HCW Biologics(HCWB) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's Q1 2025 financial statements, including balance sheets, statements of operations, changes in equity, and cash flows, along with management's discussion of the critical financial condition, operational results, liquidity challenges, and internal controls Financial Statements For the quarter ended March 31, 2025, the company reported a significant decrease in revenue and a net loss of $2.2 million, an improvement from a $7.5 million loss in the prior-year period, primarily due to a large credit from legal expense reimbursements. The balance sheet reflects a deteriorating financial position, with cash reserves dwindling to $1.1 million and a growing stockholders' deficit of $8.6 million. The statements highlight significant liquidity challenges and a substantial doubt about the company's ability to continue as a going concern, which is further detailed in the notes Condensed Balance Sheets As of March 31, 2025, the company's total assets decreased to $26.3 million from $30.2 million at year-end 2024, driven by a significant drop in cash and cash equivalents from $4.7 million to $1.1 million. Total liabilities stood at $34.8 million, with current liabilities of $27.1 million exceeding total current assets of $1.9 million. The stockholders' deficit widened from $6.8 million to $8.6 million, indicating a worsening financial position Condensed Balance Sheet Summary (Unaudited) | Account | Dec 31, 2024 | Mar 31, 2025 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $4,674,572 | $1,107,613 | | Total current assets | $5,698,482 | $1,894,708 | | Total assets | $30,236,578 | $26,285,406 | | Liabilities & Stockholders' Deficit | | | | Total current liabilities | $29,628,885 | $27,142,090 | | Total liabilities | $37,006,750 | $34,847,454 | | Total stockholders' deficit | $(6,770,172) | $(8,562,048) | Condensed Statements of Operations For the three months ended March 31, 2025, revenues plummeted to $5,065 from $1.1 million in the prior-year period. The company reported a net loss of $2.2 million, a significant improvement from a $7.5 million net loss in Q1 2024. This improvement was primarily driven by a net credit in legal expenses of $1.7 million (due to a $2.0 million insurance reimbursement), which offset a $4.4 million expense in the prior year. Research and development expenses decreased, while general and administrative costs rose Condensed Statement of Operations (Unaudited, Three Months Ended March 31) | Metric | 2024 | 2025 | | :--- | :--- | :--- | | Revenues | $1,126,712 | $5,065 | | Net revenues | $614,747 | $1,013 | | Research and development | $2,123,284 | $1,478,711 | | General and administrative | $1,566,092 | $2,227,597 | | Legal expenses, net | $4,419,034 | $(1,739,493) | | Loss from operations | $(7,493,663) | $(1,965,802) | | Net loss | $(7,468,061) | $(2,196,875) | | Net loss per share, basic and diluted | $(0.20) | $(0.05) | Condensed Statements of Changes in Stockholders' Equity (Deficit) For the three months ended March 31, 2025, the total stockholders' deficit increased from $6.8 million to $8.6 million. The change was primarily driven by the net loss of $2.2 million for the period, slightly offset by stock-based compensation and minor proceeds from stock option exercises - The balance of stockholders' deficit increased from $(6,770,172) at the beginning of the quarter to $(8,562,048) at the end of the quarter, mainly due to the net loss of $(2,196,875)[17] Condensed Statements of Cash Flows For the first quarter of 2025, net cash used in operating activities was $3.5 million, similar to the prior year. There were no investing activities. Financing activities resulted in a net cash use of $53,103, a stark contrast to the $4.2 million provided by financing in Q1 2024. Consequently, cash and cash equivalents decreased by $3.6 million during the quarter, ending at $1.1 million Cash Flow Summary (Unaudited, Three Months Ended March 31) | Activity | 2024 | 2025 | | :--- | :--- | :--- | | Net cash used in operating activities | $(3,603,870) | $(3,513,856) | | Net cash used in investing activities | $(129,709) | $0 | | Net cash provided by (used in) financing activities | $4,222,554 | $(53,103) | | Net increase (decrease) in cash | $488,975 | $(3,566,959) | | Cash and cash equivalents at end of period | $4,084,076 | $1,107,613 | Notes to Condensed Interim Financial Statements The notes disclose critical information, including a reverse stock split effective April 11, 2025, and a formal conclusion that substantial doubt exists about the company's ability to continue as a going concern due to sustained operating losses and negative working capital. Key events include legal disputes with its construction contractor BE&K, the settlement of arbitration with ImmunityBio, and various financing efforts to remain solvent and compliant with Nasdaq listing rules. Subsequent events after the quarter-end, such as a $5.0 million equity offering and the conversion of $6.6 million in secured notes, are crucial to the company's immediate future - Management concluded that there is substantial doubt about the Company's ability to continue as a going concern for at least 12 months from the issuance date of the financial statements[26][41][42] - A 1-for-40 reverse stock split was effective on April 11, 2025[24] - The company is involved in legal proceedings with its general contractor, BE&K, which has filed a complaint and mechanics liens related to unpaid invoices for the construction of its new manufacturing facility[29][90][93] - Subsequent to quarter-end, the company closed a $5.0 million equity offering, converted $6.6 million of secured notes to equity, and gained access to a $40.0 million equity line of credit (ELOC) to improve its financial position and regain Nasdaq compliance[95][98][36] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's dire financial condition, highlighting the substantial doubt about its ability to continue as a going concern. The analysis focuses on the sharp decline in Q1 2025 revenue and the factors driving the reduced net loss, primarily a one-time insurance reimbursement for legal fees. The discussion details the company's strategy to survive, which hinges on a new financing plan launched after settling a major arbitration. This plan includes an equity line of credit, a potential $7.0 million license fee from WY Biotech, and recent equity offerings. The company is also actively working to regain compliance with all Nasdaq listing requirements to maintain its public listing Overview The company is a clinical-stage biopharmaceutical firm focused on developing immunotherapies for diseases linked to chronic inflammation and aging, a condition known as "inflammaging." It utilizes two proprietary platforms, TOBI™ and TRBC, to create its drug candidates. Following a settlement with ImmunityBio, the company has reassessed its pipeline to focus on protein-based immunotherapies for life-threatening diseases like pancreatic cancer and quality-of-life conditions such as alopecia areata - The company focuses on developing immunotherapies for diseases promoted by chronic inflammation, particularly age-related "inflammaging"[102] - The company utilizes two drug discovery platforms: the legacy TOBI™ platform and the new TRBC platform for creating multi-specific cytokines and immune-cell engagers[105][108] - Following a legal settlement, the company has clarified its intellectual property and is focusing its clinical development on select product candidates like HCW9302, while seeking partners for non-core assets[106][107] Business Highlights and Clinical Development Key business developments include amending the WY Biotech license agreement, which could yield a $7.0 million fee in June 2025, and closing a $5.0 million equity offering in May 2025. However, the project to build a manufacturing facility is stalled due to legal action from the contractor over unpaid invoices. The company is focused on regaining Nasdaq compliance, having achieved the minimum bid price requirement and making progress on other rules. Clinically, the FDA cleared an IND for a Phase 1 trial of HCW9302 for alopecia areata, expected to start in Q3 2025. The company is also seeking commercial partners for its HCW9206 compound for CAR-T therapies - The company expects to receive a $7.0 million license fee from WY Biotech in June 2025, pending WY Biotech's acceptance of a technology transfer report[111][119] - Closed a $5.0 million equity offering on May 15, 2025, and restructured existing warrants to a lower exercise price[113] - The company regained compliance with the Nasdaq minimum bid price rule and is working to meet other listing requirements by a June 16, 2025 deadline[117][120] - Received FDA clearance to initiate a Phase 1 clinical trial for HCW9302 in patients with alopecia areata, with the study expected to begin in Q3 2025[124][125] Results of Operations Comparing Q1 2025 to Q1 2024, revenues fell drastically from $1.1 million to just $5,065. Research and development expenses decreased by 30% to $1.5 million, mainly due to reduced manufacturing and preclinical activities. General and administrative expenses rose 42% to $2.2 million, driven by accretion expense on secured notes and increased professional fees. Legal expenses showed a net credit of $1.7 million due to an insurance reimbursement, compared to a $4.4 million expense in the prior year, which was the primary reason for the smaller net loss of $2.2 million Comparison of Operating Results (Three Months Ended March 31) | Metric | 2024 | 2025 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $614,747 | $1,013 | $(613,734) | (99.8)% | | Research and development | $2,123,284 | $1,478,711 | $(644,573) | (30)% | | General and administrative | $1,566,092 | $2,227,597 | $661,505 | 42% | | Legal expenses, net | $4,419,034 | $(1,739,493) | $(6,158,527) | N/A | | Net loss | $(7,468,061) | $(2,196,875) | $5,271,186 | (70.6)% | - The decrease in R&D expenses was primarily due to a $313,503 (54%) decline in manufacturing and materials costs and a $107,980 (38%) decline in preclinical expenses as certain studies were completed[152][154][155] - The increase in G&A expenses was mainly due to a $273,059 accretion expense for the Secured Notes' bonus payment and a $100,563 increase in professional services fees[158][160][162] Liquidity and Capital Resources The company's liquidity is critically low, with only $1.1 million in cash as of March 31, 2025, leading to substantial doubt about its ability to operate for the next twelve months. Operations are funded through stock sales, debt, and license revenues. The company faces significant liabilities, including $12.4 million in unpaid legal fees and potential acceleration of its $6.5 million bank loan due to construction-related liens. To address this, the company has secured access to a $40 million equity line of credit, raised $5.0 million in a May 2025 offering, converted $6.6 million of debt to equity, and anticipates a $7.0 million license fee. Despite these efforts, management concluded the substantial doubt was not alleviated - As of March 31, 2025, the company had $1.1 million in cash and cash equivalents, and management concluded there was substantial doubt about its ability to continue as a going concern[170][185] - The company has significant outstanding liabilities, including $12.4 million in unpaid legal fees from a past arbitration and is facing lawsuits from its general contractor (BE&K) over unpaid construction invoices[174][172] - Key financing activities to improve liquidity include a $40M Equity Purchase Agreement (ELOC), a potential $7.0M license fee from WY Biotech, a $5.0M equity offering (May 2025), and the conversion of $6.6M in Secured Notes to equity (May 2025)[178][177][182] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposures are interest rate sensitivity on its cash and cash equivalents and the marketability risk of its investment in Wugen common stock, which is a private company with limited liquidity - Primary market risk is interest rate sensitivity. The company is also exposed to marketability risk for its Wugen common stock investment, as there is no public market for these shares[201] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2025, and concluded that they were effective. There were no material changes in internal control over financial reporting during the quarter - Based on an evaluation as of March 31, 2025, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[203] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[206] PART II. OTHER INFORMATION This section details recent legal proceedings, confirms no material changes to risk factors, outlines unregistered equity sales, and provides further information on the Senior Secured Note financing and its conversion to equity Legal Proceedings The company has resolved its major arbitration with ImmunityBio through a settlement agreement that clarified intellectual property rights, with no monetary payments required by either party. However, the company is now facing new legal challenges. On April 17, 2025, its general contractor, BE&K, filed a complaint related to unpaid invoices for the construction of its manufacturing facility, and other subcontractors have also filed claims - The company entered into a confidential settlement agreement with ImmunityBio on July 13, 2024, resolving a major arbitration. The settlement involved transferring ownership of certain TOBI-based molecule IP to ImmunityBio while retaining key rights to lead product candidates like HCW9218 (for non-cancer diseases), HCW9302, and HCW9206[210][211] - On April 17, 2025, the company received a complaint filed by its general contractor, BE&K Building Group, related to the construction of its new facility. Other subcontractors have also filed counterclaims and cross-claims[213] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors disclosed in the Annual Report have occurred[214] Unregistered Sales of Equity Securities and Use of Proceeds This section details several sales of unregistered securities. In February 2024, the company sold $2.5 million of common stock to officers and directors. In November 2024, it issued unregistered warrants to purchase 6,717,000 shares of common stock in a private placement. In March 2025, it issued 384,615 shares as a commitment fee for an Equity Purchase Agreement - In February 2024, the company sold 1,785,718 unregistered shares of common stock to certain officers and directors for aggregate proceeds of $2.5 million[215] - In November 2024, as part of a larger offering, the company issued unregistered warrants to purchase up to 6,717,000 shares of common stock in a private placement[217] - On March 12, 2025, the company issued 384,615 unregistered shares of common stock as a commitment fee for its Equity Purchase Agreement with Square Gate Capital[219] Other Information This section provides detailed information on the Senior Secured Note financing, which raised an aggregate of $6.9 million by October 2024. The notes are secured by the company's equity in Wugen, Inc. A significant development was the subsequent agreement to convert $6.6 million of this debt into equity. This conversion, approved by stockholders on March 31, 2025, and effected on May 7, 2025, was a key part of the company's plan to improve its stockholders' equity and regain compliance with Nasdaq listing rules - The company issued an aggregate of $6.9 million in Senior Secured Notes between March and October 2024, which are secured by the company's equity ownership in Wugen, Inc[225][226][228] - On March 31, 2025, stockholders approved the conversion of at least $6.6 million of the Secured Notes into common stock and warrants[233] - The conversion was completed on May 7, 2025, which cancelled the notes and resulted in the issuance of unregistered common stock and warrants to the participating noteholders[234] Exhibits This section lists the exhibits filed with the Quarterly Report, including agreements related to the Equity Purchase Agreement, various promissory notes, placement agency agreements, and officer certifications