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, 2021

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries, EyeGate Pharma S.A.S. (through its dissolution on December 30, 2020), 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 (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 long-lived assets, revenue recognition, stock-based compensation, 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, and prior to its dissolution on December 31, 2020, operations of EyeGate Pharma S.A.S. were, 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.

Cash and Cash Equivalents and Restricted Cash

The 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. At December 31, 2021 and 2020, the Company has classified $0.045 million as restricted cash.

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, 2021. 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

Goodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired. In 2021, this consists of the goodwill of the Company’s subsidiaries Jade, Kiora GmbH, and Bayon. In 2020, this consists of the goodwill of the Company’s subsidiaries Jade and Kiora GmbH. 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 performed qualitative impairment evaluations on its goodwill as of December 31, 2021. Goodwill as of December 31, 2021 was reduced to zero after taking an impairment loss of $4.498 million. The Fair Value is determined using the income approach with a reconciliation to the Company’s stock price. The impairment is reported on the consolidated statements of operations. Goodwill as of December 31, 2020 is $3.485 million.

In-process Research and Development

In-Process Research and Development

The 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 and periodically evaluates this asset 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. At December 31, 2021, there is $8.696 million of in-process R&D as part of intangible asset and in-process R&D on the Consolidated Balance Sheets. This amount includes an impairment loss of $1.770 million reported on the consolidated statements of operations. The impairment loss is for KIO-201 and is due to the fact the asset is regulated as a drug and not a device which is extending development time. At December 31, 2020, there is $9.730 million of in-process R&D as part of intangible asset and in-process R&D on the Consolidated Balance Sheet.

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 segments.

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, 2021 and 2020, all of the Company’s net deferred income tax assets were subject to a full valuation allowance. As of December 31, 2021 and 2020, the Company has a net deferred tax liability of $0.614 million and $0.729 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, 2021, the Company had no unrecognized uncertain income tax positions.

Refunds for Research and Development

Kiora, through its Kiora GmbH subsidiary, is entitled to receive certain refunds associated with its research and development expenses in Austria. These refunds are realized in the form of a cash payment in the year following the incurred research & development expenses. The Company records the refundable payment as a reduction in expense in the year in which the research and development expenses are incurred.

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 at grant date, based on the estimated fair value of the award, and recognizes the cost 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 recognizes compensation expense for non-employee stock option grants at the fair value of the goods or services received or the equity instruments issued, whichever is more reliably measurable. 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.

Related Party Transactions

Related-Party Transactions

During the year ended December 31, 2021, 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. Additionally, on January 6, 2021, the Company completed a private placement of 1,531,101 shares of Common Stock and warrants to purchase up to 1,531,101 shares of Common Stock to an affiliate of Armistice Capital, LLC, with a combined purchase price per share and warrant of $5.225. 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 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.

2. Summary of Significant Accounting Policies - (continued)

During the year ended December 31, 2020, the Company entered into certain related-party transactions, making payments for services to two vendors, seven consultants and two public universities, all of whom also are stockholders of the Company. The Company made payments related to manufacturing services to one vendor in the amount of approximately $502,000. Except for the manufacturing services as described previous, the transactions with related parties during the year ended December 31, 2020 are not material to the accompanying Consolidated Financial Statements.

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 41,216 shares for year ended December 31, 2021 and 77,262 shares for the year ended December 31, 2020.

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, 2021 and 2020, 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. All shares of Common Stock that may potentially be issued in the future are as follows:


	Year Ended December 31,
	2021	2020
Common Stock Warrants	6,757,180	2,726,700
Employee Stock Options	515,922	246,893
Preferred Stock	2,089	865,500
Total Shares of Common Stock Issuable	7,275,191	3,839,093

Fair Value of Financial Instruments

As of December 31, 2021 and 2020, the fair value of the Company’s contingent consideration was $6.519 million and $5.343 million, respectively. During the year ended December 31, 2021, the Company recorded contingent consideration at fair value of $1.388 million as a result of the Bayon acquisition and reduced the contingent consideration liability by $0.212 million due to a payment made in accordance with terms from the Panoptes acquisition. During the year ended December 31, 2020, the Company recorded contingent consideration at fair value of $3.633 million as a result of the Panoptes acquisition. The remaining contingent consideration arose from Series D Preferred Shares. The Company evaluates the fair value of contingent consideration on a quarterly basis and there were no fair value adjustments recorded during the years ended December 31, 2021 and 2020.

At December 31, 2021 and 2020, the Company had no other assets or liabilities that are subject to fair value methodology and estimation in accordance with U.S. GAAP.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for smaller reporting companies in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect the adoption of this standard to have a material effect on the Company’s Consolidated Financial Statements and related disclosures.