Kiora Pharmaceuticals, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2022

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This guidance removes the liability and equity separation models for convertible instruments with a cash conversion feature or beneficial conversion feature. As a result, companies will more likely account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account). In addition, the guidance simplifies the settlement assessment that issuers perform to determine whether a contract in their own equity qualifies for equity classification. Finally, the guidance requires entities to use the if-converted method to calculate earnings per share for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company adopted ASU 2020-06 on January 1, 2022. The adoption of ASU 2020-06 did not have a material effect for the Company.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) to clarify an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. Specifically, the ASU provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense. The guidance is effective for annual reporting periods beginning after December 15, 2021, and interim periods within those fiscal years. The Company adopted ASU 2021-04 on January 1, 2022. The adoption of ASU 2021-04 did not have a material effect for the Company.

In November 2021, the FASB issued ASU 2021-10, which requires business entities to disclose information about certain government assistance they receive. Such disclosure requirements include the nature of the transactions and the related accounting policy used, the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item and significant terms and conditions of the transactions. ASU 2021-10 was effective for the Company January 1, 2022. The adoption of ASU 2021-10 did not have a material effect for the Company.

Basis of Presentation and Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries, Jade Therapeutics, Inc. (“Jade”), Kiora Pharmaceuticals GmbH (“Kiora GmbH”) (formerly known as Panoptes Pharma Ges.m.b.H or “Panoptes”) (effective December 18, 2020 when the Company acquired all of the capital stock of Panoptes), Bayon Therapeutics, Inc. ("Bayon") (effective October 21, 2021 when the Company acquired all of the capital stock of Bayon), and Kiora Pharmaceuticals Pty Ltd (“Kiora Pty”) (formerly known as Bayon Therapeutics Pty Ltd), collectively referred to as “the Company”. All inter-company balances and transactions have been eliminated in consolidation. These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of expenses during the reporting periods. The Company makes significant estimates and assumptions in recording the accruals for the Company’s clinical trial and research activities, establishing the useful lives of intangible assets and property and equipment, conducting impairment reviews of goodwill, in-process research and development (IPR&D), stock-based compensation, assumptions used to value warrants including warrant modifications and

inducements, and contingent considerations payable. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Although the Company monitors and regularly assesses these estimates, actual results could differ significantly from these estimates. The Company records changes in estimates in the period that it becomes aware of the change.

Foreign Currency Translation

Operations of Kiora GmbH are conducted in euros which represent its functional currency. Operations of Kiora Pty are conducted in Australian dollars, which represent its functional currency. Balance sheet accounts of such subsidiaries were translated into U.S. dollars at the exchange rate in effect at the balance sheet date and income statement accounts were translated to the average rate of exchange prevailing during the period. Translation adjustments resulting from this process, are included in accumulated other comprehensive loss on the Consolidated Balance Sheets and a component of other comprehensive income (loss) on the Consolidated Statements of Operations and Comprehensive Loss.

Cash and Cash Equivalents and Restricted Cash

Cash and Cash Equivalents and Restricted CashThe Company considers all highly liquid investments purchased with a maturity of 90 days or less when acquired that are not restricted as to withdrawal, to be the equivalent of cash for the purpose of balance sheet and statement of cash flows presentation. The Company invests its cash in either U.S. government or treasury money market funds with maturities of 90 days or less.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the estimated useful life of 2 to 5 years for all assets. Maintenance and repair costs are expensed as incurred. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable and recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset.

Impairment of Long-Lived Assets

The Company evaluates potential impairment of long-lived assets and long-lived assets to be disposed of and considers whether long-lived assets held for use have been impaired whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable, or that the period of their recovery may have changed. Management makes significant estimates and assumptions regarding future sales, cost trends, productivity and market maturity in order to test for impairment. Management reports those long-lived assets to be disposed of and assets held for sale at the lower of carrying amount or fair value less cost to sell. Based on current facts, estimates and assumptions, management believes that no assets are impaired at December 31, 2022. There is no assurance that management’s estimates and assumptions will not change in future periods.

Research and Development Expenses

The Company expenses research and development (“R&D”) expenditures as incurred. R&D expenses are comprised of costs incurred in performing R&D activities, including salaries, benefits, facilities, research-related overhead, sponsored research costs, contracted services, license fees, expenses related to generating, filing, and maintaining intellectual property and other external costs. Because the Company believes that, under its current process for developing its products, the viability of the products is essentially concurrent with the establishment of technological feasibility, no costs have been capitalized to date.

Goodwill

GoodwillGoodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired. In 2022, the Company had no goodwill. In 2021, this consisted of the goodwill of the Company’s subsidiaries Jade and Kiora GmbH and Bayon. Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company had no goodwill as of December 31, 2022, and accordingly did not need to perform an impairment analysis. As of December 31, 2021, the Company performed qualitative and quantitative impairment evaluations on its goodwill. As a result, goodwill as of December 31, 2021 was reduced to zero after taking an impairment loss of $4.0 million. The fair value is determined using the income approach with a reconciliation to the Company’s market capitalization. The impairment is reported on the Consolidated Statements of Operations and Comprehensive Loss.

In-Process Research and Development

In-Process Research and DevelopmentThe Company records in-process R&D projects acquired in asset acquisitions that have not reached technological feasibility and which have no alternative future use. For in-process R&D projects acquired in business combinations, the Company capitalizes the in-process R&D project as an indefinite-lived intangible asset and evaluates this asset annually for impairment until the R&D process has been completed. Once the R&D process is complete, the Company amortizes the R&D asset over its remaining useful life. The Company performed an annual evaluation of it's indefinite-lived intangible assets for impairment as of August 31, 2022 with a quantitative analysis. As of December 31, 2022 the Company also performed a qualitative update analysis for impairment and based on this analysis, the fair value of these products was greater than their carrying value. The Company considered the development timelines for its program and noted no qualitative factors that would indicate potential impairment of its indefinite-lived intangible assets. At December 31, 2022 and 2021, there is $10.6 million respectively of in-process R&D as part of intangible assets and in-process R&D, net on the Consolidated Balance Sheets.

Accrued Clinical Expenses

As part of the Company’s process of preparing the Consolidated Financial Statements, the Company is required to estimate its accrued expenses. This process includes reviewing open contracts and purchase orders, communicating with its applicable personnel to identify services that have been performed on its behalf and estimating the level of service performed and the associated costs incurred for the service when the Company has not yet been invoiced or otherwise notified of actual costs. The majority of the Company’s service providers invoice monthly in arrears for services performed. The Company makes estimates of its accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known at the time. The Company periodically confirms the accuracy of these estimates with the service providers and makes adjustments if necessary.

Business Segment and Geographical Information

The Company identifies operating segments as components of the enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company views its operations and manages its business as fully integrated and operating in one business segment (research and development), and the Company operates in three geographic areas.

Income Taxes

The Company will record a deferred income tax asset and liability for the expected future income tax consequences of events that have been recognized in the Company’s consolidated financial statements and income tax returns. The Company will record a deferred income tax asset and liability based on differences

between the financial statement carrying, or “book”, amounts of assets and liabilities, and the tax bases of the assets and liabilities using the enacted income tax regulations in effect in the years in which the differences are expected to reverse. A valuation allowance against deferred income tax asset will be recorded if, based on the weight of available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized. As of December 31, 2022 and 2021, all of the Company’s net deferred income tax assets were subject to a full valuation allowance. As of December 31, 2022 and 2021, the Company has a net deferred tax liability of $0.7 million and $0.8 million, respectively.

The Company recognizes the impact of an uncertain income tax position in the financial statements if it believes that the position is more likely than not to be sustained by the relevant taxing authority. As of December 31, 2022, the Company had no unrecognized uncertain income tax positions.

Warrant Liability

The Company classifies warrants to purchase shares of its common stock as a liability on its Consolidated Balance Sheets when the warrant is a free-standing financial instrument that may require the Company to transfer cash consideration upon exercise and that cash transfer event would be out of the Company’s control. Such a “warrant liability” is initially recorded at fair value on date of grant using the Black-Scholes model, and it is subsequently re-measured to fair value at each subsequent balance sheet date. Changes in the fair value of the warrant are recognized as a component of other income (expense), net in the Consolidated Statements of Operations and Comprehensive Loss. The Company will adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrant or meeting the requirements to be reclassified to equity.

For warrants that do not meet the criteria of a liability warrant and are classified on the Company’s Consolidated Balance Sheets as equity instruments, the Company uses the Black-Scholes model to measure the value of the warrants at issuance and then applies the relative fair-value of the equity transaction between common stock, preferred stock and warrants. Common stock, and equity-classified warrants each are considered permanent equity.

Refunds for Research and Development

Kiora, through its Kiora GmbH and Kiora Pty Ltd. subsidiaries, is eligible to receive certain refundable tax incentives associated with its research and development expenses in Austria and Australia. These refunds are realized in the form of a cash payment when received, following the incurred research & development expenses. The Company records the refundable payment as a tax receivable and a reduction in expense in the period in which the research and development expenses are incurred. As of December 31, 2022 and 2021, the Company has a research & development tax receivable of $1.3 million and $0.5 million, respectively.

Concentration of Credit Risk and Off-Balance-Sheet Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company invests cash in accredited financial institutions and cash equivalents in widely held money market funds. Consequently, such funds are subject to minimal credit risk.

The Company has no significant off-balance-sheet risk such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.

Comprehensive Loss

Comprehensive loss is defined as the change in stockholders’ equity during a period from transactions and other events and circumstances from non-owner sources. The foreign currency translation adjustments are the Company’s only component of other comprehensive loss.

Stock-Based Compensation

Stock-based compensation represents the cost related to stock-based awards granted to employees and others. The Company measures stock-based compensation cost to employees and non-employees at grant date, based on the estimated fair value of the award. Compensation cost for employee awards is recognized as expense on a straight-line basis over the employee requisite service period. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Company recorded compensation expense for non-employee awards with graded vesting using the accelerated expense attribution method. The Company’s policy is to record forfeitures as they occur.

Net Loss per Share - Basic and Diluted

Net Loss per Share – Basic and Diluted

Basic and diluted net loss per share is computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding for the period, which, for basic net loss per share, does not include the weighted-average unvested restricted common stock that has been issued but is subject to forfeiture of 30,000 shares for year ended December 31, 2022 and 375 shares for the year ended December 31, 2021.

Dilutive common equivalent shares consist of stock options, warrants, and preferred stock and are calculated using the treasury stock method, which assumes the repurchase of common shares at the average market price during the period. Under the treasury stock method, options and warrants will have a dilutive effect when the average price of common stock during the period exceeds the exercise price of options or warrants. Common equivalent shares do not qualify as participating securities. In periods where the Company records a net loss including the years ended December 31, 2022 and 2021, unvested restricted common stock and potential common stock equivalents are not included in the calculation of diluted net loss per share as their effect would be anti-dilutive.

Related-Party Transactions

During the year ended December 31, 2022, the Company entered into certain related-party transactions, making payments for services to one vendor and six consultants, all of whom also are stockholders of the Company. These transactions generally are ones that involve a stockholder or option holder of the Company to whom the Company also makes payments during the year, typically as a consultant or a service provider. The Company incurred expenses of approximately $0.1 million for services to the related party vendor Ora, Inc. who is providing the Company with clinical study services for KIO-301. One of the Company’s directors is an executive at Ora, Inc. $0.1 million of this amount was included in accounts payable at December 31, 2022 and was subsequently paid.

During the year ended December 31, 2021, the Company entered into certain related-party transactions, making payments for services to one vendors, six consultants and two public universities, all of whom also are stockholders of the Company. Additionally, on January 6, 2021, the Company completed a private placement of 38,278 shares of Common Stock and warrants to purchase up to 38,278 shares of Common Stock to an affiliate of Armistice Capital, LLC, with a combined purchase price per share and warrant of $209.00. Steven J. Boyd and Keith Maher, each of whom were members of the Company’s board of directors through August 3, 2021,

are affiliates of Armistice Capital, LLC, and Mr. Boyd held voting and investment power over such entity. The total net proceeds from the private placement were approximately $8.0 million. Lastly, on October 21, 2021, the Company acquired Bayon of which the Company’s CEO, Brian M. Strem, was a Co-Founder and Managing Director. Except for the private placement and Bayon acquisition as described previous, the transactions with related parties during the year ended December 31, 2021 are not material to the accompanying Consolidated Financial Statements.

Fair Value of Financial Instruments

Each period the Company revalues its contingent consideration obligations associated with business acquisitions to their fair value. The estimate of the fair value of contingent consideration is determined by applying probability of success, discount rate, and updated timing of the payment. The outstanding payments relate to obligation from acquisitions made by the Company. Below is the list of obligations for each relevant transaction are as of December 31, 2022 as follows:


Acquisition	Milestone Achievement Condition	Contingent Consideration Payable
Bayon
	Successful completion of Phase 1b	$	0.5	million
	Successful completion of Phase 2	$	1.0	million
	Successful completion of Phase 3	$	4.0	million
	FDA approval	$	1.7	million
Panoptes
	Beginning of Phase 3	$	4.8	million
	FDA approval	$	4.8	million
Jade
	FDA approval	$	2.2	million

Changes in the fair value of contingent consideration are included within “Operating Expenses” in the Company's Consolidated Statements of Operations and Comprehensive Loss. Below are the status of each transaction's contingent consideration:

Bayon: As of December 31, 2021, the Company recorded contingent consideration at fair value of $0.9 million as a result of the Bayon acquisition which closed on October 21, 2021. During the year ended December 31, 2022, the Company recorded an increase in estimated fair value of $0.3 million. As of December 31, 2022, the Company had contingent consideration at fair value of $1.1 million.

Panoptes: The Panoptes transaction closed December 18, 2020. As of December 31, 2021, the Company recorded contingent consideration of $1.6 million. During the year ended December 31, 2022, the Company recorded an increase in estimated fair value of $0.1 million. The estimated fair value of contingent consideration as of December 31, 2022 was $1.7 million.

Jade: As of December 31, 2021, the Company had a fair value of contingent consideration of $0.6 million. During the year ended December 31, 2022, the contingent consideration was increased by $0.2 million for a change in fair value. As of December 31, 2022, the Company had fair value of contingent consideration of $0.7 million.

At December 31, 2022 and 2021, the Company had no other assets or liabilities that are subject to fair value methodology and estimation in accordance with U.S. GAAP.