HCW Biologics says its first quarter earnings per share was overstated by 80 cents, because it gave all the undistributed earnings to the common stock and none to the warrants

$2.19 was the wrong number.

HCW Biologics said on Friday that its accounts for the quarter ended March 31 should no longer be relied upon. The audit committee reached that conclusion on August 10, in consultation with management and with Crowe LLP, the company's auditor, and the filing says an amended quarterly report will follow.

The error is in one calculation. Earnings per share is worked out under the two-class method when a company has participating securities, meaning instruments that would share in a dividend if one were paid. HCW Biologics has such instruments in the form of warrants carrying non-forfeitable dividend rights, and it allocated 100 percent of its undistributed earnings to the common stock anyway.

The arithmetic

The company gives the two share counts. On a post-split basis it had 904,312 weighted-average common shares outstanding at March 31, and participating warrants exercisable for a further 524,501 shares.

Those two numbers set the split. The company says roughly 63.3 percent of the undistributed earnings should have gone to the common stock and roughly 36.7 percent to the participating securities, which is what those share counts produce.

Reported basic and diluted earnings per share was $2.19. The company calls that an overstatement of $0.80 a share. It does not state a corrected figure, and the subtraction it implies leaves $1.39.

The share counts are small because the reverse split took effect on June 30, and the filing states the figures on that post-split basis.

The control

Management concluded that a material weakness exists in the technical accounting review control over complex warrant instruments and financing transactions, including how contractual provisions and the legal interpretations attached to them are evaluated, at a sufficient level of precision. The remedies listed are more technical review and closer coordination with legal counsel and other advisers.

What has to be redone

Two things. The company intends to file a Form 10-Q/A restating the quarter, and it intends to amend or update a registration statement that carries the affected figures before that statement becomes effective. It also withdraws reliance on every earlier report, release and communication describing the March quarter.