall be prosecuted by the Indemnified Party in a reasonable manner and in good faith or will be settled at the discretion of the Indemnified Party (with the consent of the Indemnifying Party, which consent will not be unreasonably withheld). The Indemnified Party will have full control of such defense and proceedings, including any compromise or settlement thereof; provided, however, that if requested by the Indemnified Party, the Indemnifying Party will, at the sole cost and expense of the Indemnifying Party, provide reasonable cooperation to the Indemnified Party and its counsel in contesting any Third-Party Claim which the Indemnified Party is contesting. Notwithstanding the foregoing provisions of this clause (ii), if the Indemnifying Party has notified the Indemnified Party within the Dispute Period that the Indemnifying Party disputes its liability or the amount of its liability hereunder to the Indemnified Party with respect to such Third Party Claim and if such dispute is resolved in favor of the Indemnifying Party in the manner provided in clause (iii) below, the Indemnifying Party will not be required to bear the costs and expenses of the Indemnified Party’s defense pursuant to this clause (ii) or of the Indemnifying Party’s participation therein at the Indemnified Party’s request, and the Indemnified Party shall reimburse the Indemnifying Party in full for all reasonable costs and expenses incurred by the Indemnifying Party in connection with such litigation. The Indemnifying Party may participate in, but not control, any defense or settlement controlled by the Indemnified Party pursuant to this clause (ii), and the Indemnifying Party shall bear its own costs and expenses with respect to such participation.
(iii) If the Indemnifying Party notifies the Indemnified Party that it does not dispute its liability or the amount of its liability to the Indemnified Party with respect to the Third Party Claim under Section 9.2 or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes its liability or the amount of its liability to the Indemnified Party with respect to such Third Party Claim, the amount of Damages specified in the Claim Notice shall be conclusively deemed a liability of the Indemnifying Party under Section 9.2 and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand. If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such Third Party Claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute; provided, however, that if the dispute is not resolved within thirty (30) days after the Claim Notice, the Indemnifying Party shall be entitled to institute such legal action as it deems appropriate.
(b) In the event any Indemnified Party should have a claim under Section 9.2 against the Indemnifying Party that does not involve a Third Party Claim, the Indemnified Party shall deliver a written notification of a claim for indemnity under Section 9.2 specifying the nature of and basis for such claim, together with the amount or, if not then reasonably ascertainable, the estimated amount, determined in good faith, of such claim (an “Indemnity Notice”) with reasonable promptness to the Indemnifying Party. The failure by any Indemnified Party to give the Indemnity Notice shall not impair such party’s rights hereunder except to the extent that the Indemnifying Party demonstrates that it has been irreparably prejudiced thereby. If the Indemnifying Party notifies the Indemnified Party that it does not dispute the claim or the amount of the claim described in such Indemnity Notice or fails to notify the Indemnified Party within the Dispute Period whether the Indemnifying Party disputes the claim or the amount of the claim described in such Indemnity Notice, the amount of Damages specified in the Indemnity Notice will be conclusively deemed a liability of the Indemnifying Party under Section 9.2 and the Indemnifying Party shall pay the amount of such Damages to the Indemnified Party on demand.
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If the Indemnifying Party has timely disputed its liability or the amount of its liability with respect to such claim, the Indemnifying Party and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute; provided, however, that if the dispute is not resolved within thirty (30) days after the Claim Notice, the Indemnifying Party shall be entitled to institute such legal action as it deems appropriate.
(c) The Indemnifying Party agrees to pay the Indemnified Party, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim.
(d) The indemnity provisions contained herein shall be in addition to (i) any cause of action or similar rights of the Indemnified Party against the Indemnifying Party or others, and (ii) any liabilities the Indemnifying Party may be subject to.
ARTICLE X
MISCELLANEOUS
Section 10.1 GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflicts of law (whether of the State of New York or any other jurisdiction).
Section 10.2 ARBITRATION. Any disputes, claims, or controversies arising out of or relating to the Transaction Documents, or the transactions, contemplated thereby, or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this Agreement to arbitrate, shall be referred to and resolved solely and exclusively by binding arbitration to be conducted before JAMS, or its successor pursuant the expedited procedures set forth in the JAMS Comprehensive Arbitration Rules and Procedures (the “Rules”), including Rules 16.1 and 16.2 of those Rules. The arbitration shall be held in New York, New York, before a tribunal consisting of three (3) arbitrators each of whom will be selected in accordance with the “strike and rank” methodology set forth in Rule 15. Either party to this Agreement may, without waiving any remedy under this Agreement, seek from any federal or state court sitting in the Southern District of New York any interim or provisional relief that is necessary to protect the rights or property of that party, pending the establishment of the arbitral tribunal. The costs and expenses of such arbitration shall be paid by and be the sole responsibility of the Company, including but not limited to the Investor’s attorneys’ fees and each arbitrator’s fees. The arbitrators’ decision must set forth a reasoned basis for any award of damages or finding of liability. The arbitrators’ decision and award will be made and delivered as soon as reasonably possibly and in any case within sixty (60) days’ following the conclusion of the arbitration hearing and shall be final and binding on the parties and may be entered by any court having jurisdiction thereof.
Section 10.3 JURY TRIAL WAIVER. THE COMPANY AND THE INVESTOR HEREBY WAIVE A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THE TRANSACTION DOCUMENTS.
Section 10.4 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Company and the Investor and their respective successors. Neither this Agreement nor any rights of the Investor or the Company hereunder may be assigned by either party to any other Person.
Section 10.5 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the benefit of the Company and the Investor and their respective successors, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as set forth in Article IX.
Section 10.6 TERMINATION. At any time, the Company shall have the option to terminate this Agreement for any reason or for no reason by delivering written notice (a “Company Termination Notice”) to the Investor electing to terminate this Agreement without any liability whatsoever of any party to any other party under this Agreement (except as set forth below). The Company Termination Notice shall not be effective until one business day after it has been received by the Investor, provided that this Agreement cannot be terminated (i) while there is an outstanding Put Notice, the shares of Common Stock under which have yet to be issued and (ii) the Company has not paid all amounts owed to the Investor pursuant to this Agreement. In addition, this Agreement shall automatically terminate on the earlier of (i) the end of the Commitment Period; (ii) the date that the Company sells and the Investor purchases the Maximum Commitment Amount; or (iii) the date that, pursuant to or within the meaning of any Bankruptcy Law, the Company commences a voluntary case or any Person commences a proceeding against the Company, a Custodian is appointed for the Company or for all or substantially all of its property or the Company makes a general assignment for the benefit of its creditors. Following completion of the Investor’s due diligence review, which shall be no later than ten (10) Trading Days following the Execution Date (the “Due Diligence Period”), or if at any time the Company receives a final delisting notice from the Principal Market or if at any time the Common Stock fails to be listed on an Eligible Market, the Investor may terminate its obligations under this Agreement by written notice to the Company and may deem any outstanding Put Notice as withdrawn.
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Notwithstanding the foregoing, in the event of termination of this Agreement, the provisions of Articles III, IV, V, VI, IX and the agreements and covenants of the Company and the Investor set forth in this Article X shall survive the termination of this Agreement for the maximum length of time allowed under applicable law.
Section 10.7 ENTIRE AGREEMENT. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the Company and the Investor with respect to the matters covered herein and therein and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.
Section 10.8 FEES AND EXPENSES. Except as expressly set forth in the Transaction Documents or any other writing to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, except for the non-refundable deposit of $30,000 which the Company shall have paid to the Investor prior to the Execution Date in connection with the execution of the Term Sheet entered into between the Company and Square Gate Capital, LLC, or certain affiliates or related parties thereof to be allocated towards the Investor’s due diligence and legal costs. For the avoidance of doubt as provided herein, the Company shall pay all Transfer Agent fees, Clearing Costs, stamp taxes and other taxes and duties levied in connection with any Securities.
Section 10.9 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument. This Agreement may be delivered to the other parties hereto by e-mail of a copy of this Agreement bearing the signature of the parties so delivering this Agreement.
Section 10.10 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party.
Section 10.11 FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments, and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
Section 10.12 NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
Section 10.13 EQUITABLE RELIEF. Each party acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the other by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, each party acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the such party of the provisions of this Agreement, that the other party shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.
Section 10.14 TITLE AND SUBTITLES. The titles and subtitles used in this Agreement are used for the convenience of reference and are not to be considered in construing or interpreting this Agreement.
Section 10.15 AMENDMENTS; WAIVERS. No provision of this Agreement may be amended or waived by the parties from and after the date that is one (1) Trading Day immediately preceding the initial filing of the Registration Statement with the SEC. Subject to the immediately preceding sentence, (i) no provision of this Agreement may be amended other than by a written instrument signed by both parties hereto and (ii) no provision of this Agreement may be waived other than in a written instrument signed by the party against whom enforcement of such waiver is sought. No failure or delay in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power, or privilege
Section 10.16 PUBLICITY. The Company and the Investor shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement, other than as required by law, without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement.
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Notwithstanding the foregoing, the Company shall not publicly disclose the name of the Investor without the prior written consent of the Investor, except to the extent required by law. The Investor acknowledges that this Agreement and all or part of the Transaction Documents may be deemed to be “material contracts,” as that term is defined by Item 601(b)(10) of Regulation S-K, and that the Company may therefore be required to file such documents as exhibits to reports or registration statements filed under the Securities Act or the Exchange Act. The Investor further agrees that the status of such documents and materials as material contracts shall be determined solely by the Company, in consultation with its counsel.
** Signature Page Follows ** IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the Execution Date.
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HCW BIOLOGICS INC. |
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By: |
/s/ Hing C. Wong |
Name: Hing C. Wong |
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Title: Founder and Chief Executive Officer |
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SQUARE GATE CAPITAL MASTER FUND, LLC – SERIES 4
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By: |
/s/ Christopher Perugini |
Name: Christoper Perugini |
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Title: Managing Partner |
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** Signature Page to Equity Purchase Agreement ** TO: SQUARE GATE CAPITAL MASTER FUND, LLC – SERIES 4 We refer to the Equity Purchase Agreement, dated February 20, 2025 (the “Agreement”), entered into by and between HCW Biologics Inc. and you. Capitalized terms defined in the Agreement shall, unless otherwise defined herein, have the same meaning when used herein.
EXHIBIT A
FORM OF PUT NOTICE
DATE:
We hereby:
1) Notify you that the Maximum Put Amount as of the delivery of this Put Notice is _________.
2) Give you notice that:
[__] we require you to purchase Put Shares in an amount equal to _________, which is not in excess of the Maximum Put Amount;
[__] we request that you purchase an amount of Put Shares equal to _________ (the “Excess Purchase Amount”) which is in excess of the Maximum Put Amount but less than or equal to $3,000,000 less the Maximum Put Amount.
If we have requested that you purchase in excess of the Maximum Put Amount, prior to the opening of trading on the Trading Day immediately following the delivery of this Put Notice please confirm if you will purchase the Maximum Put Amount, the Excess Purchase Amount or some amount of Put Shares between the Maximum Put Amount and the Excess Purchase Amount and what amount. Failure to so confirm will be deemed confirmation that you elect to purchase the Maximum Put Amount.
Subsequent to the submission of this Put Notice, the Company and the Investor may agree to increase the amount of Put Shares subject to this Put Notice in accordance with Section 2.4 of the Agreement. In the event of any such increase, following the date of the Valuation Period relating to this Put Notice, the Company will reflect the amount of Put Shares as so increased in the space provided below and resubmit this Put Notice to you for your records.
Total amount of Put Shares following an increase under Section 2.4 of the Agreement: ______
3) Certify that, as of the date hereof, the conditions set forth in Section 7.1 of the Agreement are satisfied.
HCW BIOLOGICS INC.
By: |
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Name: |
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Title: |
EXHIBIT B
FORM OF OFFICER’S CERTIFICATE
OF
HCW BIOLOGICS INC.
Pursuant to Section 7.1(j) of that certain equity purchase agreement, dated February 20, 2025 (the “Agreement”), by and between HCW Biologics Inc. (the “Company”) and Square Gate Capital Master Fund, LLC – Series 4 (the “Investor”), the undersigned, in his capacity as Chief Financial Officer of the Company, and not in his individual capacity, hereby certifies, as of the date hereof (such date, the “Condition Satisfaction Date”), the following:
1. The representations and warranties of the Company contained in the Agreement are true and correct in all material respects as of the Condition Satisfaction Date as though made on the Condition Satisfaction Date (except for representations and warranties specifically made as of a particular date) with respect to all periods, and as to all events and circumstances occurring or existing to and including the Condition Satisfaction Date, except for any conditions which have temporarily caused any representations or warranties of the Company set forth in the Agreement to be incorrect and which have been corrected with no continuing impairment to the Company or the Investor; and
2. All of the conditions precedent to the obligation of the Investor to purchase Put Shares set forth in the Agreement, including but not limited to Section 7.1 of the Agreement, have been satisfied as of the Condition Satisfaction Date.
Capitalized terms used herein shall have the meanings set forth in the Agreement unless otherwise defined herein.
IN WITNESS WHEREOF, the undersigned has hereunto affixed his hand as .
By: |
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Name: |
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Title: |
EXHIBIT C
EXHIBIT D
DISCLOSURE SCHEDULES
REGISTRATION RIGHTS AGREEMENT
FORM OF TRANSFER AGENT INSTRUCTION LETTER FORM OF REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of February 20, 2025 (the “Execution Date”), is entered into by and between HCW Biologics Inc., a corporation incorporated in the State of Delaware (the “Company”), and Square Gate Capital Master Fund, LLC - Series 4, a series limited liability company organized in the State of Delaware (together with its permitted assigns, the “Buyer”). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in that certain Equity Purchase Agreement by and between the parties hereto, dated as of the Execution Date (as amended, restated, supplemented or otherwise modified from time to time, the “Purchase Agreement”).
WHEREAS:
The Company has agreed, upon the terms and subject to the conditions of the Purchase Agreement, to sell to the Buyer up to Twenty Million Dollars ($20,000,000.00) of Put Shares, which amount may be increased pursuant to the terms and conditions set forth in the Purchase Agreement, and to induce the Buyer to enter into the Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “Securities Act”), and applicable state securities laws.
NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Buyer hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following meanings:
a. “Investor” means the Buyer, any transferee or assignee thereof to whom the Buyer assigns its rights under this Agreement in accordance with Section 9 and who agrees to become bound by the provisions of this Agreement, and any transferee or assignee thereof to whom a transferee or assignee assigns its rights under this Agreement in accordance with Section 9 and who agrees to become bound by the provisions of this Agreement.
b. “Person” means any individual or entity including but not limited to any corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency.
c. “Register,” “Registered,” and “Registration” refer to a registration effected by preparing and filing one or more registration statements of the Company in compliance with the Securities Act and/or pursuant to Rule 415 under the Securities Act or any successor rule providing for the offering of securities on a continuous basis (“Rule 415”), and the declaration or ordering of effectiveness of such registration statement(s) by the United States Securities and Exchange Commission (the “SEC”).
d. “Registrable Securities” means all of the (i) Commitment Shares, (ii) Put Shares which have been, or which may, from time to time be issued, including without limitation all of the shares of Common Stock which have been issued or will be issued to the Investor under the Purchase Agreement (without regard to any limitation or restriction on purchases), and (iii) any and all shares of capital stock issued or issuable with respect to the Put Shares and Commitment Shares as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitation on purchases under the Purchase Agreement.
e. “Registration Statement” means one or more registration statements of the Company on Form S-1 covering the resale of the Registrable Securities including the Initial Registration Statement and any New Registration Statement or Other Registration Statement (each as defined herein).
2. REGISTRATION.
a. Mandatory Registration. The Company shall, as soon as commercially practicable, but in no event later than by April 7, 2025 , file with the SEC an initial Registration Statement on Form S-1 covering the maximum number of Registrable Securities as shall be permitted to be included thereon in accordance with applicable SEC rules, regulations and interpretations so as to permit the resale of such Registrable Securities by the Investor, including but not limited to under Rule 415 under the Securities Act at then prevailing market prices (and not fixed prices) (the “Initial Registration Statement”). The Initial Registration Statement shall register only Registrable Securities. The Company shall use commercially reasonable efforts to have the Initial Registration Statement and any amendment thereto declared effective by the SEC no later than May 21, 2025.
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b. Rule 424 Prospectus. In addition to the Initial Registration Statement, the Company shall, as required by applicable securities regulations, from time to time file with the SEC, pursuant to Rule 424 promulgated under the Securities Act, such prospectuses and prospectus supplements, if any, to be used in connection with sales of the Registrable Securities under each Registration Statement. The Investor and its counsel shall have a reasonable opportunity to review and comment upon such prospectuses prior to filing with the SEC, and the Company shall give due consideration to all such comments. The Investor shall use its reasonable best efforts to comment upon any prospectus within two (2) business days from the date the Investor receives the pre-filing version of such prospectus.
c. Sufficient Number of Shares Registered. In the event the number of shares available under the Initial Registration Statement is insufficient to cover all of the Registrable Securities, the Company shall amend the Initial Registration Statement or file a new Registration Statement (a “New Registration Statement”), so as to cover all of such Registrable Securities (subject to the limitations set forth in Section 2(e)) as soon as practicable, subject to any limits that may be imposed by the SEC pursuant to Rule 415 under the Securities Act, including any position of the staff of the SEC (the “Staff”) with respect to the date on which the Staff will permit such additional Registration Statement(s) to be filed with the SEC and the rules and regulations of the SEC and any Principal Market (“Regulatory Restrictions”). The Company shall use its commercially reasonable efforts to cause such amendment and/or New Registration Statement to become effective as soon as commercially practicable following the filing thereof. In the event that any of the Registrable Securities are not included in the Initial Registration Statement, or have not been included in any New Registration Statement, and the Company files any other registration statement under the Securities Act (other than on Form S-4, Form S-8, or with respect to other employee related plans or rights offerings) (an “Other Registration Statement”), then the Company shall, to the extent permitted under the Regulatory Restrictions, include in such Other Registration Statement first all of such Registrable Securities that have not been previously Registered, and second any other securities the Company wishes to include in such Other Registration Statement. The Company agrees that, subject to the exceptions and limitations set forth in the immediately preceding sentence, it shall not file any such Other Registration Statement unless all of the Registrable Securities have been included in such Other Registration Statement or otherwise have been Registered for resale as described above.
d. Effectiveness. The Investor and its counsel shall have a reasonable opportunity to review and comment upon any Registration Statement and any amendment or supplement to such Registration Statement and any related prospectus prior to its filing with the SEC, and the Company shall give due consideration to all reasonable comments. The Investor shall furnish all information reasonably requested by the Company for inclusion therein. The Company shall use commercially reasonable efforts to keep all Registration Statements effective, including but not limited to pursuant to Rule 415 promulgated under the Securities Act and available for the resale by the Investor of all of the Registrable Securities covered thereby at all times until the earlier of (i) the date as of which the Investor may sell all of the Registrable Securities without any restrictions (including any restrictions under Rule 144 promulgated under the Securities Act) and (ii) the date on which the Investor shall have sold all the Registrable Securities covered thereby and no Put Shares remain issuable under the Purchase Agreement (the “Registration Period”). In the event that any Registration Statement filed hereunder is no longer effective and Rule 144 is available for sales of the Registrable Securities, the Company shall provide an opinion upon request of the Investor that the Investor may sell any such Registrable Securities held by the Investor pursuant to Rule 144 with all costs related to such opinion to be borne by the Company. Each Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading.
e. Offering. If the Staff or the SEC seeks to characterize any offering pursuant to a Registration Statement filed pursuant to this Agreement as constituting an offering of securities that does not permit such Registration Statement to become or remain effective and be used for resales by the Investor under Rule 415 at then-prevailing market prices (and not fixed prices) by comment letter or otherwise, or if after the filing of the Initial Registration Statement with the SEC pursuant to Section 2(a), the Company is otherwise required by the Staff or the SEC to reduce the number of Registrable Securities included in such Initial Registration Statement, then the Company shall reduce the number of Registrable Securities to be included in such Initial Registration Statement (after having consulted the Investor and its legal counsel as to the specific Registrable Securities to be removed therefrom) until such time as the Staff and the SEC shall so permit such Registration Statement to become effective and be used as aforesaid. In the event of any reduction in Registrable Securities pursuant to this paragraph, the Company shall file one or more New Registration Statements in accordance with Section 2(c) until such time as all Registrable Securities have been included in Registration Statements that have been declared effective and the prospectus contained therein is available for use by the Investor. Notwithstanding any provision herein or in the Purchase Agreement to the contrary, the Company’s obligations to register Registrable Securities (and any related conditions to the Investor’s obligations) shall be qualified as necessary to comport with any requirement of the SEC or the Staff as addressed in this Section 2(e).
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3. RELATED OBLIGATIONS.
With respect to a Registration Statement and whenever any Registrable Securities are to be Registered pursuant to Section 2, including on any Other Registration Statement, the Company shall use its commercially reasonable efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations:
a. The Company shall prepare and file with the SEC such amendments (including post-effective amendments on Form S-1) and supplements to any Registration Statement and any Other Registration Statement and the prospectus used in connection with such Registration Statement and Other Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the Securities Act, as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement or applicable Other Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such registration statement.
b. The Company shall permit the Investor to review and comment upon each Registration Statement or any Other Registration Statement and all amendments and supplements thereto at least two (2) business days prior to their filing with the SEC, and not file any document in a form to which Investor reasonably objects. The Investor shall use its commercially reasonable efforts to comment upon the Registration Statement or any Other Registration Statement and any amendments or supplements thereto within two (2) business days from the date the Investor receives the final version thereof. The Company shall furnish to the Investor, without charge, and within three (3) business days, any comments and/or any other correspondence from the SEC or the Staff to the Company or its representatives relating to the Registration Statement or any Other Registration Statement. The Company shall respond to the SEC or the Staff, as applicable, regarding the resolution of any such comments and/or correspondence as promptly as practicable and in any event within two weeks upon receipt thereof.
c. Upon request of the Investor, the Company shall furnish to the Investor, (i) promptly after the same is prepared and filed with the SEC, at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, (ii) upon the effectiveness of any Registration Statement, a copy of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as the Investor may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as the Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by the Investor. For the avoidance of doubt, any filing available to the Investor via the SEC’s live EDGAR system shall be deemed “furnished to the Investor” hereunder.
d. The Company shall use commercially reasonable efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or “blue sky” laws in such jurisdictions in the United States as required by applicable law, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threatening of any proceeding for such purpose.
e. As promptly as practicable after becoming aware of such event or facts, the Company shall notify the Investor in writing of the happening of any event or existence of such facts as a result of which the prospectus included in any Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver a copy of such supplement or amendment to the Investor (or such other number of copies as the Investor may reasonably request). The Company shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment thereto has become effective (notification of such effectiveness shall be delivered to the Investor by email or facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to any Registration Statement or related prospectus or related information, and (iii) of the Company’s reasonable determination that a post-effective amendment to a Registration Statement would be appropriate.
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f. The Company shall use its commercially reasonable efforts to prevent the issuance of any stop order or other suspension of effectiveness of any registration statement, or the suspension of the qualification of any Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. In addition, if the Company shall receive any comment letter from the SEC relating to any Registration Statement under which Registrable Securities are Registered, the Company shall notify the Investor of the issuance of such order and use its best efforts to address such comments in a manner satisfactory to the SEC.
g. The Company shall use its commercially reasonable efforts to (i) cause all the Registrable Securities to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation and quotation of all the Registrable Securities on the Principal Market. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section.
h. The Company shall cooperate with the Investor to facilitate the timely preparation and delivery of DWAC Shares representing the Registrable Securities to be offered pursuant to any Registration Statement. “DWAC Shares” means shares of Common Stock that are (i) issued in electronic form, (ii) freely tradable and transferable and without restriction on resale and (iii) timely credited by the Company to the Investor’s or its designee’s specified DWAC account with The Depository Trust Company (“DTC”) under the DTC/FAST Program, or any similar program hereafter adopted by DTC performing substantially the same function.
i. The Company shall at all times maintain the services of its Transfer Agent and registrar with respect to its Common Stock.
j. If reasonably requested by the Investor, the Company shall (i) immediately incorporate in a prospectus supplement or post-effective amendment such information relating solely to the Investor as the Investor believes should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as practicable upon notification of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement.
k. The Company shall use its commercially reasonable efforts to cause the Registrable Securities covered by any Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.
l. Within one (1) business day after any Registration Statement which includes Registrable Securities is declared effective by the SEC, or any prospectus supplement or post-effective amendment including Registrable Securities is filed with the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the Transfer Agent for such Registrable Securities (with copies to the Investor) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A. Thereafter, if requested by the Investor at any time, the Company shall require its counsel to deliver to the Investor a written confirmation whether or not (i) the effectiveness of such Registration Statement has lapsed at any time for any reason (including, without limitation, the issuance of a stop order) (ii) any comment letter has been issued by the SEC and (iii) whether or not the Registration Statement is current and available to the Investor for sale of all of the Registrable Securities.
m. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of Registrable Securities pursuant to any Registration Statement.
4. OBLIGATIONS OF THE INVESTOR.
a. The Company shall notify the Investor in writing of the information the Company reasonably requires from the Investor in connection with any Registration Statement hereunder. The Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. Notwithstanding the foregoing, the Registration Statement shall contain the “Selling Stockholder” and “Plan of Distribution” sections, each in substantially the form provided to the Company by the Investor.
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b. The Investor agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder and responding to the comments and queries from the SEC in connection therewith unless its counsel shall otherwise advise.
c. The Investor agrees that, upon receipt of any notice from the Company of the happening of any event or existence of facts of the kind described in Section 3(f) or the first sentence of Section 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until withdrawal of a stop order contemplated by Section 3(f) or the Investor’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e). Notwithstanding anything to the contrary, the Company shall cause its Transfer Agent to promptly issue DWAC Shares in accordance with the terms of the Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale prior to the Investor’s receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of Section 3(e) and for which the Investor has not yet settled.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than sales or brokerage commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees incurred by the Company, and fees and disbursements of counsel for the Company (but not counsel for the Investor), shall be paid by the Company.
6. INDEMNIFICATION.
a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend the Investor, each Person, if any, who controls or is under common control with the Investor, the members, the directors, officers, partners, employees, agents, representatives of the Investor and each Person, if any, who is an “affiliate” of the Investor within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (each, an “Indemnified Person”), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, attorneys’ fees, amounts paid in settlement or expenses, joint or several, (collectively, “Claims”) incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an Indemnified Person is or may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement, any Other Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other “blue sky” laws of any jurisdiction in which Registrable Securities are offered (“Blue Sky Filing”), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) in which Registrable Securities are offered or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement or any Other Registration Statement or (iv) any material violation by the Company of this Agreement (the matters in the foregoing clauses (i) through (iv) being, collectively, “Violations”). The Company shall reimburse each Indemnified Person promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information about the Investor furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of a Registration Statement, any Other Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e); (ii) with respect to any superseded prospectus, shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the superseded prospectus was corrected in the revised prospectus, as then amended or supplemented, if such revised prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e), and the Indemnified Person was promptly advised in writing not to use the incorrect prospectus prior to the use giving rise to a violation and such Indemnified Person, notwithstanding such advice, used it; (iii) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(c) or Section 3(e); and (iv) shall not cover Violations caused by a material breach of any Indemnified Person’s representations, warranties or covenants under the Transaction Documents, any Indemnified Person’s violation of state or federal securities laws or any conduct by any Indemnified Person that constitutes fraud, gross negligence or willful misconduct (as determined by a final non-appealable judgment of court having jurisdiction over such matter).
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Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investor pursuant to Section 9.
b. Promptly after receipt by an Indemnified Person under this Section 6 of notice of the commencement of any action or proceeding by a third party, which shall be deemed to include any claim by a shareholder of the Company (including any governmental action or proceeding), involving a Claim, such Indemnified Person shall, if a Claim in respect thereof is to be made against the Company under this Section 6, deliver to the Company a written notice of the commencement thereof, and the Company shall have the right to participate in, and, to the extent the Company so desires, to assume control of the defense thereof with counsel mutually satisfactory to the Company and to the Indemnified Person; provided, however, that an Indemnified Person shall have the right to retain its own counsel with the fees and expenses to be paid by the Company. The Indemnified Person shall reasonably cooperate with the Company in connection with any negotiation or defense of any such action or third party Claim by the Company and shall furnish to the Company all information reasonably available to the Indemnified Person which relates to such action or third party Claim. The indemnifying party shall keep the Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. The Company shall not, without the consent of the Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Person of a release from all liability in respect to such third party Claim or litigation. Following indemnification as provided for hereunder, the Company shall be subrogated to all rights of the Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the Company within a reasonable time of the commencement of any such action shall not relieve the Company of any liability to the Indemnified Person under this Section 6, except to the extent that the Company is prejudiced in its ability to defend such action. An indemnifying party’s obligations under this Section 6 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the indemnifying party, which consent shall not be unreasonably withheld, delayed, denied, or conditioned.
c. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred.
d. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Person against the Company or others, and (ii) any liabilities the Company may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by the Company is prohibited or limited by law, the Company agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law.
8. REPORTS AND DISCLOSURE UNDER THE SECURITIES ACTS.
With a view to making available to the Investor the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Investor to sell securities of the Company to the public without registration (“Rule 144”), the Company agrees, at the Company’s sole expense, to:
a. make and keep “current public information” available, as such term is understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act;
c. furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting and or disclosure provisions of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration; and
d. take such additional action as is reasonably requested by the Investor to enable the Investor to sell the Registrable Securities pursuant to Rule 144, including, without limitation, delivering all such legal opinions, consents, certificates, resolutions and instructions to the Company’s Transfer Agent as may be requested from time to time by the Investor at the Company’s expense and otherwise fully cooperate with Investor and Investor’s broker to effect such sale of securities pursuant to Rule 144.
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The Company agrees that damages may be an inadequate remedy for any breach of the terms and provisions of this Section 8 and that Investor shall, whether or not it is pursuing any remedies at law, be entitled to equitable relief in the form of a preliminary or permanent injunctions, without having to post any bond or other security, upon any breach or threatened breach of any such terms or provisions.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Buyer. The Buyer, or any Investor, may not assign its rights under this Agreement without the written consent of the Company other than to an affiliate of such Investor.
10. AMENDMENT OF REGISTRATION RIGHTS.
No provision of this Agreement may be (i) amended other than by a written instrument signed by both parties hereto or (ii) waived other than in a written instrument signed by the party against whom enforcement of such waiver is sought. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.
11. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.
b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by email (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses for such communications shall be:
If to the Company:
2929 North Commerce Parkway
Miramar, FL 33025
Attention: Hing C. Wong and Nicole Valdivieso, Esq.
E-mail: hingwong@hcwbiologics.com and legal@hcwbiologics.com
With a mandatory copy (which shall not constitute notice) to:
Clark Hill
130 East Randolph Street
Suite 3900
Chicago, IL 60601
Attention: James F. Groth
Email: jgroth@clarkhill.com
If to the Investor:
Square Gate Capital Master Fund, LLC -with a mandatory copy to (that shall not constitute notice)
Series 4
40 Wall Street
Floor 28, Suite 2728
New York, NY 10005
E-mail: eloc@squaregatecapital.com
Attention: Christopher Perugini, Managing Partner
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Lucosky Brookman LLP
101 Wood Avenue South
Woodbridge, NJ 08830
E-mail: sbrookman@lucbro.com
Attention: Seth Brookman
or at such other address and/or email address and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) business days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s email account containing the time, date, recipient email address, as applicable, and an image of the first page of such transmission or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by email or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
c. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.
d. Any disputes, claims, or controversies hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein shall be referred to and resolved solely and exclusively by binding arbitration to be conducted before JAMS, or its successor pursuant the expedited procedures set forth in the JAMS Comprehensive Arbitration Rules and Procedures (the “Rules”), including Rules 16.1 and 16.2 of those Rules. The arbitration shall be held in New York, New York, before a tribunal consisting of three (3) arbitrators each of whom will be selected in accordance with the “strike and rank” methodology set forth in Rule 15. Either party to this Agreement may, without waiving any remedy under this Agreement, seek from any federal or state court sitting in the Southern District of New York any interim or provisional relief that is necessary to protect the rights or property of that party, pending the establishment of the arbitral tribunal. The costs and expenses of such arbitration shall be paid by and be the sole responsibility of the Company, including but not limited to the Buyer’s attorneys’ fees and each arbitrator’s fees. The arbitrators’ decision must set forth a reasoned basis for any award of damages or finding of liability. The arbitrators’ decision and award will be made and delivered as soon as reasonably possible and in any case within sixty (60) days’ following the conclusion of the arbitration hearing and shall be final and binding on the parties and may be entered by any court having jurisdiction thereof.
e. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.
f. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
g. This Agreement and the Purchase Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.
h. Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties hereto.
i. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
j. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission or by e-mail in a “.pdf” format data file of a copy of this Agreement bearing the signature of the party so delivering this Agreement.
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k. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
l. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.
m. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the Execution Date.
THE COMPANY: |
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HCW BIOLOGICS INC. |
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By: |
/s/ Hing C. Wong |
Name: Hing C. Wong |
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Title: Founder and Chief Executive Officer |
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BUYER: |
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SQUARE GATE CAPITAL MASTER FUND, LLC – SERIES 4 |
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By: |
/s/ Christopher Perugini |
Name: Christopher Perugini |
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Title: Managing Partner |
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EXHIBIT A
TO REGISTRATION RIGHTS AGREEMENT
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[ ] [ ], 2025
Equiniti Trust Company, LLC
48 Wall St
Floor 23
New York, NY 10005
Re: EFFECTIVENESS OF REGISTRATION STATEMENT
Ladies and Gentlemen:
We are counsel to HCW Biologics Inc., a corporation incorporated in the State of Delaware (the “Company”), and have represented the Company in connection with that certain Equity Purchase Agreement, dated as of February 20, 2025 (the “Purchase Agreement”), entered into by and between the Company and Square Gate Capital Master Fund, LLC—Series 4 (the “Buyer”) pursuant to which the Company has agreed to issue to the Buyer shares of common stock of the Company, par value $0.0001 per share (the “Common Stock”), in an amount up to Twenty Million Dollars ($20,000,000.00), which amount may be increased pursuant to the terms and conditions set forth in the Purchase Agreement (the “Put Shares”), in accordance with the terms of the Purchase Agreement. In connection with the transactions contemplated by the Purchase Agreement, the Company has registered with the U.S. Securities & Exchange Commission the following shares of Common Stock:
(1) Put Shares to be issued to the Buyer upon purchase from the Company by the Buyer from time to time in accordance with the Purchase Agreement; and
(2) Commitment Shares which were issued to the Buyer pursuant to the Purchase Agreement.
Pursuant to the Purchase Agreement, the Company also has entered into a Registration Rights Agreement, of even date with the Purchase Agreement with the Buyer (the “Registration Rights Agreement”) pursuant to which the Company agreed, among other things, to register the Put Shares and the Commitment Shares under the Securities Act of 1933, as amended (the “Securities Act”). In connection with the Company’s obligations under the Equity Purchase Agreement and the Registration Rights Agreement, on February 20, 2025, the Company filed a Registration Statement (File No. 333-[ ]) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the resale of the Put Shares and the Commitment Shares.
In connection with the foregoing, we advise you that a member of the SEC’s staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the Securities Act at [ ] [A.M./P.M.] on [ ], 2025 and we have no knowledge, after telephonic inquiry of a member of the SEC’s staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Put Shares are available for resale under the Securities Act pursuant to the Registration Statement and may be issued without any restrictive legend.
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Very truly yours, [Company Counsel] |
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By: |
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cc: Square Gate Capital Master Fund, LLC - Series 4
Appendix B
BINDING TERM SHEET FOR CONVERSION OF SENIOR SECURED NOTES
HCW Biologics Inc. (the “Company”) and the undersigned holders (each, a “Noteholder”) of promissory notes of the Company are parties to (1) that certain Amended and Restated Senior Secured Note Purchase Agreement dated as of July 2, 2024, as amended (the “Note Purchase Agreement”), pursuant to which the Company issued to each Noteholder a Senior Secured Promissory Note representing each Noteholder’s investment in the Company (as amended, the “Notes”), (2) that certain Amended and Restated Pledge Agreement dated as of July 2, 2024 (the “Pledge Agreement”), and (3) that certain Amended and Restated Escrow Agreement dated as of July 2, 2024 (the “Escrow Agreement”). Capitalized terms used in this Term Sheet without further definition are used herein as defined in the Note Purchase Agreement.
Pursuant to Section 6 of the Note Purchase Agreement, the parties agreed to “negotiate in good faith terms and conditions for an amendment to [the Note Purchase Agreement]” under which the Notes would be converted into shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”), following final resolution of the Arbitration and a bona fide equity financing with proceeds of at least $5.0 million. The Arbitration has been resolved and dismissed, and the Company completed a $6.9 million equity financing on November 18, 2024.
This Binding Term Sheet sets forth the principal terms upon which the Company and the Noteholders have agreed that the outstanding principal and accrued interest under the Notes will be converted to shares of Common Stock (the “Conversion”).
The parties agree that they will execute appropriate amendments to the Note Purchase Agreement, Notes, Pledge Agreement and Escrow Agreement (together, the “Amendment”) providing for such conversion in accordance with this Binding Term Sheet, such Amendment to be effective upon approval of the Conversion at a special meeting of the Company’s stockholders to be called and held as soon as commercially practicable after the execution of this Binding Term Sheet (“Stockholder Approval”).
Conversion Terms Subject to Stockholder Approval: |
The Company has scheduled a Special Stockholders’ Meeting for March 31, 2025, at which time the stockholders of the Company will be asked to approve the conversion terms. None of the Noteholders will be entitled to vote for this measure. |
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Conversion Price: |
Outstanding Principal amount of the Notes will be converted into shares of Common Stock (“Conversion Shares”) at $0.65 per share, as adjusted for any stock split, reverse stock split, stock dividend, combination or other recapitalization with respect to the Common Stock (the “Conversion Price”) as promptly as commercially practicable following Stockholder Approval. Any unpaid accrued interest under the Notes will be paid in cash upon Conversion thereof. In connection with the Conversion, the Notes will be cancelled and all converting Noteholders’ rights to payments of principal, interest, bonus and other amounts in respect thereof will be extinguished. |
Warrants: |
Each converting Noteholder will receive warrants (“Warrants”) to purchase a number of shares of Common Stock equal to 50% of the number of Conversion Shares received by such Noteholder at an exercise price equal to the Conversion Price, exercisable for a period of 5-years from the date of issuance. |
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Lock-up: |
The Conversion Shares will be subject to a 180-day lock-up period following the issuance thereof (the “Lock-up Period”). |
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Registration: |
Conversion Shares and shares of Common Stock underlying the Warrants will not be registered upon issuance. The Company will prepare and file a resale registration statement with the SEC with respect to such shares and make commercially reasonable efforts to cause such registration statement to be declared effective at the end of the Lock-up Period. |
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B-1
Allocation of Wugen Proceeds: |
The Amendment will provide that, notwithstanding conversion of the Notes, the Pledged Shares will remain in Escrow under the Escrow Agreement until occurrence of a Mandatory Prepayment Event. Following a Mandatory Prepayment Event, the Company will receive and retain 48.45% of the Wugen Proceeds, and the converting Noteholders will receive a pro rata share of 51.55% of the Wugen Proceeds equal to the quotient of the principal amount of the Noteholder’s converted Note divided by $6,905,000. See Exhibit A for a table setting forth the post-conversion Common Stock and Warrants that would be held by each Noteholder, as well as the number of Wugen Shares the proceeds of which would be allocated to them, in the event of conversion by all Noteholders. |
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Execution |
Noteholders’ signed term sheet to be returned to Nicole Valdivieso, Esq., VP Legal Affairs, HCW Biologics Inc., nicolevaldivieso@hcwbiologics.com by the close of business on February 20, 2025. |
B-2
ACCEPTED AND AGREED as of February 20, 2025:
HCW BIOLOGICS INC. |
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By: |
/s/ Hing C. Wong
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Its: |
Founder and CEO |
NOTEHOLDERS: |
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O’NEILL AAF LLC |
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By: |
/s/ George D. O’Neill, Jr.
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/s/ Hing C. Wong
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George D. O’Neill, Jr., Manager |
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DR. HING C. WONG |
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/s/ Chris Cheung
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/s/ Ling Cheung
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CHRIS CHEUNG |
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LING CHEUNG |
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/s/ Michael Poon
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/s/ Manwah Wong
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MICHAEL POON |
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MANWAH WONG |
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/s/ Ho Cheung Wong
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/s/ Hoi Sang Yeung
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HO CHEUNG WONG |
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HOI SANG YEUNG |
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/s/ R. Kemp Riechmann
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/s/ Benjamin J. Patz
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R. KEMP RIECHMANN, Trustee of Revocable Trust of Roland Kemp Riechman |
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BENJAMIN J. PATZ |
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/s/ Rebecca Byam
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/s/ Scott T. Garrett
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REBECCA BYAM |
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SCOTT T. GARRETT |
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/s/ Gary M. Winer
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/s/ Rick S. Greene
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GARY M. WINER |
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RICK S. GREENE |
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/s/ Lee Flowers
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LEE FLOWERS |
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GERALD M. KLUFT, Trustee of the Gerald M. Kluft Revocable Trust |
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/s/ Kathy Chiu
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KATHY CHIU |
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JACK BROOKS |
B-3
Exhibit A
B-4
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated May 15, 2024 (except for Note 16, as to which the date is March 28, 2025), with respect to the consolidated financial statements included in the Annual Report of HCW Biologics Inc. on Form 10-K for the year ended December 31, 2024. We consent to the incorporation by reference of said report in the Registration Statements of HCW Biologics Inc. on Form S-3 (File No. 333-266991) and Form S-8 (File No. 333-258067).
/s/ GRANT THORNTON LLP
Miami, Florida
March 28, 2025
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-258067 on Form S-8 and Registration Statement No. 333-266991 on Form S-3 of HCW Biologics Inc. of our report dated March 28, 2025, on the balance sheet of HCW Biologics Inc. as of December 31, 2024, and the statements of operation, changes in stockholders’ equity (deficit) and cash flows for the year ended, appearing in this Annual Report on Form 10-K.
/s/ Crowe LLP
Indianapolis, Indiana
March 28, 2025
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Hing C. Wong, certify that:
/s/ Hing C. Wong |
Hing C. Wong |
Founder and Chief Executive Officer |
(Principal Executive Officer) |
Date: March 28, 2025
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rebecca Byam, certify that:
/s/ Rebecca Byam |
Rebecca Byam |
Chief Financial Officer |
(Principal Financial Officer) |
Date: March 28, 2025
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HCW Biologics Inc. (the “Company”) on Form 10-K for the year ended December 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: March 28, 2025 |
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By: |
/s/ Hing C. Wong |
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Hing C. Wong |
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Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HCW Biologics Inc. (the “Company”) on Form 10-K for the year ended December 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: March 28, 2025 |
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By: |
/s/ Rebecca Byam |
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Rebecca Byam |
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Chief Financial Officer |
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(Principal Financial Officer) |
