Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and operating results together with our financial statements and the related notes appearing at the end of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in the section of the Annual Report on Form 10-K captioned “Risk Factors” and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a clinical-stage biotechnology company focused on developing proprietary new therapies to enhance the function of regulatory T cells (“Tregs”). Tregs are a subpopulation of T-lymphocytes consisting of CD4+CD25high hFOXP3+ cells that suppress inflammatory responses. Tregs were first discovered in 1995 by Dr. Shimon Sakaguchi and since their discovery, multiple lines of research have contributed to elucidate Treg biology and its role in health and disease. Tregs and their transcription factors have been shown to be essential to maintaining cellular homeostasis by regulating autoimmune and inflammatory responses and maintaining self-tolerance in mammals. Dysfunctional Tregs underlie numerous disease states, and this cellular dysfunction is driven by the chronic inflammatory environment and high levels of oxidative stress commonly observed in certain diseases. Further, the degree of Treg dysfunction is correlated with the severity and progression of serious and life-threatening conditions. These and other recent advances in the understanding of Treg biology, have made this subset of T lymphocytes an important therapeutic target, which we believe may provide new treatments for serious diseases.
We have built a diversified product candidate pipeline that includes both ex vivo and in vivo approaches intended to restore the suppressive and immunomodulatory functions of Tregs. Our product candidate pipeline is based on our three distinct therapeutic modalities: autologous Treg cell therapy, allogeneic Treg-derived exosomes and Treg-enhancing biologics. “Autologous” means the treatment of a patient with human cells derived from the patient itself, whereas “Allogeneic” means the treatment of a patient with human cells derived from a donor other than the patient, where such donor is genetically non-identical. We are initially focused on developing our Treg-based therapies for neurodegenerative, autoimmune and metabolic diseases where Treg dysfunction has been identified to be an important pathophysiological component of the disease and where new and effective therapies are urgently needed.
Since our inception in 2020, we have generated preclinical and clinical data in multiple models and diseases. Our autologous Treg cell therapy program has completed a Phase 1 and Phase 2a studies in amyotrophic lateral sclerosis, or ALS. The clinical data from these initial studies has served as an important confirmation of the underlying immunomodulatory properties of Tregs and their potential therapeutic benefits. These studies have also significantly expanded our own foundational knowledge of the biological activity of Tregs, which we believe will be critical for the design of our future clinical and preclinical studies, the selection of future targeted diseases and the overall advancement of our development pipeline.
Since our inception in April 2020, our operations have consisted of developing our clinical and preclinical product candidates and we have devoted substantially all of our resources to developing product and technology rights, conducting research and development, organizing and staffing our company, business planning and raising capital. We have funded our operations primarily through private convertible preferred stock offerings, a convertible debt financing and our initial public offering that closed in January 2023. Our net losses were $12.2 million and $4.9 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $17.9 million. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates.
We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates through all stages of development and clinical trials and, ultimately, seek regulatory approval. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We expect our expenses and capital requirements will increase significantly in connection with our ongoing activities as we:
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continue our ongoing and planned research and development of our product candidates;
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initiate nonclinical studies and clinical trials for any additional product candidates that we may pursue;
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continue to scale up external manufacturing capacity with the aim of securing sufficient quantities to meet our capacity requirements for clinical trials and potential commercialization;
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establish a sales, marketing and distribution infrastructure to commercialize any approved product candidates and related additional commercial manufacturing costs;
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develop, maintain, expand, protect and enforce our intellectual property portfolio, including patents, trade secrets and know-how;
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acquire or in-license other product candidates and technologies;
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add clinical, operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts; and
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incur additional legal, accounting, investor relations and other expenses associated with operating as a public company.
Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.
We will need to raise substantial additional capital to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we plan to finance our operations through the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to secure adequate additional funding, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates or delay our pursuit of potential in-licenses or acquisitions. The financial statements included elsewhere in this Annual Report on Form 10-K have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
The COVID-19 pandemic continues to have a major impact in the US and around the world. The availability of vaccines holds promise for the future, though new variants of the virus and potential waning immunity from vaccines may result in continued impact from this pandemic in the future, which could adversely impact our operations. To date, we have managed delays and disruptions without significant impact in planned and ongoing preclinical and clinical trials, manufacturing or shipping. Potential impacts to our business include delays in planned and ongoing preclinical and clinical trials including enrollment of patients, disruptions in time and resources provided by independent clinical investigators, contract research organizations, and other third-party service providers, temporary closures of our facilities, disruptions or restrictions on our employees’ ability to travel, and delays in manufacturing and/or shipments to and from third-party suppliers and contract manufacturers for APIs and drug product.
Components of Results of Operations
Revenue
To date, we have not recognized any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, or license agreements with third parties, we may generate revenue in the future from product sales. However, there can be no assurance as to when we will generate such revenue, if at all.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our therapeutic candidates. We expense research and development costs as incurred, including:
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Expenses incurred to conduct discovery-stage laboratory work and preclinical studies including supplies, reagents, chemicals as well as external costs of funding research performed by third parties including consultants, academic and other institutions and clinical research organizations (“CROs”) that conduct our preclinical and nonclinical studies;
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activities being performed under our sponsored research arrangement with Houston Methodist;
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personnel expenses, including salaries, benefits and stock-based compensation expense for our employees engaged in research and development functions;
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clinical trial expenses and related clinical expenses to obtain regulatory approval of our therapeutic candidates including costs of research performed by third parties, costs associated with CRO’s that conduct our clinical trials, costs to operate, manage, and monitor investigative sites and clinical, regulatory, manufacturing and other professional services;
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clinical expenses incurred under agreements with contract manufacturing organizations, or CMOs, or incurred directly by us for manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical study and clinical trial materials;
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fees paid to consultants who assist with research and development activities;
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expenses related to regulatory activities, including filing fees paid to regulatory agencies; and
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allocated expenses for facility costs, including rent, utilities, depreciation and maintenance.
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We classify and evaluate our research and development expenses in two dimensions: clinical and preclinical, and external and internal. We do not further classify or evaluate our internal research and development expenses by product candidate or by Series as these expenses primarily relate to compensation, materials and supplies, and other costs which are deployed across multiple therapeutic modalities, multiple product candidates, and multiple therapeutic areas under development.
Once a product candidate has received approval from the FDA of its IND application, we consider it a clinical product candidate. For each of our clinical product candidates, we report or will report external development costs and other external research and development costs attributable to such clinical product candidates. These external development costs include: fees paid to CROs, CMOs and research laboratories, process development, manufacturing and clinical development activities. Any internal research and development expenses associated with clinical product candidates are captioned as internal research and development costs as described in the paragraph above.
Until such time as a product candidate has received approval of its IND application, we consider it a preclinical product candidate. Each of our preclinical product candidates is being developed on one of our three therapeutic modalities: (1) Treg-enhancing biologics; (2) Treg-derived exosomes; and (3) autologous Treg cell therapy. The product candidates utilizing our Treg-enhancing biologics are collectively referred to as the “300 Series.” The product candidates utilizing our Treg-derived exosomes are collectively referred to as the “200 Series.” The product candidates utilizing our autologous Treg cell therapy are collectively referred to as the “100 Series.” Currently, our 300 Series product candidates include COYA 301 and COYA 302, our 200 Series product candidates include COYA 201 and COYA 206, and our 100 Series product candidate is COYA 101. For our preclinical candidates we report external development costs and other external research and development costs collectively by Series. These external development costs include: fees paid to CROs, CMOs and research laboratories, process development, manufacturing and clinical development activities. Preclinical research and development activities often benefit more than one preclinical product candidate within a given Series and so disaggregating the data would neither be practicable or meaningful.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase significantly over the next several years as we increase personnel costs, including stock-based compensation, conduct our clinical trials, including later-stage clinical trials, for current and future product candidates and prepare regulatory filings for our product candidates. As described in the notes to financial statements contained elsewhere in this Annual Report on Form 10-K, under the terms of our license we may be required to make payments to Methodist if certain milestones are achieved. This could result in significant charges to research and development in the period such milestones become probable of being achieved.
In-Process Research and Development
Research and development costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached technological feasibility which includes manufacturing, clinical, intellectual property and/or regulatory success which has no alternative future use. The licenses purchased by us require substantial completion of research and development and regulatory and marketing approval efforts in order to reach technological feasibility. As such, for the year ended December 31, 2022 the purchase price of licenses acquired was classified as acquired in-process research and development expenses in the statements of operations.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for employees and consultants in executive, finance and accounting, legal, operations support, information technology and human resource functions. General and administrative expense also includes corporate facility costs not otherwise included in research and development expense, including rent, utilities, depreciation and maintenance, as well as legal fees related to intellectual property and corporate matters and fees for accounting and consulting services.
We expect that our general and administrative expense will increase in the future to support our continued research and development activities, potential commercialization efforts and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, legal support and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of the Nasdaq Capital Market and the Securities and Exchange Commission, or SEC, insurance and investor relations costs. If any of our current or future product candidates obtains U.S. regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team.
Depreciation
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Depreciation expense relates to the fixed assets which consist mainly of lab equipment. The lab equipment is depreciated over its estimated useful life of five years.
Change in Fair Value of Convertible Promissory Notes
Under the fair value election as prescribed by ASC 815, we recognize the qualifying change in fair value of our 2022 Promissory Notes each reporting period until the notes are settled. Changes in fair value attributable to changes in instruments specific credit risk are recorded in other comprehensive income to the extent they are material.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest earned on our excess cash and federal tax credits.
Income Taxes
Since our inception, we have not recorded any income tax benefits for the net operating losses, or NOLs, we have incurred or for our research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our NOLs and tax credits will not be realized. As such, we have a full valuation allowance against all NOLs and tax credits for all periods presented.
Results of Operations
For the Years Ended December 31, 2022 and December 31, 2021
The following table sets forth our results of operations for the years ended December 31, 2022 and December 31, 2021:
Year Ended December 31,
Operating expenses:
Other income (expense):
Change in fair value of convertible promissory notes (2,496,510 ) — (2,496,510 )
Research and Development Expenses
Research and development expenses increased by $1.9 million from $2.5 million for the year ended December 31, 2021 to $4.4 million for the year ended December 31, 2022. The increase was mainly due to increasing our clinical trial expenses as well as an increase in headcount to support our continued trials. For our clinical product candidate (COYA 101), we track our external research and development expenses on a candidate-by-candidate basis. For our preclinical product candidates, we track our external research and development expenses in aggregate by Series. External research and development expenses include fees paid to CROs, CMOs and research laboratories in connection with our pre-clinical development, process development, manufacturing and clinical development activities.
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Research and development expenses disaggregated and classified by clinical and preclinical, and external and internal expenses are summarized in the table below:
Year Ended December 31,
External costs:
Clinical product candidates:
Pre-clinical product candidates:
Internal costs:
In-Process Research and Development
During the year ended December 31, 2022, we entered into a license agreement with ARScience Biotherapeutics, Inc. Under the terms of the license agreement, we paid license fees of $0.5 million, which were expensed as in-process research and development expense. We had no such in-process research and development license fees in 2021.
General and Administrative Expenses
General and administrative expenses increased by $2.5 million from $2.3 million for year ended December 31, 2021 to $4.8 million for the year ended December 31, 2022. The increase was primarily due to an increase in personnel related expenses due to increases in employee headcount and an increase in our professional fees and consulting fees as we expanded our operations to support our research and development efforts. We expect that our general and administrative fees will continue to increase as we operate as a public company.
Change in fair value of convertible promissory notes
The expense related to the change in fair value of the 2022 Promissory Notes increased by $2.5 million during the year ended December 31, 2022, primarily due to changes in estimates regarding the probability and time to conversion.
Liquidity and Capital Resources
Overview
Since our inception, we have not recognized any revenue and have incurred operating losses and negative cash flows from our operations. We have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. Since our inception through December 31, 2022 we have funded our operations through the sale of convertible promissory notes and convertible preferred stock. As of December 31, 2022 we had $5.9 million in cash and cash equivalents and had an accumulated deficit of $17.9 million. We expect our existing cash and cash equivalents, together with the $14.5 million in net proceeds from our initial public offering and the exercise of the underwriter's over-allotment option, to enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2024. We have based these estimates on assumptions that may prove to be imprecise, and we could utilize our available capital resources sooner than we expect.
Funding Requirements
Our primary use of cash is to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future operating capital requirements will depend on many factors, including, but not limited to:
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the scope, timing, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates;
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the costs of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization;
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the extent to which we enter into collaborations or other arrangements with additional third parties in order to further develop our product candidates;
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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
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the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies;
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expenses needed to attract and retain skilled personnel;
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costs associated with being a public company;
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the costs required to scale up our clinical, regulatory and manufacturing capabilities;
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the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for any of our product candidates for which we receive marketing approval; and
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revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval.
We need significant additional funds to meet operational needs and capital requirements for clinical trials, other research and development expenditures, and business development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Cash Flows
The following table shows a summary of our cash flows for the years ended December 31, 2022 and December 31, 2021:
Year Ended December 31,
Cash provided by (used in) financing activities 9,357,878 (340,584 )
Net increase (decrease) in cash and cash equivalents $ 1,593,524 $ (4,380,656 )
Operating Activities
During the year ended December 31, 2022, we used $7.2 million of cash in operating activities. Cash used in operating activities reflected our net loss of $12.2 million, offset by a $0.8 million net decrease in our operating assets and liabilities and noncash charges of $4.3 million, which primarily consisted of $2.5 million in the change in fair value of the convertible promissory notes, $1.0 million of debt issuance costs, and $0.5 million in acquired in-processing research and development costs. The primary use of cash was to fund our operations related to the development of our product candidates.
During the year ended December 31, 2021, we used $3.9 million of cash in operating activities. Cash used in operating activities reflected our net loss of $4.9 million, offset by a $0.7 million net decrease in our operating assets and liabilities and noncash charges of $0.2 million, which consisted of depreciation and $0.2 million in stock-based compensation. The primary use of cash was to fund our operations related to the development of our product candidates.
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Investing Activities
During the year ended December 31, 2022, we used $0.5 million of cash for the purchase of in-process research and development. During the year ended December 31, 2021, we used $0.1 million of cash for the purchase of fixed assets.
Financing Activities
During the year ended December 31, 2022, financing activities provided $9.4 million of cash, which consisted of $10.5 million from the issuance of our 2022 Promissory Notes, slightly offset by the payment of issuance costs of $1.0 million. During the year ended December 31, 2021, we used $0.3 million of cash for the payment of the offering costs from the sale of our Series A convertible preferred stock in December 2020.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Critical Accounting Policies
This management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to prepaid/accrued research and development expenses and include fair value of the Company’s convertible promissory notes (see Notes 3 and 7 to our financial statements found elsewhere in this Annual Report on Form 10-K), equity and related inputs, including discount for lack of marketability and volatility, used to estimate the fair value of the grant date fair value of stock options (see Note 10 to our financial statements found elsewhere in this Annual Report on Form 10-K). We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are the most critical to the judgments and estimates used in the preparation of our financial statements.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates. We expense research and development costs as incurred.
We accrue an expense for preclinical studies and clinical trial activities performed by our vendors based upon estimates of the proportion of work completed. We determine the estimates by reviewing contracts, vendor agreements and purchase orders, and through discussions with our internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. However, actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including our clinical development plan.
We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the prepaid/accrual accordingly. Nonrefundable advance payments for goods and services, including fees for clinical trial expenses, process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are deferred and recognized as expense in the period that the related goods are consumed or services are performed.
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Stock-Based Compensation
We measure compensation expense for all stock-based awards based on the estimated fair value of the stock-based awards on the grant date. We use the Black-Scholes option pricing model to value our stock option awards. We recognize compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. We have not issued awards for which vesting is subject to a market or performance conditions.
We estimate the fair value of stock options using the Black-Scholes option-pricing model, which requires assumptions, including the fair value of our common stock prior to the IPO, volatility, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options, and our expected dividend yield. Certain assumptions used in our Black-Scholes option-pricing model represent management’s best estimates and involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future.
These subjective assumptions are estimated as follows:
Fair value of common stock— Historically, for all periods prior to our IPO, the fair value of the shares of common stock underlying our share-based awards was estimated on each grant date by our board of directors. To determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. Since becoming a public company in 2023, we have used our stock price to determine fair value of our common stock.
Expected volatility—As a privately held company we did not have any trading history for our common stock; accordingly the expected volatility was estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty. As a public company will continue to use the average volatility for comparable publicly traded biotechnology companies until we have ample trading history of our own stock commensurate with the estimated expected term of our options.
Estimating the Fair Value of Convertible Promissory Notes
We have elected the fair value option for the accounting for our convertible promissory notes issued in 2022 and utilized an independent third-party valuation specialist to assist management in measuring the fair value. The fair value of the Notes is determined using a scenario-based analysis that estimates the fair value based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the noteholders, including various IPO, settlement, equity financing, corporate transaction and dissolution scenarios. Since the Notes converted to common stock on January 3, 2023, we were able to utilize this information in the estimate of the fair value of the notes at December 31, 2022.
Commitments and contingencies, including convertible promissory notes, license and sponsored research agreements
Convertible Promissory Notes
In April 2022, we issued $10.5 million in principle amount of 2022 Promissory Notes, which bore interest at an annual rate of 6.0%, paid in kind, with a stated maturity date of June 30, 2024. The 2022 Promissory Notes automatically converted into 2,736,488 shares of common stock in connection with the closing of our initial public offering.
Upon issuance, we elected to account for the 2022 Promissory Notes at fair value in accordance with ASC 815 with any changes in fair value being recognized through the statements of operations until the 2022 Promissory Notes are settled. Changes in fair value attributable to changes in instruments specific credit risk were recorded in other comprehensive income to the extent they were material.
Patent Know How and License Agreement with The Methodist Hospital
In September 2022, we entered into Methodist License Agreement with Methodist to make, sell and sublicense products and services using the intellectual property and know-how of Methodist. As part of the Methodist License Agreement, we will pay Methodist a four-figure license maintenance fee annually until the first sale of licensed product occurs. The term of the Methodist License Agreement is effective until no intellectual property patent rights remain, unless terminated sooner by (1) bankruptcy or insolvency, (2)
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the failure by us to monetize the intellectual property within five years of the date of the agreement (further discussed below), (3) due to breach of contract, or (4) at our election for any or no reason.
In addition to the equity issuance and reimbursement of patent related expenses, we agreed to make contingent milestone payments to Methodist on a Licensed Product-by-Licensed Product or Licensed Service-by-Licensed Service basis upon the achievement of certain development, approval and sales milestones (i) related to the treatment of ALS totaling up to $325,000 in the aggregate, and (ii) related to the treatment of each other indication (that is not ALS) totaling between $212,500 and up to $425,000 in the aggregate per indication. We are also required to pay Methodist, on a licensed product-by-licensed product and country-by-country basis, royalties (subject to customary reductions) equal to 1% to 10% of annual worldwide net sales of such licensed product during a defined royalty term. The applicable royalty percentage increases as Licensed Products are used to treat from one to more than three indications and if a given Licensed Product utilizes only T-reg cell therapy or is a combination of both T-reg cell therapy and exosomes. Therefore, the lowest tier is paid when there is only a single indication being addressed with a single product. The highest tier is paid only on combination products where there are three or more indications being served. We are also required to pay a low single digit percentage for certain licensed services. We are required to pay royalties at between 10%-20% of sublicense revenue. Commencing on January 1, 2025, the minimum amount which will be owed by us once commercialization occurs is $50,000 annually.
The Methodist License Agreement provides that in the event we sublicense products and services covered by the Methodist License Agreement, then royalties owed to Houston Methodist would be computed as a percentage of payments received by us from the sublicensee. In addition, the termination provisions provide that Houston Methodist may only terminate the Methodist License Agreement, among other things, in the event that after five years we are not “Actively Attempting to Develop or Commercialize,” as such term is defined in the Methodist License Agreement.
Sponsored Research Agreement with Houston Methodist Research Institute
In February 2021, we executed the SRA with HMRI. Pursuant to the SRA, we agreed to fund $1.5 million in research in the area of neurodegenerative diseases through February 2022. We subsequently amended the SRA to extend the term through February 2025, which includes an annual funding commitment of $1.5 million per year. As of September 15, 2022, we have provided notice to HMRI regarding termination of the SRA in expectation that a reduced yearly budget be negotiated post termination. For the 90-day period commencing after the termination date of the SRA, were responsible for reimbursing HMRI for accrued expenses incurred by HMRI. As of December 31, 2022, we have continued operations in good faith with HMRI in anticipation of a finalized agreement which we expect to result in an annual funding of $0.5 million.
ARScience License Agreement
On August 23, 2022, we entered into the ARS License Agreement with ARS pursuant to which ARS granted us an option to, if we choose to exercise such option, to acquire an exclusive, royalty-bearing license for two patents regarding certain formulations of hrIL-2 (the product that serves as the basis for COYA 301), with the right to grant sublicenses through multiple tiers under these patents. In consideration for the ARS Option, we paid ARS a one-time, non-refundable, non-creditable option fee of $100,000 and a mid-six-figure up-front fee.
In addition, we may also owe tiered payments to ARS based on our achievement of certain developmental milestones. Under the ARS License Agreement, we will pay an aggregate of $13.25 million in developmental milestone payments for the first Combination Product (as defined in the ARS License Agreement) in a new indication. We will then pay an aggregate of $11.6 million in developmental milestone payments for each Combination Product in each subsequent new indication. Further, for the first Mono Product (as defined In the ARS License Agreement), we will pay an aggregate of $11.75 million in developmental milestone payments. We will then pay an aggregate of $5.85 million in developmental milestone payments for each Mono Product in each subsequent new indication, and we will owe an aggregate of $5.85 million if all developmental milestones are achieved for each new indication. We will also owe royalties on net sales of licensed products ranging from low to mid-single digit percentages. In the event we sublicense our rights under the ARS License Agreement, we will owe royalties on sublicense income within the range of 10% to 20%. To date, the Company has paid mid-six-figure digits in licensing fees to ARS under the ARS License Agreement.
Recent Accounting Pronouncements
See Note 2 to our financial statements found elsewhere in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our financial statements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
The information required by this item appears in a separate section of this Annual Report on Form 10-K beginning on page F-1 and is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Previously Reported Material Weakness
As previously disclosed in our prospectus filed with the SEC on December 30, 2022, in connection with the audit of our financial statements as of and for the years ended December 31, 2021 and 2020, we identified a material weakness in our internal control over financial reporting related to a (i) lack of sufficient accounting and supervisory personnel who have the appropriate level of technical accounting experience and training, (ii) lack of adequate procedures and controls, including those in information technology and oversight to ensure that accurate financial statements can be prepared and reviewed on a timely basis for financial reporting purposes, and (iii) lack of proper segregation of duties. The material weakness did not result in any material misstatements to our previously issued financial statements, nor the financial statements in this Form 10-K.
The Company’s management is committed to maintaining a strong internal control environment. In response to the identified material weakness, management, with the oversight of the Audit Committee of the Board of Directors, took comprehensive actions to improve our internal control over financial reporting and remediate the material weakness such as:
•
Increased and hired additional personnel, from an internal and external basis, in the accounting function with the appropriate technical knowledge and expertise for financial reporting purposes;
•
Implemented, strengthened, formalized and documented policies and internal control procedures which have been assessed as effective based on management’s testing; and
•
Successfully implemented an ERP system to automate certain processes and allow for a more robust framework of general IT controls and proper segregation of duties within the environment.
89
In connection with our review of disclosure procedures as of December 31, 2022, we have concluded that our previously identified material weakness has been remediated.
Changes in Internal Control Over Financial Reporting
Except for the changes mentioned in connection with the remediation of the previously identified material weakness discussed above, there were no changes in our internal controls over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fourth quarter ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
90
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders, or Proxy Statement, to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022, and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders.
91
PART IV
Item 15. Exhibit and Financial Statement Schedules.
(a)(1) Financial Statements
The financial statements and related notes, together with the report of Weaver and Tidwell, L.L.P. appear at pagesF-1 through F-20 following the Exhibit List as required by “Part II—Item 8—Financial Statements and Supplementary Data” of this Form 10-K.
(a)(2) Financial Statement Schedules
All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
ExhibitNumber Description
3.1* Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated By-Laws.
4.6* Description of Securities of Coya Therapeutics, Inc.
92
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan or arrangement.
# Certain identified information has been excluded from this exhibit (indicated by asterisks) because it is both not material and the type of information that the Company treats as private or confidential, in accordance with the rules of the SEC.
Item 16. Form 10-K Summary
None.
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Coya Therapeutics, Inc.
Date: March 29, 2023 By: /s/ Howard Berman
Name: Howard Berman
Title: Chief Executive Officer
Date: March 29, 2023 By: /s/ David Snyder
Name: David Snyder
Title: Chief Financial Officer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Name Title Date
/s/ Howard Berman Chief Executive Officer and Director March 29, 2023
Howard Berman (Principal Executive Officer)
/s/ David Snyder Chief Financial Officer March 29, 2023
David Snyder (Principal Financial and Accounting Officer)
Chief Operating Officer
/s/ Ann Lee Director March 29, 2023
Ann Lee
/s/ Anabella Villalobos Director March 29, 2023
Anabella Villalobos
/s/ Hideki Garren Director March 29, 2023
Hideki Garren
/s/ Dov Goldstein Director March 29, 2023
Dov Goldstein
94
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Statements of Operations for the Years ended December 31, 2022 and 2021 F-4
Statements of Cash Flows for the Years ended December 31, 2022 and 2021 F-6
Notes to Financial Statements F-7
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Coya Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Coya Therapeutics, Inc. (the Company) as of December 31, 2022 and 2021, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has stated that substantial doubt exists about the Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/ s / Weaver and Tidwell, L.L.P.
We have served as the Company's auditor since 2021.
Austin, Texas
March 29, 2023
F-2
COYA THERAPEUTICS, INC.
BALANCE SHEETS
December 31,
Assets
Current Assets:
Liabilities and Stockholders' (Deficit) Equity
Current liabilities:
Convertible promissory notes 12,965,480 —
Commitments and contingencies (Note 8)
Stockholders' (deficit) equity:
Total liabilities and stockholders' (deficit) equity $ 8,395,566 $ 4,792,110
The accompanying notes are an integral part of these financial statements.
F-3
COYA THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
Year Ended December 31,
In-process research and development 525,000 —
Other income (expense):
Change in fair value of convertible promissory notes (2,496,510 ) —
Share information:
Net loss per share of common stock, basic and diluted $ (4.73 ) $ (1.89 )
The accompanying notes are an integral part of these financial statements.
F-4
COYA THERAPEUTICS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Convertible Preferred Stock Additional Stockholders'
Series A Common Stock Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
The accompanying notes are an integral part of these financial statements.
F-5
COYA THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
Operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of convertible promissory notes 2,496,510 —
Acquired in-processing research and development 525,000 —
Changes in operating assets and liabilities:
Investing activities:
Purchase of in-process research and development (525,000 ) —
Purchase of fixed assets - (136,804 )
Financing activities:
Proceeds from issuance of convertible promissory notes 10,468,970 —
Payment of deferred financing costs related to the IPO (113,883 ) —
Payment of debt issuance costs (997,367 ) —
Payment for Series A offerings costs - (341,901 )
Proceeds from founders for subscription receivable - 1,000
Proceeds from the exercise of stock options 158 317
Net cash provided by (used in) financing activities 9,357,878 (340,584 )
Net increase (decrease) in cash and cash equivalents 1,593,524 (4,380,656 )
Supplemental schedule of non-cash activities:
The accompanying notes are an integral part of these financial statements.
F-6
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
1. Organization and description of business
Coya Therapeutics, Inc. (“Coya”, or the “Company”) is a clinical-stage biotechnology company focused on developing proprietary new therapies to enhance the function of Regulatory T cells (“Tregs”). Coya’s initial developmental programs are focused on neurodegenerative, chronic inflammatory, autoimmune, and metabolic diseases of high unmet medical need.
Going Concern and Liquidity
The Company has incurred losses and negative cash flows from operations since inception and has an accumulated deficit of $17,868,547 as of December 31, 2022. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its product candidates currently in development. Substantial additional financing will be needed by the Company to fund its operations and to commercially develop its product candidates. No assurance can be given that any such financing will be available when needed or that the Company’s research and development efforts will be successful.
The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements—Going Concern, which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the financial statements are issued (or when applicable, one year after the date that the financial statements are available to be issued). As of December 31, 2022, the Company had cash and cash equivalents of $5,933,702, which, when combined with the net proceeds from its initial public offering ("IPO") (Note 13), is expected to enable the Company to fund its operating expenses and capital expenditure requirements into the second quarter of 2024, at which time the Company will need to secure additional funding. If the Company is unable to obtain additional financing, the lack of liquidity could have a material adverse effect on the Company’s future prospects. As a result of these factors, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these financial statements are issued.
The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Management is currently evaluating different strategies to obtain the required funding of future operations. These strategies may include, but are not limited to, additional funding from current investors, funding from new investors including strategic corporate investors, and additional registrations of the Company’s common stock. There can be no assurance these future funding efforts will be successful.
Risks and uncertainties
The Company is subject to a number of risks associated with companies at a similar stage, including dependence on key individuals, competition from similar products and larger companies, volatility of the industry, ability to obtain adequate financing to support growth, the ability to attract and retain additional qualified personnel to manage the anticipated growth of the Company, and general economic conditions.
In December 2019, a novel strain of coronavirus disease (“COVID-19”) was reported and in March 2020, the World Health Organization characterized COVID -19 as a global pandemic. The COVID-19 pandemic has forced international, federal, state, and local governments to enforce prohibitions of non-essential activities. The Company has been impacted by COVID-19 since inception. The extent and duration of the adverse impact of COVID-19 on the Company over the longer term remains uncertain and dependent on future developments that cannot be accurately predicted at this time.
As the impact of COVID-19 continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the financial statements as new events occur and additional information becomes known. To the extent the
F-7
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Company’s actual results differ materially from those estimates and assumptions, the Company’s future financial statements could be affected.
2. Basis of presentation and significant accounting policies
Basis of presentation
The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the ASC and Accounting Standards Updates (“ASU”) of the FASB.
Use of estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the financial statements, actual results may materially vary from these estimates. Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary.
Significant areas that require management’s estimates include fair value of the Company’s convertible promissory notes, the fair value of the Company's equity, prior to being publicly traded, and related inputs, including discount for lack of marketability and volatility, and the grant date fair value of stock options (Note 10), useful life of fixed assets and accrued research and development expenses.
Segment information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment.
Fair value of financial instruments
Management believes that the carrying amounts of the Company’s cash equivalents, accounts payable, and accrued expenses approximate fair value due to the short-term nature of those instruments. Convertible promissory notes are recorded at fair value on a recurring basis (Note 3).
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash and cash equivalents.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of amounts invested in a money market account.
F-8
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Deferred financing costs
The Company capitalizes costs that are directly associated with in-process equity and debt financing until such financings are consummated, at which time such costs are recorded against the gross proceeds from the applicable financing. If a financing is abandoned, deferred financing costs are expensed. As of December 31, 2022, the Company has incurred $1,117,290 in fees associated with the IPO, which are recognized as deferred financing costs on the balance sheet. The Company elected to account for its 2022 Convertible Promissory Notes (Note 7) using the fair value option under ASC 815, and as such, issuance costs of $997,367 were immediately expensed as a component of general and administrative expense in the statements of operations during the year ended December 31, 2022.
Research and development costs
Research and development costs are expensed as incurred and consist primarily of funds paid to third parties for the provision of services for product candidate development, clinical and preclinical development and related supply and manufacturing costs, regulatory compliance costs, and personnel and stock-based compensation expenses. At the end of the reporting period, the Company compares payments made to third-party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record a net prepaid or accrued expense relating to these costs.
Upfront milestone payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered. Costs incurred in obtaining technology licenses are charged to research and development expense as acquired in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use.
Patent costs
The Company expenses all costs as incurred in connection with patent applications (including direct application fees, and the legal and consulting expenses related to making such applications) and such costs of $120,992 and $10,000 were incurred during the years ended December 31, 2022, and 2021, respectively, which are included in general and administrative expenses in the accompanying statements of operations.
Stock-based compensation
The Company measures share-based employee and nonemployee awards at their grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the awards. The Company accounts for forfeitures in the period in which they occur.
Estimating the fair value of share-based awards requires the input of subjective assumptions, including the estimated fair value of the Company’s common stock, and, for stock options, the expected life of the options and stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in estimating the fair value of share-based awards represent management’s estimate and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards.
The expected term of the stock options is estimated using the “simplified method” as the Company has no historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. For stock price volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option
F-9
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
grants. The risk-free rate is based on the U.S. Treasury yield curve commensurate with the expected term of the option. 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.
Fixed assets
Fixed assets, which consist mainly of lab equipment, are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful life of the assets. Research medical equipment is depreciated over the assets estimated useful lives of five years.
Long-Lived Assets
Long-lived assets, such as fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.
The Company did not recognize any impairment of long‐lived assets for the years ended December 31, 2022 or 2021.
Leases
The Company accounts for leases in accordance with ASC 842, Leases (“ASC 842”). At contract inception, the Company determines if an arrangement is or contains a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If an arrangement is determined to be or contain a lease, the lease is assessed for classification as either an operating or finance lease at the lease commencement date, defined as the date on which the leased asset is made available for use by the Company, based on the economic characteristics of the lease.
When determining the expected accounting lease term, the Company includes the noncancellable lease term, together with periods covered by (i) an option to extend the lease if the Company is reasonably certain to exercise such option, (ii) an option to terminate the lease if the Company is reasonably certain not to exercise such option and (iii) an option to extend or not terminate the lease where the exercise of such option is controlled by the lessor. The Company has elected the short-term lease exemption, which allows the Company to not recognize lease liabilities and right-of-use assets arising from lease arrangements with lease terms of twelve months or less.
In May 2021, the Company entered into an agreement to lease medical research equipment. Rent expense for this short-term lease for the years ended December 31, 2022, and 2021 was $30,000 and $150,686, respectively. The medical research equipment lease expired in February 2022.
Income taxes
Income taxes are accounted for under the asset and liability method. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities, and the expected benefits of net operating loss and income tax credit carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the period in which temporary differences are expected to be settled, is reflected in the Company's financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. As of December 31, 2022 and 2021, the Company has concluded that a full valuation allowance is necessary for all of its net deferred tax assets. The Company had no amounts recorded for uncertain tax positions, interest, or penalties in the accompanying financial statements. Although there are no unrecognized income tax benefits, when applicable, the Company’s policy is to report interest and penalties related to unrecognized income tax benefits as a component of income tax expense.
F-10
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Net loss per share
Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted net loss per share of common stock includes the effect, if any, from the potential exercise or conversion of securities, such as convertible preferred stock, common stock warrants and stock options, which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, potentially dilutive securities are not included in the calculation when the impact is anti-dilutive. The Company’s convertible preferred stock entitles the holder to participate in dividends and earnings of the Company, and, if the Company were to recognize net income, it would have to use the two-class method to calculate earnings per share. The two-class method is not applicable during periods with a net loss, as the holders of the convertible preferred stock have no obligation to fund losses.
The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as they would be anti-dilutive:
December 31,
Series A Convertible Preferred Stock (as converted) 1,316,926 1,316,926
Convertible promissory notes (as converted) 2,736,488 —
Amounts in the above table reflect the common stock equivalents.
Recently issued but not yet adopted accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. This new guidance is effective for the Company as of January 1, 2023. The Company is currently evaluating the impact of this ASU and does not expect that adoption of this standard will have a material impact on its financial statements and related disclosures.
3. Fair value measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
•
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
F-11
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
•
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
•
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
In accordance with the fair value hierarchy described above, the following table sets forth the Company’s assets and liabilities
measured at fair value on a recurring basis:
December 31, 2022 Note Carrying
Reference Input Level Fair Value Value
Assets:
Cash and cash equivalents (money market funds) Level 1 $ 5,933,702 $ 5,933,702
Liabilities:
December 31, 2021 Note Carrying
Reference Input Level Fair Value Value
Assets:
Cash and cash equivalents (money market funds) Level 1 $ 4,340,178 $ 4,340,178
As further described in Note 7, in April 2022 the Company issued unsecured convertible promissory notes (the “Notes”) to
various investors. Due to the number of embedded provisions contained in the Notes, the fair value option, as prescribed by ASC 815, was elected and applied in connection with the preparation of these financial statements. The fair value of the Notes is determined using a scenario-based analysis that estimates the fair value based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to the noteholders, including various IPO, settlement, equity financing, corporate transaction and dissolution scenarios.
The Company adjusts the carrying value of the Notes to their estimated fair value at each reporting date, with qualifying
increases or decreases in the fair value recorded as change in fair value of convertible promissory notes in the statements of operations.
Changes in the fair value resulting from changes in the instrument-specific credit risk will be presented separately in other
comprehensive income, however, through December 31, 2022, these changes have not been material to the financial statements. The Company measured the change in fair value related to instrument-specific credit risk by isolating the change in the fair value of the Notes resulting from the change in CCC option-adjusted spreads between measurement dates.
Balance at beginning of year $ -
Issuance of convertible promissory notes 10,468,970
4. Prepaids and other current assets
Prepaids and other current assets consist of:
December 31,
F-12
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
5. Fixed assets, net
Fixed assets, net consist of:
December 31,
Depreciation expense for the years ended December 31, 2022, and 2021 was $27,361 and $16,133, respectively.
6. Accrued expenses
Accrued expenses consist of:
December 31,
7. Convertible promissory notes
In April 2022, the Company issued $10,468,970 of Notes, which bore interest at an annual rate of 6.0%, paid in kind, and had a
maturity date of June 30, 2024. The Notes originally contained a feature in which they would automatically convert into shares of conversion securities, which may be preferred stock or common stock, upon a qualified equity financing (“Qualified Equity Financing”) or upon a change of control. A Qualified Equity Financing was originally defined as the offer and sale for cash of any equity securities that results in aggregate gross proceeds of at least $20,000,000. In December 2022, the noteholders agreed to amend the Notes to remove the quantitative threshold from the definition such that the Notes would convert upon the Company closing a public offering pursuant to an effective registration statement and be listed for trading on an approved stock exchange or marketplace. Upon the closing of the IPO on January 3, 2023, the Notes converted into 2,736,488 shares of common stock. Upon issuance, the Company elected to account for the Notes at fair value in accordance with ASC 815 with qualifying changes in fair value not related to instrument-specific credit risk being recognized through the statements of operations until the Notes are settled. The fair value of the Notes was determined to be $10,468,970 on issuance, which is the principal amount of the Notes. On issuance, total debt issuance costs of $997,367, of which $697,828 was paid to a related party, were immediately expensed as a component of general and administrative expense in the statement of operations during the year ended December 31, 2022. The Company recognized a change in fair value of the Notes of $2,496,510 in the statements of operations during the year ended December 31, 2022. This change in fair value amount included any value related to the modification of the Notes associated with changing the threshold of what constituted a Qualified Equity Financing.
The Company paid its placement agent for this issuance a cash fee of 7% of the gross proceeds raised in the offering of the 2022
Notes and, upon conversion of the Notes in January 2023, the Company issued 191,554 warrants to its placement agent to purchase its common stock with a term of five years and an exercise price of $6.00 per warrant.
8. Commitments and contingencies, including license and sponsored research agreements
License Agreements
ARS Agreement
F-13
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
In August 2022, the Company entered into a License Agreement (the “ARS License Agreement”) with ARScience Biotherapeutics, Inc. (“ARS”) pursuant to which ARS granted the Company an option to acquire an exclusive, royalty-bearing license for two patents, with the right to grant sublicenses through multiple tiers under these patents (the “ARS Option”). In consideration for the ARS Option, the Company paid ARS a one-time, non-refundable, non-creditable option fee of $100,000 and a mid-six figure up-front fee, which were expensed as in-process research and development expense in the accompanying statements of operations for the year ended December 31, 2022.
In addition, the Company may also owe tiered payments to ARS based on its achievement of certain developmental milestones. Under the ARS License Agreement, the Company will pay an aggregate of $13,250,000 in developmental milestone payments for the first Combination Product (as defined in the ARS License Agreement) in a new indication. The Company will then pay an aggregate of $11,600,000 in developmental milestone payments for each Combination Product in each subsequent new indication. Further, for the first Mono Product (as defined In the ARS License Agreement) the Company will pay an aggregate of $11,750,000 in developmental milestone payments. The Company will then pay an aggregate of $5,850,000 in developmental milestone payments for each Mono Product in each subsequent new indication, and an aggregate of $5,850,000 if all developmental milestones are achieved for each new indication. The Company will also owe royalties on net sales of licensed products ranging from low to mid-single digit percentages. In the event the Company sublicenses its rights under the ARS License Agreement, the Company will owe royalties on sublicense income within the range of 10% to 20%.
Houston Methodist Agreements
In September 2022, the Company entered into an Amended and Restated Patent Know How and License Agreement, effective as of October 2020 (the “Methodist License Agreement”), with The Methodist Hospital (“Methodist”) to make, sell and sublicense products and services using the intellectual property and know-how of Methodist. As part of the Methodist License Agreement, the Company will pay Methodist a four-figure license maintenance fee annually until the first sale of licensed product occurs. The term of the Methodist License Agreement is effective until no intellectual property patent rights remain, unless terminated sooner by (1) bankruptcy or insolvency, (2) the failure by the Company to monetize the intellectual property within five years of the date of the agreement (further discussed below), (3) due to breach of contract, or (4) at our election for any or no reason.
The Company reimbursed Methodist and its attorneys for $119,420 and $10,000 in patent related expenses, which are included in the general and administrative expenses in the accompanying statements of operations for the years ended December 31, 2022 and 2021, respectively. In addition to the equity issuance and reimbursement of patent related expenses, the Methodist License requires the Company to make payments of up to $425,000 per product candidate in aggregate upon the achievement of specific development and regulatory milestone events by such licensed product. The Company is also required to pay Methodist, on a licensed product-by-licensed product and country-by-country basis, tiered royalties (subject to customary reductions) equal to high-single digit to low-double digit percentages of annual worldwide net sales of such licensed product during a defined royalty term. The Company is also required to pay a low single digit percentage for certain licensed services. Commencing on January 1, 2025, the minimum amount which will be owed by the Company once commercialization occurs is $50,000 annually.
The Methodist License Agreement provides that in the event the Company sublicense products and services covered by the Methodist License Agreement, then royalties owed to Houston Methodist would be computed as a percentage of payments received by the Company from the sublicensee. In addition, the termination provisions provide that Houston Methodist may only terminate the Methodist License Agreement, among other things, in the event that after five years the Company is not “Actively Attempting to Develop or Commercialize,” as such term is defined in the Methodist License Agreement.
Sponsored Research Agreement
In February 2021, the Company entered into a one-year Sponsored Research Agreement (“SRA”) with Houston Methodist Research Institute (“HRMI”), a Texas nonprofit corporation and an affiliate of Methodist, which can be extended or renewed by mutual agreement. Under the SRA, the Company agreed to fund up to $1,547,094 in research in the area of neurodegenerative diseases performed by HRMI. In return, the Company will gain expanded access to data methods and know-how per the SRA, and, if the research produces intellectual property, the Company will have all first rights to the intellectual property. As of September 15, 2022, the Company provided notice to HMRI regarding termination of the SRA in expectation that a reduced yearly budget be negotiated post termination.
F-14
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
As of December 31, 2022, the Company continued operations in good faith with HRMI in anticipation of a finalized agreement. The Company incurred $1,635,712 and $1,295,828 in research and development expenses under the SRA during the years ended December 31, 2022 and 2021, respectively.
Employment contracts
The Company has entered into employment contracts with its officers and certain employees that provide for severance and continuation of benefits in the event of termination of employment either by the Company without cause or by the employee for good reason, both as defined in the agreements. In addition, in the event of termination of employment following a change in control, as defined in each agreement, either by the Company without cause or by the employee for good reason, any unvested portion of the employee’s initial stock option grant becomes immediately vested.
Litigation
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. There are no matters currently outstanding.
9. Convertible preferred stock and stockholders’ equity
Convertible preferred stock
The following is a summary of the rights, preferences, and terms of the Company's Series A convertible preferred stock ("Series
A"):
Dividends
Holders of Series A, in preference to holders of any other class or series of the Company’s stock, are entitled to dividends only when declared by the Board of Directors, but such will accrue at a rate of 8% of the original issuance price prior to and in preference to any declaration of other dividends. No dividends were declared or paid from inception through December 31, 2022.
Voting
Each share of Series A shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which such shares of Series A are convertible as of the record date for determining stockholders entitled to vote on such matter. Generally, holders of the Series A shall vote together with the holders of common stock as a single class and on an as converted into common stock basis. The Company’s Board of Directors has five members. The holders of the Series A preferred stock are entitled to elect one of the Directors, the holders of common stock are entitled to elect two Directors, one Director shall be the Chief Executive Officer of the Company, and one independent Director is an individual that is mutually acceptable to holders of the majority of the common stock.
Liquidation preference
In the event of a liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, or in the event of a deemed liquidation event, which includes a sale of the Company as defined in the Company’s articles of incorporation, holders of Series A are entitled to receive, in preference to all other stockholders, the greater of (i) an amount equal to the Series A original issue price of $1.338, plus any dividends declared but unpaid, or (ii) such amount per share as would have been payable had all shares of Series A been converted into common stock. If upon the occurrence of such event, the assets and funds available for distribution are insufficient to pay such holders the full amount to which they are entitled, then the entire assets legally available for distribution shall be distributed ratably among the holders of Series A in proportion to the full amounts to which they would otherwise be entitled. As of December 31, 2022, no dividends have been declared, and the liquidation preference represents the original issue price of $1.338 per share of Series A.
Conversion
Each share of Series A is convertible into common stock at any time at the option of the holder thereof at the conversion price then in effect. Upon the closing of IPO on January 3, 2023, the Series A automatically converted into 1,316,926 shares of common stock.
F-15
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Redemption
The Series A is subject to redemption under certain deemed liquidation events; however, these events are solely within the control of the Company, and as such, the Series A is classified as permanent equity in the Company’s accompanying balance sheets.
Common stock and common stock warrants
The holders of common stock are entitled to one vote for each share of common stock held at all meetings of stockholders. Unless required by law, there shall be no cumulative voting. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, after the payment of all preferential amounts required to be paid to the holders of shares of Series A, the remaining funds and assets available for distribution to the stockholders of the Company will be distributed among the holders of shares of common stock, pro rata based on the number of shares of common stock held by each such holder.
In connection with the Series A offering, the Company issued freestanding warrants to purchase 92,184 shares of the Company’s common stock to the placement agent of the Series A offering. These warrants have an exercise price of $9.15 per common share and a term of five years from the date of issuance. These warrants are not redeemable and are generally not transferrable. During its evaluation of equity classification for the Company's common stock warrants, the Company considered the conditions as prescribed within ASC 815-40, Derivatives and Hedging, Contracts in an Entity’s own Equity. The conditions within ASC 815-40 are not subject to a probability assessment. The warrants do not fall under the liability criteria within ASC 480, Distinguishing Liabilities from Equity, as they are not puttable and do not represent an instrument that has a redeemable underlying security. The warrants do meet the definition of a derivative instrument under ASC 815 but are eligible for the scope exception as they are indexed to the Company’s own stock and would be classified in permanent equity if freestanding. The fair value of these warrants was determined to be $15,138 on the date of issuance and were recorded as a component of additional paid-in capital as part of the Series A offering.
Reverse Stock Split
In December 2022, the Company effected a one-for-5.6955 reverse stock split of its common stock. No fractional shares were issued in connection with the reverse stock split. Any fractional share resulting from the reverse stock split was rounded down to the nearest whole share, and in lieu of any fractional shares, the Company will pay in cash to the holders of such fractional shares an amount equal to the fair value, as determined by the board of directors, of such fractional shares. All common stock, per share and related information presented in the financial statements and accompanying notes have been retroactively adjusted to reflect the reverse stock split.
10. Stock-based compensation
In January 2021, the Company adopted the 2021 Equity Incentive Plan (“2021 Plan”). The 2021 Plan provides for the granting of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, equity appreciation rights, performance awards, and other equity-based awards. The Company's employees, officers, independent directors, and other persons are eligible to receive awards under the 2021 Plan. As of December 31, 2022, 790,097 shares of the Company’s common stock were authorized to be issued, of which 311,089 shares were available for future issuance.
The amount, terms of grants, and exercisability provisions are determined and set by the Company's Board of Directors or compensation committee. The Company measures employee stock-based awards at grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the award. The Company has recorded stock-based compensation in the accompanying statements of operations as follows:
December 31,
F-16
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Stock options
The Company has issued service-based stock options that generally have a contractual life of up to 10 years and may be exercisable in cash or as otherwise determined by the Board of Directors. Vesting generally occurs over a period of not greater than four years.
The following table summarizes the activity for the year ended December 31, 2022:
Weighted
Weighted averageremaining Aggregate
average contractual intrinsic
Options exercise price term (years) value
As of December 31, 2022, the unrecognized compensation cost was $346,417, and will be recognized over an estimated weighted-average amortization period of 1.9 years.
The fair value of options is estimated using the Black-Scholes option pricing model, which takes into account inputs such as the exercise price, the estimated fair value of the underlying common stock at the grant date, expected term, estimated stock price volatility, risk-free interest rate, and dividend yield. The fair value of stock options granted during the year ended December 31, 2022 was determined using the methods and assumptions discussed below.
•
The expected term of employee stock options with service-based vesting is determined using the “simplified” method, as prescribed in SEC’s Staff Accounting Bulletin (“SAB”) No. 107, 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.
•
The expected stock price volatility is based on historical volatility of comparable public entities within the Company’s industry, which were commensurate with the expected term assumption as described in SAB No. 107.
•
The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the expected term.
•
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.
•
The Company's common stock became publicly traded on December 29, 2022. However, prior to the Company's common stock being publicly traded, its Board of Directors periodically estimated the fair value of the Company’s common stock considering, among other things, contemporaneous valuations of its common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
The grant date fair value of each option grant for the year ended December 31, 2022 was estimated using the Black-Scholes option-pricing model using the following weighted-average assumptions:
Risk-free interest rate 3.3 %
Expected term (years) 5.6
Expected volatility 83.48 %
Expected dividend yield —
Estimated fair value of the Company's common stock per share $ 3.48
11. Income taxes
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COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The Company has incurred losses since inception and has not recorded current or deferred income taxes.
A reconciliation of income tax benefit at the statutory federal income tax rate and income taxes as reflected in the financial statements is as follows:
December 31,
Federal tax benefit at statutory rate (21.0 )% (21.0 )%
Permanent differences 4.6 1.1
Change in valuation allowance 16.4 19.9
Total provision 0 % 0 %
Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which differences are expected to reverse.
Significant components of the Company's deferred tax assets for federal income taxes consisted of the following:
December 31,
Accrued expenses and other 60,521 —
Deferred tax assets, net of valuation allowance $ 60 $ 2,358
Deferred tax liabilities
Fixed assets $ (60 ) $ (2,358 )
Net deferred tax assets $ — $ —
As December 31, 2022 and December 31, 2021, the Company has net operating loss carryforwards for federal income tax purposes of approximately $2,898,754 and $2,356,929, respectively. Net operating losses are available to offset future federal taxable income. These net operating loss carryforwards have no expiration.
In assessing the recoverability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has determined that it is more likely than not that certain future tax benefits may not be realized as a result of current and future income. Accordingly, a valuation allowance has been recorded against all of the Company’s deferred tax assets.
Net operating loss and tax credit carry-forwards are subject to review and possible adjustment by the Internal Revenue Service (“IRS”) and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code, which could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has not yet conducted a study to determine if any such limitation exists.
F-18
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company had no interest or penalties related to uncertain tax positions. All tax years of the Company from inception are open to examination by federal tax and state tax authorities. To the extent utilized in future years’ tax returns, net operating loss carryforwards as of December 31, 2022 will remain subject to examination until utilized. The Company has not been informed by any tax authorities for any jurisdiction that any of its tax years is under examination as of December 31, 2022.
12. Related party transactions
In April 2022, the Company issued $10,468,970 of Notes, which bear interest at an annual rate of 6.0%, paid in kind, and have a maturity date of June 30, 2024, as further described in Note 7. The fair value of the Notes was determined to be $10,468,970 on issuance, which is the principal amount of the Notes. On issuance, total debt issuance costs of $997,367, of which $697,828 was paid to a related party, were immediately expensed as a component of general and administrative expense in the statement of operations during the year ended December 31, 2022.
In connection with the issuance of the Company’s Series A, the Company incurred $704,750 placement agent fees which were paid to an affiliate of the pre-Merger owners of Coya Therapeutics, Inc. As described in Note 9, the placement agent also received warrants for the purchase of 92,184 shares of the Company’s common stock.
Additionally, the Company entered into a consulting arrangement with the pre-Merger owner of Coya Therapeutics, Inc., whereby the Company paid a monthly consulting and advisory fee of $10,000, which commenced in January 2021. This arrangement terminated in December 2022.
For the years ended December 31, 2022 and 2021, the Company paid $30,000 and $127,500 of consulting fees, respectively, related to a consulting arrangement with a Company founder. This arrangement terminated in May 2022.
13. Subsequent events
The Company has evaluated subsequent events from the balance sheet date through March 29, 2023, the date at which the financial statements were issued and has determined that there are no such events to report outside of the below:
On January 3, 2023, the Company completed its IPO in which the Company sold 3,050,000 shares of its common stock and 1,525,000 warrants to purchase common stock at $5.00. The warrants related to the IPO have an exercise price of $7.50 per warrant and a contractual life of five years. The Company received net proceeds of $13,432,500 after deducting underwriting discounts, commissions, and other offering expenses paid by the Company. In connection with the closing of the IPO, (i) all of the Company's outstanding shares of Series A converted into an aggregate of 1,316,926 shares of common stock, (ii) the Company's Notes converted into an aggregate of 2,736,488 shares of common stock, and (iii) the Company filed an amended and restated certificate of incorporation to, among other things, increase the number of authorized shares of common stock to 200,000,000 and increase the number of authorized shares of preferred stock to 10,000,000. As part of the Note conversion, the Company issued 191,554 warrants to its placement agent with an exercise price of $6.00 per warrant and a contractual life of five years. The Company also issued 213,500 warrants with an exercise price of $6.25 per warrant and a contractual life of five years to its underwriters as a portion of the underwriting compensation in connection with the IPO.
In connection with the IPO, the Company granted its underwriters a 30-day over-allotment option ("Over-Allotment") to purchase up to an additional 290,000 shares of common stock and warrants to purchase 145,000 shares of common stock to cover over-allotments at $5.00, less underwriting discount. On January 25, 2023, the underwriters purchased 237,804 shares of common stock and 145,000 warrants to purchase common stock at $5.00 per share in connection with Over-Allotment. Upon the sale of the Over-Allotment, the Company issued its underwriters an additional 16,646 warrants with an exercise price of $6.25 per warrant and a contractual life of
F-19
COYA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
five years. The Company received net proceeds of $1,105,789 after deducting underwriting discounts for the common stock and warrants issued in connection with the Over-Allotment.
On March 16, 2023, the Company entered into an exclusive License and Supply Agreement ("DRL Agreement") with Dr. Reddy's Laboratories ("DRL"). The DRL Agreement will become effective on April 1, 2023. Pursuant to the terms of the DRL Agreement, the Company will in-license DRL's proposed abatacept biosimilar to be used in the development and commercialization of the Company's biologic product candidate combination that aims to suppress inflammation (“COYA 302”) in the U.S., Canada, Mexico, South America, the European Union, the United Kingdom, and Japan. In consideration for the license, within 30 days from execution of the DRL Agreement, the Company will pay a one-time, non-refundable upfront fee of $350,000. The Company will pay to DRL up to an aggregate of approximately $2,900,000 of pre-approval regulatory milestone payments for the first indication in the Field (as defined in the DRL Agreement) and an additional approximately $20,000,000 if all other development, regulatory approval and sales milestones are incurred under the DRL License Agreement. The Company will also pay to DRL a low-six figure milestone payment per additional indication. Further, pursuant to the DRL Agreement, the Company will pay to DRL single-digit royalties on Net Sales (as defined in the DRL Agreement).
F-20