HCW Biologics Inc. — Q1 2024 Form 10-Q
Period: Three months ended March 31, 2024; unaudited. HCW Biologics is a clinical-stage biopharmaceutical company developing immunotherapies for cancer and other age-related diseases. It has no approved products and has not generated commercial product sales. Reported revenue to date came from Wugen licensing and supply arrangements.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Revenue | $1.13 million | $41,883 |
| Cost of revenue; net revenue | $512,000; $615,000 | $29,000; $13,000 |
| Operating expenses | $8.11 million | $5.37 million |
| Research and development | $2.12 million | $2.26 million |
| General and administrative | $5.99 million | $3.12 million |
| Operating loss; net loss | $7.49 million; $7.47 million | $5.36 million; $5.07 million |
| Basic and diluted loss per share | $0.20 | $0.14 |
| Net cash used in operations | $3.60 million | $3.64 million |
| Cash used in investing; cash from financing | $130,000; $4.22 million | $300,000; $2,000 |
| Cash and cash equivalents at quarter end | $4.08 million | $18.39 million at March 31, 2023 |
| Total assets; total liabilities | $30.43 million; $21.69 million | $28.51 million; $15.05 million at December 31, 2023 |
| Debt, net | $8.27 million | $6.30 million at December 31, 2023 |
Q1 2024 current assets were $6.21 million versus current liabilities of $13.41 million. Stockholders’ equity was $8.74 million, down from $13.46 million at year-end. The Cogent Bank loan had approximately $6.4 million principal outstanding, bears 5.75% interest, and matures in 2027. Senior secured notes issued in March bear 9% interest, mature in 2026, and are secured by the company’s 5.6% interest in Wugen. The company reported compliance with Cogent loan covenants.
Changes and notable items
- Revenue increased substantially, reflecting Wugen purchases of development-supply materials; management attributed the prior-year low level to Wugen limiting purchases amid clinical-program changes and manufacturing delays. Revenue remained entirely dependent on Wugen.
- R&D expense declined 6%, mainly as HCW9302 preclinical and IND-enabling work wound down; manufacturing and materials expense more than doubled.
- G&A expense rose 92%, primarily because professional services increased to $4.77 million, including $4.1 million of Altor/NantCell-related legal fees versus $1.1 million a year earlier. Management expected material defense costs through Q3 2024.
- Q1 financing included a $2.5 million private placement of common stock and $2.0 million of secured notes. The stock placement issued 1,785,718 shares at $1.40 per share, a reported premium to recent market prices.
- Property and equipment increased to $22.59 million. Construction commitments for the new headquarters and manufacturing facility were $2.8 million at quarter end; $2.19 million of capital expenditures were accrued but unpaid.
- The company recorded a $5.3 million credit-loss reserve at December 31, 2023 for a project-financing interest reserve deposit that the lender failed to return after termination of the credit agreement. Recovery remained uncertain; the company said it would pursue available remedies.
Outlook, risks and contingencies
- Going concern: Management concluded substantial doubt remains about the company’s ability to continue as a going concern for at least 12 months from issuance. It expects continuing losses and says additional capital is necessary; if financing and cost reductions are insufficient, operations may be curtailed or cease.
- The company was pursuing up to $10 million in secured-note bridge financing; $3.6 million had been issued by the financial-statement issuance date, including $1.6 million purchased by the CEO on May 13. Management said full subscription could fund operations until business-development or further capital-raising transactions, but gave no assurance of success.
- After quarter end, the company disclosed a criminal scheme that misdirected approximately $1.3 million from company accounts and caused default on a legally binding $8 million secured-note purchase commitment. Management said the incident did not affect the reported Q1 financial position, results or cash flows; an investigation and control remediation were underway.
- Altor/NantCell arbitration involves claims including alleged trade-secret misappropriation and requests for damages and intellectual-property-related relief. A separate Delaware complaint seeks a 50% contribution toward legal-fee advances for the CEO. The company said potential losses could not be reasonably estimated and no accrual was recorded; an adverse outcome could materially affect the business.
- Clinical plans include a UPMC-sponsored Phase 2 HCW9218 ovarian-cancer study, with enrollment expected in the second half of 2024; a planned randomized Phase 2 pancreatic-cancer study with the NCI; and an HCW9302 IND submission planned for Q3 2024. These are plans, not assured milestones. Management anticipated higher clinical spending if financing permits.
- Phase 1 HCW9218 studies were completed in February 2024 and met the primary objective of identifying a recommended Phase 2 dose. The filing reported stable disease in 5 of 7 ovarian-cancer patients in one study and 2 of 15 patients in the pancreatic-cancer study; these limited results do not establish efficacy.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of March 31, 2024 due to two material weaknesses involving review and acceptance of financing proposals and processes for unusual significant transactions. A final remediation plan was expected by June 30, 2024.
- Other cited uncertainties include inflation, rising interest rates, supply-chain and geopolitical disruptions, facility-buildout delays and costs, and limited liquidity for the Wugen investment. No quantified financial guidance was provided.
Investor verification priorities
- Verify cash, near-term cash needs and financing raised after quarter end, including the status of the $8 million note commitment default, the $1.3 million loss, and any recovery or insurance proceeds.
- Track the secured-note financing against the $10 million target, its collateral and repayment terms, and any additional related-party funding.
- Assess the status and financial consequences of the Altor/NantCell arbitration and fee-contribution lawsuit, including any developments after the scheduled May 2024 hearing.
- Confirm whether the company’s control remediation was implemented and whether the material weaknesses have been resolved.
- Monitor Wugen purchases and supply revenue, as well as funding and execution of planned clinical trials and the HCW9302 IND submission.