Company: HCWB
Filing Date: 2025-05-09
Form Type: S-1
Source: 0001193125-25-116745
Chunk: 28

Company: HCW Biologics Inc.
Filing Date: 2025-05-09
Form: S-1
Chunk 28
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 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