HCW Biologics Inc. Stock Compensation Disclosure

11. Stock-based Compensation

On June 21, 2021, the 2021 Plan was adopted by the Company’s board of directors and approved by the Company’s stockholders. As of the adoption date, the 2019 Plan was terminated. No terms were changed for grants previously awarded under the 2019 Plan, and the Company concluded a modification did not occur. Under the 2019 Plan, the Company primarily granted employees incentive stock options, which had a maximum term of ten years from the date of the grant. Generally, the incentive stock options granted under the 2019 Plan have a four-year, service-based vesting period. All of the options granted under the 2019 Plan had an exercise price equal to the fair value of a share of Common Stock on the date of the grant, according to Company policy.

The 2021 Plan permits the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, and stock bonus awards. The 2021 Plan initially reserved 86,109 shares of Common Stock, including the transfer of remaining shares reserved under the 2019 Plan. In addition, the number of shares reserved for issuance under the 2021 Plan will increase automatically on the first day of each fiscal year beginning with the 2022 fiscal year.

Under the 2021 Plan, the term of each stock option must be stated in the stock award agreement. In the case of an incentive stock option, the term will be ten years from the date of grant, or such shorter term as may be provided in the stock award agreement. Moreover, in the case of an incentive stock option granted to a participant who owns stock representing more than 10% of the total combined voting power of all classes of our stock or the stock of any of our affiliates, the term of the incentive stock option will be five years from the date of grant or such shorter term as may be provided in the stock award agreement. Under the 2021 Plan, the Company continues to have a policy to grant options with an exercise price equal to the fair value of a share of Common Stock, as determined by the closing price on Nasdaq on the grant date.

The exercise price of the underlying stock options and the fair value of the Company’s Common Stock for stock options as of the reporting date. The intrinsic value of stock options exercised during the years ended December 31, 2024 and 2025 was $14,484 and $1,654, respectively. The weighted-average fair value of options granted during the years ended December 31, 2024 and 2025 was $33.77 and $2.44 per share, respectively.

For stock option grants with service-based vesting, stock-based compensation expense represents the portion of the grant date fair value of employee stock option grants recognized over the requisite service period of the awards on a straight-line basis, net of estimated forfeitures. For options that vest upon the achievement of performance milestones, the Company estimates fair value at the date of grant and compensation expense is recognized using the accelerated attribution method when it is determined that the performance criteria are probable of being met.

In determining the grant date fair value of the stock-based awards, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and its determination generally requires significant judgment.

Fair Value of Common Stock—Since the completion of our initial public offering on July 19, 2021, the fair value of each share of Common Stock underlying stock option grants is based the quoted market price on the primary stock exchange on which our Common Stock is traded on the day the stock award or option is granted.

Expected term—The expected term of stock options is determined using the “simplified” method, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option due to the Company’s lack of sufficient historical data.

Expected volatility—The expected volatility was derived from the historical stock volatilities of comparable peer public companies within our industry.

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury Bond in effect at the time of grant for periods corresponding with the expected term.

Dividend yield—The expected dividend yield is 0% because the Company has not historically paid, and does not expect, for the foreseeable future, to pay a dividend on its Common Stock.

For the year ended December 31, 2024, for options with service-based vesting conditions, the Company recognized $61,250 of employee stock-based compensation expense in research and development expenses and $947,762 of employee stock-based compensation in general and administrative expenses in the accompanying audited statement of operations.

For the year ended December 31, 2025, for options with service-based vesting conditions, the Company recognized $48,069 of employee stock-based compensation expense in research and development expenses and $720,555 of employee stock-based compensation in general and administrative expenses in the accompanying audited statement of operations. As of December 31, 2025, the Company had an aggregate of $23,697 of unrecognized employee stock-based compensation cost for options with service-based vesting, which is expected to be recognized over a weighted average vesting period of 1.14 years.