HCW Biologics has arranged up to $10.2 million in secured debt financing from Streeterville Capital, with $3 million initially paid to the company, less $30,000 in transaction costs. The other $7 million was placed in an account of a new wholly owned subsidiary under the lender’s control arrangements, rather than being transferred directly into the company’s operating account.
The financing consists of two notes with different interest rates and access terms. The company says it plans to use the proceeds for clinical development, business-development initiatives and general corporate purposes.
Key details
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Two notes, with $10.2 million in total stated principal: The first note has $3.2 million in principal and an 8% annual interest rate. It includes a $240,000 original issue discount and $30,000 for the lender’s transaction costs in its initial balance. The second note has $7 million in principal and bears interest at 5% annually.
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The $7 million is held under a controlled-account arrangement: HCW Biologics’ newly formed subsidiary, HCWB Holdings, owns the account where the funds were deposited. The money is subject to an agreement involving the lender and the bank. When the company exchanges part of the second note for a new note on the first note’s terms, a corresponding amount is released from the account and transferred to the company’s operating account.
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The company can move portions of the second note into the more expensive first-note structure: Each time the outstanding balance of all first notes falls by $1 million, the company may, subject to conditions, exchange $750,000 of the second note for a new note with the first note’s terms. The parties can agree to a different amount. This is an exchange of debt for debt, not an issuance of shares.
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Both notes mature two years after issuance and can be prepaid with a premium: The company may repay either note early, in whole or in part, but must pay a premium equal to 10% of the balance being prepaid.
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The lender has repayment rights beginning six months after closing: Under the first note, the lender may seek monthly redemptions of up to $125,000, plus make-whole interest calculated through maturity. The lender also has limited redemption rights under both notes, subject to conditions. Amounts due after a redemption notice must be paid in cash within two trading days.
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The first note may incur a substantial monitoring fee: If it remains outstanding 90 days after closing, a one-time fee is added to its balance. The fee is calculated so that the balance, including the fee, equals the existing balance divided by 0.85. The fee and interest on it are forgiven over time in proportion to cash repayments if, on a payment date, at least one specified condition applies: 20-day trading volume is below $2 million, the stock’s closing bid has been below $30 for each of the previous 30 trading days, or the company is in Nasdaq’s delisting protocol.
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Trigger events can increase the debt balance and lead to default remedies: The notes allow the lender, after specified major or minor trigger events, to increase the applicable balance by 10% or 5%, respectively, subject to limits in the agreements. If the company does not cure a trigger event after a written demand, it becomes an event of default, allowing remedies that include accelerating the balance and charging default interest.
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The financing is secured by subsidiary assets and ownership: HCWB Holdings guarantees the obligations, and HCW Biologics has pledged all of its membership interests in the subsidiary. The account holding the $7 million is also subject to the lender’s control arrangement.
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A placement agent is being paid for arranging the financing: Maxim Group is entitled to a cash fee equal to 7% of gross proceeds, plus reimbursement of out-of-pocket expenses and reasonable legal fees capped at $30,000.
Plain-English implications
The financing provides HCW Biologics with an initial cash infusion and a further $7 million that becomes available through the specified exchange process. In return, the company takes on secured debt with interest, early-repayment premiums and lender redemption rights. The subsidiary guarantee and pledge also give the lender claims tied to the subsidiary and the funds held in its account.