HCW Biologics Inc. — Q2 2023 Form 10-Q
Business and period: Clinical-stage biopharmaceutical company developing immunotherapies for age-related diseases. This unaudited filing covers the three and six months ended June 30, 2023, compared with the same 2022 periods. Revenue to date came from its Wugen license and materials-supply arrangements; the company reported no commercial product sales.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $622,807 | $454,000 | $664,690 | $3,571,545 |
| Cost of revenue | $502,402 | $287,200 | $531,752 | $1,615,276 |
| Net revenue (revenue less cost) | $120,405 | $166,800 | $132,938 | $1,956,269 |
| Research and development | $1,616,666 | $1,969,882 | $3,872,479 | $3,759,558 |
| General and administrative | $3,014,260 | $1,707,995 | $6,131,550 | $3,588,597 |
| Operating loss | $(4,510,521) | $(3,511,077) | $(9,871,091) | $(5,391,886) |
| Net loss | $(4,304,420) | $(3,510,561) | $(9,375,106) | $(5,567,768) |
| Basic and diluted loss per share | $(0.12) | $(0.10) | $(0.26) | $(0.16) |
- Margins: Net revenue as a share of revenue was approximately 19% in Q2 2023 and 20% for the first half, versus approximately 37% and 55%, respectively, in 2022.
- Cash flow: Operating cash use was $13.0 million in the first half of 2023, compared with $4.3 million used in the prior-year period. Investing activities used $1.9 million, largely for property and equipment; financing provided $9,613. Cash and cash equivalents declined $14.9 million to $7.4 million.
- June 30 balance sheet: Short-term investments were $10.0 million, a $5.3 million interest-reserve deposit was restricted for debt interest, total assets were $39.5 million, and stockholders’ equity was $28.6 million. Current liabilities were $4.5 million.
- Debt and liquidity: The Cogent Bank loan had $6.5 million gross principal outstanding at 5.75%, with principal-and-interest payments scheduled to begin September 2023 and maturity in August 2027. A separate Prime facility of up to $26.3 million at 7% had no borrowings at June 30. The company reported obtaining required construction permits on August 10, 2023, satisfying the final condition to access the facility. Management stated cash and short-term investments were expected to fund operations for at least 12 months, while noting projections depend on assumptions and additional capital may be needed.
Material changes and developments
- First-half revenue fell sharply year over year, which management attributed to changes in Wugen’s clinical development plan, delays in ramping up its manufacturing process, and revenue-recognition criteria not being met for some transactions.
- Q2 R&D expense decreased 18%, mainly from lower manufacturing and preclinical costs, partly offset by higher clinical-trial costs. First-half R&D rose 3% as clinical-trial and depreciation costs increased.
- G&A expense rose 76% in Q2 and 71% in the first half. The main driver was professional and legal fees, including expenses related to Altor/NantCell proceedings; the filing reports $1.2 million of such legal fees in Q2 and a $2.3 million year-over-year increase in those fees for the first half.
- First-half operating cash use included the $5.3 million deposit to establish the Prime facility interest reserve. Property and equipment purchases were $1.9 million in cash, with additional capital expenditures accrued but unpaid.
- The company granted U.S. Patent No. 11,672,826 in June 2023 covering methods of using HCW9218 to treat multiple cancers.
Outlook, risks, and contingencies
- HCW9218 is being evaluated in two Phase 1/1b trials for solid tumors. Management reported no dose-limiting toxicity to date; it expected the University of Minnesota study to finish in the second half of 2023, with data planned for an industry conference before year-end. The company-sponsored pancreatic cancer trial was expected to complete its Phase 1b portion in late 2023 or early 2024, with a data readout planned for the first half of 2024.
- HCW9302 remains preclinical. The company was completing IND-enabling work and intended to submit an IND application in 2023. Management expected R&D spending to increase as development continues.
- The Prime facility is intended to finance construction of new headquarters, research laboratories, a vivarium, and manufacturing facilities. The company also planned to use part of its proceeds to refinance the Cogent loan and recoup $3.2 million advanced from operating capital. A $1.8 million debt-issuance cost is payable upon the first draw.
- Altor/NantCell’s claims against the company and its CEO, including trade-secret and contract-related allegations, are proceeding in JAMS arbitration. The company said a possible loss or range of loss could not be reasonably estimated and recorded no accrual. It expected material legal expenses to continue.
- Management cited inflation, rising rates, supply-chain and geopolitical uncertainty, lingering COVID-19 effects on clinical-site staffing, and risks of delays or cost overruns in trials, IND-enabling work, and headquarters construction. It intends to pursue non-dilutive funding, but may seek debt or equity financing if conditions permit; if adequate financing is unavailable, it may delay product development.
Facts investors should verify
- Revenue figures contain inconsistencies in the MD&A: the financial statements report Q2 revenue of $622,807 and first-half revenue of $664,690, while MD&A passages cite $662,807 and $644,690, respectively. Confirm the figures against the filed financial statements and any later correction.
- Track the timing and terms of the first draw under the Prime facility, including the $1.8 million fee, use of proceeds, and any refinancing of the Cogent loan.
- Monitor cash burn, the availability of non-dilutive funding, clinical and IND milestones, and whether the stated 12-month liquidity expectation remains supportable.
- Follow developments and potential costs or outcomes in the Altor/NantCell arbitration; the filing provides no estimable loss range.