GRI Bio, Inc. 10-K

Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Based on the evaluation of our disclosure controls and procedures as of March 25, 2021, our Chief Executive Officer has concluded that, as of such date, our disclosure controls and procedures, as defined above, are effective. Material Weakness in Internal Control Over Financial Reporting The closing of our initial public offering occurred on February 12, 2021. As a newly public company under the Exchange Act, we are not required to evaluate the effectiveness of our internal controls over financial reporting until the end of the fiscal year after we file our Annual Report on Form 10-K for the year ended December 31, 2020. Although our management did not conduct an evaluation of our internal control over financial reporting, in connection with the audit of our financial statements for the years ended December 31, 2020, 2019 and 2018, we became aware of material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses related to a lack of segregation of duties in the financial reporting process due to the small size of our accounting and finance department, lack of sufficient documentation of various accounting processes, and the design over controls related to recording certain transactions. We plan to remediate the material weaknesses by hiring additional accounting and finance staff, and implementing new controls, processes and technologies to formalize internal controls frameworks and procedures. While we have initiated our remediation plan, we cannot assure you when or if these remediation measures will be fully completed or that they will prevent future control deficiencies or material weaknesses. Attestation Report of the Registered Public Accounting Firm This Annual Report does not include an attestation report of our registered public accounting firm due to an exemption provided by the JOBS Act for “emerging growth companies.” Changes in Internal Control Over Financial Reporting We are taking actions to remediate the material weaknesses relating to our internal controls over financial reporting as described above. Except as otherwise disclosed herein, there have been no changes in our internal control over financial reporting during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 75 Management’s 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 our independent registered public accounting firm due to a transition period established by the rules of the Securities and Exchange Commission for newly public companies. Item 9B. OTHER INFORMATION None. 76 PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE MANAGEMENT The following table sets forth certain information about our directors, director nominees, our executive officers, and a key consultant. Name Age Position Executive Officers David Baker 57 President, Chief Executive Officer and Director (Principal Executive, Financial, and Accounting Officer) Penny S. Toren 54 Senior Vice President, Regulatory Affairs & Program Management Non-Employee Directors and Director Nominee Ofir Levi(1)(3) 47 Director, Chairman of the Board Joseph Payne(1)(2)(3) 49 Director Richard Ammer 50 Director Marella Thorell(1)(2) 54 Director Key Consultant Timothy Whitaker, M.D. 62 Chief Medical Officer (1) Member of the audit committee. (2) Member of the compensation committee. (3) Member of the nominating and corporate governance committee. Executive Officers David Baker has served as our President and Chief Executive Officer since January 15, 2019, and as a member of the Board from that time until August 23, 2019, and upon the consummation of the initial public offering of our common stock on February 12, 2021, he was again appointed as a director. Prior to being appointed our President and Chief Executive Officer, he served as a consultant to our company since January 15, 2018. He previously served as the Interim Chief Executive Officer and Chief Commercial Officer of Alcobra Ltd (now known as Arcturus), where he oversaw the development of ADAIR. Prior to joining Alcobra Ltd., he worked at Shire Pharmaceuticals for 10 years, including as Vice President of Commercial Strategy and New Business in the Neuroscience Business Unit. In that role, Mr. Baker led the commercial assessment of neuroscience licensing opportunities, managed commercial efforts on pipeline CNS products, and led the long-term strategic planning process. Previously, he served as Global General Manager for Shire’s Vyvanse® where he led the launch of Vyvanse and led global expansion efforts including successful establishment of a partnership in Japan and launches in Canada and Brazil. Prior to that, Mr. Baker served as Vice President of Marketing for all of Shire’s ADHD products. From 1990 through 2004, Mr. Baker worked at Merck & Co., where he held positions of increasing responsibility in marketing, sales, market research, and business development. In addition to his knowledge and experience with CNS medications, Mr. Baker’s expertise includes therapeutics for osteoporosis, migraine, and hyperlipidemia. He has been directly involved with the marketing of five medications with annual sales in excess of $1 billion each. Mr. Baker graduated Magna Cum Laude with a bachelor’s degree in Economics and Computer Science from Duke University. He earned a Master of Business Administration in Marketing from Duke’s Fuqua School of Business. Mr. Baker also serves on the board of directors of Benchworks, Inc., a private healthcare advertising agency. We believe Mr. Baker’s extensive experience in the biopharmaceuticals industry and his in-depth understanding of our business, strategy and management team qualifies him to serve on our board of directors. 77 Penny S. Toren has served as our Senior Vice President, Regulatory Affairs, since April 2018. She brings over 25 years of Regulatory and Clinical Development experience in the pharmaceutical industry from Glaxo SmithKline, AstraZeneca, Cephalon, and Teva. At Vallon, Ms. Toren heads the Regulatory Affairs & Program Management function, providing regulatory strategies to optimize the most efficient and effective outcomes for Vallon’s drug products as well as ensuring full compliance with FDA and DEA regulations for products in development through post approval. From 2003 until April 2018, Ms. Toren developed the Global Regulatory Policy & Intelligence function for Teva’s Specialty, Generic, & Biosimilar portfolio. In this role, Ms. Toren participated in several FDA, PhRMA, and BIO cross company working groups to address regulatory policy for abuse deterrent products. Prior to that, Ms. Toren led the successful registration of Fentora®, negotiated approval of the first RiskMap for opioids, and was a driver of the initial development of the Fentora® and Actiq® REMS programs. Ms. Toren earned her bachelor’s degree in Chemistry and Biology from Florida Atlantic University, an MS in Biostatistics and Epidemiology from New York Medical College. Non-Executive Directors Ofir Levi has served as a member of our Board since inception and has served as the Chairman of the Board since our inception. He is an accomplished biotech entrepreneur with over 16 years of experience establishing, managing and investing in early to late stage life science companies. He was a research consultant for Adamas Health Care Fund from its inception in 2014 until January 2020 where he led a research team that conducts deep scientific analysis of publicly traded pharmaceutical and biotechnology companies. Prior to his engagement with Adamas Health Care Fund, Dr. Levi was the founder and CEO at Bioassociate Ltd., an expertise-based consulting, research and analysis company focused on the pharmaceutical, biotechnology and life science sectors. Until 2011, Dr. Levi was the CEO of Radmor Biocap LLC, a company that invested and managed seed and early stage companies, pharmaceutical development, clinical diagnostics and medical devices. Led by Dr. Levi Radmor, signed several license agreements with leading universities around the world for novel technologies, and established companies developing these technologies. Dr. Levi completed his Ph.D. studies in Prof. Daniel Michaelson’s neurobiology lab at Tel-Aviv University. During the four years of his Ph.D. studies, he led a research group in both in-house research and several international collaborations. Dr. Levi’s PhD thesis focused on neurogenesis processes in Alzheimer’s Disease. We believe Dr. Levi’s extensive experience as an investor and entrepreneur in the biopharmaceuticals industry and his in-depth understanding of our business, strategy and management team qualifies him to serve on our board of directors. Joseph Payne joined our board of directors on June 22, 2018 in connection with the Asset Purchase Agreement, as the designated director nominee of Arcturus pursuant to the terms of the 2018 Voting Agreement (as hereinafter defined), which agreement terminated upon the filing of the registration statement in connection with the initial public offering of our common stock. See “Item 1. Business — Asset Purchase Agreement” in this Annual Report for more information. He also serves on the board of directors of Arcturus since November 2017. Mr. Payne previously served as President and Chief Executive Officer of Arcturus and on its board of directors from March 2013 to February 2018. Prior to joining Arcturus, Mr. Payne served as Senior Manager of Nitto Denko Corporation, a life sciences research company, from June 2009 until February 2013. Mr. Payne’s background includes over 20 years of drug discovery experience at Arcturus, Nitto Denko Corporation, Kalypsys Inc., Merck Research Labs, Bristol-Myers Squibb Co. and DuPont Pharmaceuticals Co. Mr. Payne received a bachelor’s degree in Chemistry, magna cum laude from Brigham Young University, a Master of Science in Synthetic Organic Chemistry from the University of Calgary and an Executive Training Certificate from MIT Sloan School of Management. We believe Mr. Payne’s extensive experience in the biopharmaceuticals industry and as a chief executive officer of a biopharmaceutical company qualifies him to serve on our board of directors. Richard Ammer, M.D., Ph.D. , Since 2003, Dr. Ammer serves as general manager and since 2012 as managing owner of MEDICE Arzneimittel Pütter GmbH & Co. KG, a family-owned mid-sized pharmaceutical enterprise, where he is responsible for search and development, medical and regulatory affairs, manufacturing, market access and international marketing and distribution. Since 2008, Dr. Ammer has served as a board member and Vice President of the German Pharmaceutical Association with a focus on research and development. Dr. Ammer graduated with a degree in medicine from Technical University, Munich, and internship at Harvard Medical School, Boston. Dr. Ammer pursued his clinical and scientific education in internal medicine at Massachusetts General Hospital in Boston from 1996 until 2000, the German Heart Center from 2000 until 2001, and the University Hospital in Muenster 2001, where he has been responsible for patients undergoing cardiac and renal care. He also established a nation-wide network of excellence and competence on cardiac arrhythmias, sponsored by the federal ministry of science (BMBF), for which he served as its general manager from 2002 to 2004. His research on atrial fibrillation, for which he obtained his PhD in 2000 from Technical University, Munich, was awarded by the European Society in Cardiology with the Young Investigator Award in Basic Science in 2001. Dr. Ammer also studied business administration and economics at University St. Gallen from 1992 until 1996, and at Harvard Extension School from 1996 until 1998 and obtained a PhD in 2005 from University St. Gallen. Since 2001, Dr. Ammer has also served as lecturer at University St. Gallen, Switzerland. We believe Dr. Ammer’s extensive experience in the biopharmaceuticals industry and as a chief executive officer of a biopharmaceutical company qualifies him to serve on our board of directors. 78 Marella Thorell has served as a director and as the chairperson of our audit committee since February 12, 2021. Since February 2021, she has served as Head of Finance of Centessa Pharmaceuticals Limited, a next-generation biopharmaceutical company, formed by Medicxi through the merger of ten private biotech companies and completion of a $250 million Series A financing. Prior to that, Ms. Thorell was the Chief Financial Officer of Palladio BioSciences, Inc. Ms. Thorell has more than 25 years of experience in executive financial and operational roles and has successfully led multiple M&A, licensing, and fundraising transactions. Ms. Thorell also served as CFO/COO and an Executive Director of Realm Therapeutics, which was acquired by ESSA Pharma in July 2019, having previously held a number of other senior positions within Realm Therapeutics. Ms. Thorell was appointed a director of ESSA following the acquisition. Ms. Thorell worked at Campbell Soup Company, in several financial and management roles of increasing responsibility. She was also an executive consultant focusing on financial and human capital projects. She began her career and earned her CPA qualification with Ernst & Young, LLP. Ms. Thorell earned a BS in Business from Lehigh University, magna cum laude. We believe Ms. Thorell’s extensive experience and education in finance and accounting in the biopharmaceuticals industry qualifies her to serve on our board of directors. Key Consultant Timothy Whitaker, M.D. is a part-time consultant that has served as our Chief Medical Officer since April 2018. He brings over 20 years of experience in the pharmaceutical industry and nearly a decade in academic medicine. His pharmaceutical industry experience involves extensive leadership and management of many global clinical development programs, achieving numerous global regulatory approvals. The majority of this work has been in neuroscience and includes leading the development and approval of multiple ADHD medications. Most recently, Dr. Whitaker served as the Chief Medical Officer at Alder Biopharmaceuticals leading a positive Phase III study in the development of a CGRP antagonist for migraine. Prior to that, Dr. Whitaker worked at Shire for more than 10 years, most recently as VP and Neuroscience Therapeutic Area Head, Global Clinical Development. Prior to Shire, Dr. Whitaker served as a Senior Director — Neuroscience at Wyeth Research with a focus on sleep disorders and life cycle management for Effexor®. Prior to joining industry, Dr. Whitaker held a variety of clinical and teaching positions at the University of Vermont (UVM) College of Medicine and the Medical Center Hospital of Vermont, including Associate Professor of Psychiatry, Director of the Inpatient Services, Executive Committee of the Vermont Regional Sleep Disorders Center, and Director of the Psychopharmacology Clinic. He earned his bachelor’s degree from Duke University, and his medical degree from Wake Forest University School of Medicine. He completed a residency training program in psychiatry and a fellowship in clinical psychopharmacology at UVM/Medical Center Hospital of Vermont in Burlington. Family Relationships There is no family relationship between any director, executive officer or person nominated to become a director or executive officer. Composition of Our Board of Directors Our amended and restated certificate of incorporation and amended and restated bylaws provide that the number of directors on our board shall be determined from time to time by resolution of the Board or the Company’s stockholders, and the current size of our Board is five members. Our amended and restated bylaws also provide that our directors may be removed from office with or without cause by vote of the holders of a majority of the shares of stock entitled to vote in the election of directors. Our current and future executive officers and significant employees serve at the discretion of our board of directors. Our board of directors may also choose to form certain committees, such as a compensation and an audit committee. Our board of directors is divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the directors whose terms then expire will be subject to re-election to serve until the third annual meeting following re-election. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Our directors are divided among the three classes as follows: · the Class I directors are David Baker and Ofir Levi, and their term expires at the annual meeting of stockholders to be held in 2021; 79 · the Class II directors are Richard Ammer and Marella Thorell, and their term expires at the annual meeting of stockholders to be held in 2022; and · the Class III directors are Joseph Payne, and his term expires at the annual meeting of stockholders to be held in 2023. Our amended and restated certificate of incorporation and amended and restated bylaws provide that only our board of directors can fill vacancies on the board, including due to increases in the size of the board. Any additional directorships resulting from an increase in the authorized number of directors would be placed among the three classes so that, as nearly as possible, each class consists of one-third of the authorized number of directors. The classification of our board of directors may have the effect of delaying or preventing changes in our control or management. See Exhibit 4.5 “Description of Capital Stock — Anti-Takeover Effects of our Certificate of Incorporation and Bylaws and Delaware Law.” Director Independence Under the listing requirements of The Nasdaq Capital Market, independent directors must comprise a majority of a listed company’s board of directors within twelve months from the date of listing. In addition, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees must be independent within twelve months from the date of listing. Audit committee members must also satisfy additional independence criteria, including those set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the Exchange Act), and compensation committee members must also satisfy the independence criteria set forth in Rule 10C-1 under the Exchange Act. A director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 under the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries, other than compensation for board service; or (2) be an affiliated person of the listed company or any of its subsidiaries. In order to be considered independent for purposes of Rule 10C-1, the board of directors must consider, for each member of a compensation committee of a listed company, all factors specifically relevant to determining whether a director has a relationship to such company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to: the source of compensation of the director, including any consulting advisory or other compensatory fee paid by such company to the director, and whether the director is affiliated with the company or any of its subsidiaries or affiliates. Our board of directors has determined that all members of the board of directors and our director nominees, except Richard Ammer and David Baker, are independent directors, including for purposes of the rules of The Nasdaq Capital Market and the SEC. In making such independence determination, our board of directors considered the relationships that each non-employee director has with us and all other facts and circumstances that our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. The composition and functioning of our board of directors and each of our committees comply with all applicable requirements of The Nasdaq Capital Market and the rules and regulations of the SEC. Board Oversight of Risk One of the key functions of our board of directors is informed oversight of our risk management process. In particular our board of directors is responsible for monitoring and assessing strategic risk exposure. Our executive officers are responsible for the day-to-day management of the material risks we face. Our board of directors administers its oversight function directly as a whole. Our board of directors also administers its oversight through various standing committees, which address risks inherent in their respective areas of oversight. For example, our audit committee is responsible for overseeing the management of risks associated with financial reporting, accounting and auditing matters; our compensation committee oversees the management of risks associated with our compensation policies and programs; and our nominating and corporate governance committee oversees the management of risks associated with director independence, conflicts of interest, composition and organization of our board of directors and director succession planning. 80 Board Committees Our board of directors established an audit committee, a compensation committee and a nominating and corporate governance committee and may establish other committees to facilitate the management of our business. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Our board of directors and its committees set meeting schedules throughout the year and can also hold special meetings and act by written consent from time to time, as appropriate. Our board of directors expects to delegate various responsibilities and authority to committees as generally described below. The committees regularly report on their activities and actions to the full board of directors. Each member of each committee of our board of directors qualifies as an independent director in accordance with the listing standards of The Nasdaq Capital Market. Each committee of our board of directors has a written charter that was approved by our board of directors. Copies of each charter are posted on our website at www.vallon-pharma.com under the Investor Relations section. Information contained on our website is not incorporated by reference into this Annual Report. Audit Committee The members of our audit committee are Ofir Levi, Joseph Payne and Marella Thorell, who is the chair of the audit committee. Our audit committee assists our board of directors with its oversight of the integrity of our financial statements; our compliance with legal and regulatory requirements; the qualifications, independence and performance of the independent registered public accounting firm; the design and implementation of our financial risk assessment and risk management. Among other things, our audit committee is responsible for reviewing and discussing with our management the adequacy and effectiveness of our disclosure controls and procedures. Our audit committee also discusses with our management and independent registered public accounting firm the annual audit plan and scope of audit activities, scope and timing of the annual audit of our financial statements, and the results of the audit, quarterly reviews of our financial statements and, as appropriate, initiates inquiries into certain aspects of our financial affairs. Our audit committee is responsible for establishing and overseeing procedures for the receipt, retention and treatment of any complaints regarding accounting, internal accounting controls or auditing matters, as well as for the confidential and anonymous submissions by our employees of concerns regarding questionable accounting or auditing matters. In addition, our audit committee has direct responsibility for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm. Our audit committee has sole authority to approve the hiring and discharging of our independent registered public accounting firm, all audit engagement terms and fees and all permissible non-audit engagements with the independent auditor. Our audit committee reviews and oversees all related person transactions in accordance with our policies and procedures. Each member of our audit committee is independent under the rules and regulations of the SEC and the listing standards of the Nasdaq Capital Market applicable to audit committee members. Our board of directors has determined that Marella Thorell qualifies as an audit committee financial expert within the meaning of SEC regulations and meets the financial sophistication requirements of The Nasdaq Capital Market listing standards. In making this determination, our board has considered Ms. Thorell’s prior experience, business acumen and independence. Both our independent registered public accounting firm and management periodically meets privately with our audit committee. We believe that the composition and functioning of our audit committee complies with all applicable requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and all applicable SEC and The Nasdaq Capital Market rules and regulations. We intend to comply with future requirements to the extent they become applicable to us. Compensation Committee The members of our compensation committee are Marella Thorell and Joseph Payne, who is the chair of the compensation committee. Each member of our compensation committee is independent under the rules and regulations of the SEC and the listing standards of The Nasdaq Capital Market applicable to compensation committee members. Our compensation committee assists our board of directors with its oversight of the forms and amount of compensation for our executive officers (including officers reporting under Section 16 of the Exchange Act), the administration of our equity and non-equity incentive plans for employees and other service providers and certain other matters related to our compensation programs. Our compensation committee, among other responsibilities, evaluates the performance of our chief executive officer and, in consultation with him, evaluates the performance of our other executive officers (including officers reporting under Section 16 of the Exchange Act). 81 Nominating and Corporate Governance Committee The members of our nominating and corporate governance committee are Joseph Payne and Ofir Levi, who is the chair of the nominating and corporate governance committee. Each member of our nominating and governance committee is independent under the rules and regulations of the SEC and the listing standards of The Nasdaq Capital Market, applicable to nominating and governance committee members. Our nominating and corporate governance committee assists our board of directors with its oversight of and identification of individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors, and selects, or recommends that our board of directors selects, director nominees; develops and recommends to our board of directors a set of corporate governance guidelines and oversees the evaluation of our board of directors. Communicating with Our Board of Directors You may communicate with our board of directors as a group, or to specific directors, by writing to the Chairman of our board of directors at our offices located at 100 N. 18th Street, Suite 300, Philadelphia, PA 19103, or board@vallon-pharma.com, who will then forward all such correspondence to the Chairman. The Chairman will review all such correspondence and regularly forward to our full board of directors such correspondence and copies of all correspondence that, in the opinion of the Chairman, deals with the functions of our board of directors or committees thereof or that he otherwise determines requires their attention. Directors may at any time review a log of all correspondence we receive that is addressed to members of our board of directors and request copies of any such correspondence. Concerns relating to accounting, internal controls, or auditing matters may be communicated in this manner. These concerns will be immediately brought to the attention of our board of directors and handled in accordance with procedures established by our board of directors. Notwithstanding the foregoing, the non-management directors have requested that the Chairman not forward to them advertisements, solicitations for periodicals or other subscriptions, and other similar communications. Compensation Committee Interlocks and Insider Participation None of our current or former executive officers serve as a member of the compensation committee. None of our officers serve, or have served during the last completed fiscal year, on the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or our compensation committee. For a description of transactions between us and members of our compensation committee and affiliates of such members, see the section entitled “Certain Relationships and Related Party Transactions.” Code of Business Conduct and Ethics We adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees. Our Code of Business Conduct and Ethics is available on our website at https://www.vallon-pharma.com/ . A copy of our code of ethics will also be provided to any person without charge, upon written request sent to us at our offices located at 100 N. 18th Street, Suite 300, Philadelphia, PA 19103. Delinquent Section 16 Reports Not applicable. 82 Item 11. EXECUTIVE COMPENSATION Summary Compensation Table As an emerging growth company, we are required to disclose the compensation earned by or paid to our named executive officers for the last two completed fiscal years. Name and Principal Position Year Salary ($) Option Awards ($)(1) All Other Compensation ($)(2) Total ($) David Baker, President and Chief Executive Officer (3) 2020 330,000 123,000 9,900 462,900 2019 246,000 98,000 7,843 351,843 Penny S. Toren, Senior Vice President, Regulatory Affairs 2020 235,000 57,000 7,050 299,050 & Program Management 2019 235,244 12,600 6,840 254,684 (1) Reflects the aggregate grant date fair value of stock options granted during the fiscal year calculated in accordance with FASB ASC Topic 718. See Note F to our audited financial statements for the period ended December 31, 2020, included elsewhere in this Annual Report, for a discussion of the assumptions made by us in determining the grant date fair value of our equity awards. (2) Reflects matching contributions to a SIMPLE IRA. (3) In February 2021, the Board approved a bonus payment of $206,250 to Mr. Baker. (4) In February 2021, the Board approved a bonus payment of $58,750 to Ms. Toren as well as an increase to her annual base salary of 7% to $251,450 effective March 1, 2021. Compensation Arrangements for Executive Officers Employment Agreements On January 15, 2019, David Baker entered into an employment agreement (the “ Baker Agreement ”) to serve as our President and Chief Executive Officer. Pursuant to the Baker Agreement, Mr. Baker will receive an annual base salary of $300,000, with a 10% increase on the date we raise gross proceeds of $4.0 million (or more) by way of either a private or public offering of our common stock (the “ $4.0 Million Raise ”). Mr. Baker will also receive a target annual bonus opportunity of 50% of base salary, as described below. The Baker Agreement includes a severance benefit equal to two months of base salary prior to the $4.0 Million Raise, four months of base salary on and after the $4.0 Million Raise, and six months of base salary after the listing of our common stock on a securities exchange (“ Exchange Listing ”), plus one additional month for each year of completed employment during the period commencing on the date of the first Exchange Listing (up to a maximum of six additional months, so that total severance does not ever exceed twelve months), and twelve months after a change in control, with continued medical benefits during the applicable severance period and an opportunity to earn a pro-rated bonus in the year of termination. The Baker Agreement also provides for the acceleration of vesting of the stock options granted to Mr. Baker on October 1, 2018 covering 46,875 shares of the Company’s common stock under the 2018 Plan at an exercise price of $1.84; and a grant of additional options under the 2018 Plan to purchase up to 2.0% of the fully diluted shares of common stock of the Company at an exercise price per share of $2.20 (which was the fair value of one share of common stock on the date of grant), that shall vest in installments and become exercisable as follows: 50.0% on the date the Company closes a firm-commitment underwritten public offering of its common stock pursuant to an effective registration statement, and 50.0% on the earlier of (a) an Exchange Listing, or (b) the achievement of a market capitalization for the Company equal to $50.0 million or more, with accelerated vesting on a change in control. The initial public offering completed February 12, 2021 triggered the vesting of 100% of the options. Mr. Baker’s base compensation as of January 1, 2021 is $330,000. 83 On April 2, 2018, Ms. Toren entered into an Employment Agreement (the “ Toren Agreement ”) to serve as our Senior Vice President, Regulatory Affairs & Program Management. The Toren Agreement provides for an annual base salary of $228,000 and a one-time cash signing bonus of $28,500, and a short-term incentive (“ STI ”) bonus opportunity with a target of 75% of annual base salary. Effective as of October 1, 2019, Ms. Toren received a 3.1% increase and a cash bonus of $23,000 for 2018 performance. Effective as of March 1, 2021, Ms. Toren received a 7% increase and a cash bonus of $58,750. In addition, on October 11, 2019, Ms. Toren received a grant of options to purchase 5,000 shares of common stock, at an exercise price equal to $3.8172 per share (which was the fair value of one share of common stock on the date of grant), which vest in equal installments on each of October 11, 2020, 2021, and 2022. Ms. Toren will be eligible to participate in an annual bonus plan under terms and conditions no less favorable than other similarly situated executives of the Company, provided that her target annual bonus opportunity will be 20% of her annual base a salary. She is also entitled to receive a one-time performance bonus of $130,000 related to the development and commercialization of ADAIR, which will vest in installments on the following dates: (i) $25,000 on the date the FDA completes its 30-day review period of our IND application for ADAIR (the “ First Milestone ”), which occurred in July 2018 (ii) $25,000 on the date that we successfully complete the human abuse liability study for ADAIR (the “ Second Milestone ”), (iii) $30,000 on the date that we submit an NDA filing for ADAIR (the “ Third Milestone ”), and (iv) $50,000 on the later of the date when the FDA approves the NDA and the date we engage in exclusive collaboration for commercialization of the product (the “ Fourth Milestone ”). October 1, 2018, Ms. Toren was also granted an option to purchase up to 46,875 shares of our Common Stock under the 2018 Plan at an exercise price per share equal to $1.84 (which was the fair value of one share of common stock on the date of grant). The stock options will vest in installments and become exercisable as follows: 1/6 on the date of the grant, 1/6 on the date the Second Milestone is achieved, 1/3 on the date the Third Milestone is achieved, and 1/3 on the date the Fourth Milestone is achieved. The Toren Agreement entitles Ms. Toren to certain severance benefits if the Company terminates the executive’s employment other than for death, Disability or Cause, or if she terminates her employment for Good Reason. In such event, subject to Ms. Toren signing and not revoking a release of claims in favor of Vallon, we would pay her, among other things, continued annual base salary for the period beginning on the date of termination and ending two months thereafter, and increased by an additional one month for every whole year of service performance by Ms. Toren for Vallon and its affiliates, provided that such period is subject to a maximum of six months. The Toren Agreement contains standard ownership of works, confidentiality, non-compete, non-solicitation and non-disparagement covenants. Employee Benefit and Incentive Plans Qualified Retirement Plan . We offer our employees, including our Chief Executive Officer and Senior Vice President, Regulatory Affairs & Program Management, retirement and certain other benefits, including participation in the tax-qualified SIMPLE IRA retirement plan sponsored by the Company in the same manner as all other Company other employees. Pursuant to the SIMPLE IRA program, employees are eligible to contribute to an individual SIMPLE IRA account on a tax-deferred basis. If an employee participates in the SIMPLE IRA plan, the Company makes a matching contribution to the employee’s SIMPLE IRA account in an amount up to 3% of the employee’s base salary (subject to applicable IRS compensation limits). In 2019, Mr. Baker and Ms. Toren contributed to the SIMPLE IRA and received a related matching contribution. Participants are fully vested in both their own contribution and the matching contributions at all times. We do not maintain any deferred compensation, pension, or profit-sharing plans. Our board of directors have adopted the 2018 Plan, the material terms of which are described below, allowing for the grant of equity and cash-based awards to our employees and directors. Outstanding Equity Awards at Fiscal Year-End Stock Option Awards The following table sets forth the outstanding stock option awards as of December 31, 2020 held by our named executive officers, on an award-by-award basis, setting forth the total number of shares underlying each stock option award that are (i) exercisable, but not yet exercised, (ii) unexercisable and not yet exercised, and (iii) total aggregate amount underlying each award. 84 Name Number of securities underlying unexercised, but vested stock options (1) Number of securities underlying unexercised, but unvested stock options (time based) (1) Number of securities underlying unexercised, but unvested stock options (performance based) (1) (4) Total securities underlying the stock options Option exercise price Option expiration date David Baker 46,875 - 46,875 (2) $ 1.84 10/1/2028 Chief Executive Officer 61,250 - 61,250 (3) $ 2.20 2/5/2029 - 37,500 37,500 $ 4.72 5/22/2030 - Penny Toren 7,813 - 39,062 46,875 (5) $ 1.84 10/1/2028 SVP, Regulatory Affairs and Project Management 1,666 3,334 5,000 (6) $ 3.82 10/11/2029 - 17,500 17,500 $ 4.72 5/22/2030 (1) All stock option awards were granted under our 2018 Equity Incentive Plan. (2) The stock option award is fully vested. (3) The stock option vested as to 50% of the underlying shares upon the closing of our initial public offering of our common stock, and 50% on the earlier of (a) the listing of our common stock on a national stock exchange, or (b) the achievement of a market capitalization for the Corporation equal to $50 million or more, with accelerated vesting on a change in control. (4) The stock option vests upon satisfaction of certain performance milestones. (5) The stock option vests as to one-sixth of the underlying shares of common stock upon the date of grant, then upon satisfaction of certain performance milestones. (6) The stock option vests as to one-third of the underlying shares of common stock on each of October 11, 2020, October 11, 2021and October 11, 2022. Stock Awards We have not granted any stock awards to any of our named executive officers. Director Compensation and Compensation Table Beginning in April 2020 and ending in August 2020, Dr. Levi received a consulting fee of $6,000 per month for his advisory services. None of our other directors receive, nor have received, any compensation for their service as a director since inception. See also the section entitled “Item 13. Certain Relationships and Related Transactions, and Director Independence—Ofir Levi.” We intend to pay our directors an annual retainer of $25,000 in cash, to be paid quarterly and prorated for any partial year of Board service. In addition, the Board may grant stock options under the 2018 Plan, or a cash payment, including for any service on a committee of the Board. Directors will also be eligible to receive stock option awards under the 2018 Plan. In addition, the chairperson of our audit committee shall receive an additional annual cash retainer of $10,000. The following table provides information on compensation paid to our non-employee directors in 2020. Name ​ ​ Fees Earned or Paid in Cash (US$) ​ ​ Total Richard Ammer ​ ​ $ ​ ​ - ​ ​ $ ​ ​ - Ofir Levi ​ ​ ​ ​ 24,000 ​ ​ ​ ​ 24,000 Joseph Payne ​ ​ ​ ​ - ​ ​ ​ ​ - Marella Thorell (1) ​ ​ ​ ​ - ​ ​ ​ ​ - (1) Ms. Thorell joined our board of directors effective February 12, 2021 and was granted 15,000 options which vest monthly over a period of 24 months. 85 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information known to us regarding beneficial ownership of our capital stock as of March 15, 2021 for: · each person or group of affiliated persons known by us to be the beneficial owner of more than five percent of our capital stock; · each of our named executive officers; · each of our directors; and · all of our executive officers, and directors as a group. We have determined beneficial ownership in accordance with the rules and regulations of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power, and includes securities that the individual or entity has the right to acquire, such as through the exercise of stock options, within 60 days of March 15, 2021. Except as noted by footnote, and subject to community property laws where applicable, we believe, based on the information provided to us, that the persons and entities named in the table below have sole voting and investment power with respect to all common stock shown as beneficially owned by them. The percentage of beneficial ownership in the table below is based on 6,811,122shares of common stock deemed to be outstanding as of March 15, 2021. Unless otherwise indicated, the address for each beneficial owner is c/o Vallon Pharmaceuticals, Inc., 100 N. 18th Street, Suite 300, Philadelphia, PA 19103. Common Stock Beneficially Owned Name and Address of Beneficial Owner Number of Shares and Nature of Beneficial Ownership Percentage of Total Common Stock Greater than 5% Stockholders SALMON Pharma GmbH (1) 1,523,797 22.4 % Arcturus Therapeutics Inc. (2) 843,750 12.4 Tomer Feingold (4)(10) 509,781 7.5 Dov Malnik (3)(4)(10) 509,781 7.5 Directors and Named Executive Officers David Baker (5) 115,968 1.7 Penny Toren (6) 7,813 * Ofir Levi 196,875 2.9 Richard Ammer (7) 1,523,797 22.4 Joseph Payne (8) 843,750 12.4 Marella Thorell (9) 1,875 * All directors and executive officers as a group (5 persons) 2,688,828 39.4 % *Less than 1.0%. (1) SALMON Pharma GmbH’s address is Sankt-Jakobs-Strasse 90, CH-9002 Basel, Switzerland. (2) Arcturus Therapeutics Inc.’s address is 10628 Science Center Drive, Suite 250, San Diego, California 92121. 86 (3) Mr. Malnik has granted Ariel Malnik a power of attorney to vote and dispose of the shares held individually by Mr. Malnik. (4) On March 3, 2020, the Securities and Exchange Commission filed an action against Tomer Feingold and Dov Malnik in the U.S. District Court for the Southern District of New York (SEC v. Feingold, et al., Civ. Action No. 20-cv-01881) alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 14(e) of the Exchange Act and Rule 14e-3 thereunder, and requesting other equitable relief. Adamas is named as a relief defendant in the action. The action is pending. Vallon Pharmaceuticals, Inc. is not a named party or identified in this action. (5) Consists of (i) 108,125 shares of common stock issuable pursuant to stock options exercisable within 60 days of March 15, 2021, and (ii) 7,843 shares of common stock. (6) Consists of 7,813 shares of common stock issuable pursuant to stock options exercisable within 60 days of March 15, 2021. (7) Consists of 1,476,734 shares of common stock held by SALMON Pharma GmbH (“ Salmon Pharma ”), of which Dr. Ammer is an affiliate and may be deemed to have shared voting and dispositive power over the shares beneficially owned by Salmon Pharma, but disclaims such beneficial ownership except to the extent of his pecuniary interest therein, if any. (8) Consists of 843,750 shares of common stock held by Arcturus, of which Mr. Payne is an affiliate and may be deemed to have shared voting and dispositive power over the shares beneficially owned by Arcturus, but disclaims such beneficial ownership except to the extent of his pecuniary interest therein, if any. (9) Consists of 1,875 shares of common stock issuable pursuant to stock options exercisable within 60 days of March 15, 2021. (10) On December 30, 2020, we entered into the 2020 Voting Agreement with Dov Malnik and Tomer Feingold, pursuant to which at every meeting of our stockholders, and at every adjournment or postponement thereof, Messrs. Malnik and Feingold (in their capacity as stockholders) shall have the right to vote all common stock held by them collectively constituting no more than 9.99% of the total number of shares of common stock issued and outstanding as of the record date for voting on the matters presented at such meeting or taking action by written consent. The common stock held or otherwise beneficially owned by Messrs. Malnik and Feingold in excess of the Share Voting Cap shall be voted at every meeting of the stockholders of the Company, and at every adjournment or postponement thereof, and on every action or approval by written consent of the stockholders, in a manner that is proportionate to the manner in which all other holders of the issued and outstanding shares of Common Stock vote in respect of each matter presented at any such meeting and in respect of each action taken by written consent. See the section entitled “Certain Relationships and Related Party Transactions—2020 Voting Agreement”. Equity Compensation Information Our 2018 Equity Incentive Plan is our sole equity incentive plan approved and adopted by our stockholders, and provides for the issuance of shares of our common stock to our officers and other employees, directors and consultants. The following table presents information as of December 31, 2020 with respect to compensation plans or arrangements under which shares of our common stock may be issued. 87 Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted- average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans Equity compensation plans approved by security holders (1) 248,125 $ 2.22 192,648 Equity compensation plans not approved by security holders 18,125 (2) $ 4.72 - Total 266,250 $ 2.94 (1) Includes shares of our common stock under our 2018 Equity Incentive Plan. For a description of this plan, refer to Note F to the financial statements included in this Annual Report on Form 10-K. (2) The 18,125 stock options referenced above were granted to an advisor in January 2020 and May 2020 outside of the 2018 Equity Incentive Plan, and are subject to separate stock option award agreements. 88 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Certain Relationships and Related Party Transactions The following is a summary of each transaction or series of similar transactions since the inception of Vallon Pharmaceuticals (January 11, 2018) to which it was or is a party and that: • the amount involved exceeded or exceeds $120,000 or is greater than 1% of our total assets; and • any of our directors or executive officers, any holder of 5% of our capital stock or any member of their immediate family had or will have a direct or indirect material interest. Asset Purchase Agreement In June 2018, we entered into the Asset Purchase Agreement with Arcturus, a holder of more than 5% of our common stock, the terms for which are described above under the heading “Item 1. Business — Asset Purchase Agreement”. Mr. Payne, a member of our board of directors, has served on the board of directors of Arcturus since November 2017. In connection with the Asset Purchase Agreement, we also entered into a voting agreement (the “ 2018 Voting Agreement ”), entitling Arcturus to designate a member of our board of directors; however, the 2018 Voting Agreement terminated upon the filing of the registration statement in connection with the initial public offering of our common stock. Additionally, on June 26, 2018, we entered into a Payment and Release Agreement with Amiservice Development Ltd. (“ Amiservice ”), a British Virgin Islands corporation, pursuant to which we reimbursed Amiservice for making a capital infusion into Arcturus of $250,000, as part of the transactions contemplated by the Asset Purchase Agreement, and paying other miscellaneous transaction expenses on our behalf. Amiservice is a company wholly owned by Dov Malnik, a holder of more than 5% of our common stock. We reimbursed Amiservice an aggregate sum of $562,493 as full repayment for all of the foregoing expenses. Ofir Levi Beginning in June 2020 and ending in October 2020, Dr. Levi, a member of our board of directors, received a consulting fee of $6,000 per month for his advisory services. On July 2, 2018, we entered into a Payment and Release Agreement with O2 Capital Advisors (“ O2 ”), pursuant to which we reimbursed O2 for certain consulting services by David Siner. O2 is owned by Ofir Levi, a member of our board of directors and a shareholder of the Company. The Company expensed approximately $186,000 and $161,000 for services rendered by Mr. Siner for the fiscal year ended December 31, 2019 and from our inception (January 11, 2018) through December 31, 2018, respectively. Medice Medice, through its affiliated entity, Salmon Pharma, owns approximately 22.4% of our issued and outstanding shares of common stock, and accordingly controls approximately 22.4% of our voting power. On January 6, 2020, we entered into a license agreement with Medice, which grants Medice an exclusive license, with the right to grant sublicenses, to develop, use, manufacture, market and sell ADAIR throughout Europe. Medice currently markets several ADHD products in Europe and is the ADHD market leader in Europe based on branded prescription market share. Medice is responsible for obtaining regulatory approval of ADAIR in the licensed territory. See “Item 1. Business — Medice License” for additional information. Since the completion of our initial public offering, Salmon Pharma is entitled to rights with respect to the registration of the shares of common stock held by it under the Securities Act. These rights are provided under the terms of an investor’s rights agreement between us and Salmon Pharma. See Exhibit 4.5 “Description of Capital Stock — Registration Rights” for additional information regarding these registration rights. 89 2020 Voting Agreement On December 30, 2020, we entered into the 2020 Voting Agreement with Dov Malnik and Tomer Feingold, pursuant to which at every meeting of our stockholders, and at every adjournment or postponement thereof, Messrs. Malnik and Feingold (in their capacity as stockholders) shall have the right to vote all common stock held by them collectively constituting no more than 9.99% of the total number of shares of common stock issued and outstanding as of the record date for voting on the matters presented at such meeting or taking action by written consent (the “ Share Voting Cap ”). The common stock held or otherwise beneficially owned by Messrs. Malnik and Feingold in excess of the Share Voting Cap (“ Excess Shares ”) shall be voted at every meeting of the stockholders of the Company, and at every adjournment or postponement thereof, and on every action or approval by written consent of the stockholders, in a manner that is proportionate to the manner in which all other holders of the issued and outstanding shares of Common Stock vote in respect of each matter presented at any such meeting and in respect of each action taken by written consent. Furthermore, each of Messrs. Malnik and Feingold executed an irrevocable proxy for the voting of the Excess Shares in accordance with the 2020 Voting Agreement. The 2020 Voting Agreement terminates on the earliest to occur of (i) the date following the effective date of the 2020 Voting Agreement on which Messrs. Malnik and Feingold collective beneficial own less than 9.99% of our outstanding common stock, (ii) the date following written notice to them that we have withdrawn this registration statement and do not intend to proceed with the IPO, (iii) the third anniversary of the effectiveness of this registration statement, or (iv) with respect to either Messrs. Malnik or Feingold, the date on which any proceeding before or brought by the SEC against such stockholder has been terminated or otherwise concluded. Equity Financings 2018 Private Placement In June 2018, we raised approximately $3.0 million through a private placement of 1,771,687 shares of our common stock pursuant to the Section 4(a)(2) exemption from registration under the Securities Act (the “ 2018 Private Placement ”). The following table sets forth the aggregate number of common stock acquired by 5% holders in the 2018 Private Placement described above. Participants Common Stock Aggregate Purchase Price Greater than 5% Stockholders(1) ​ ​ Tomer Feingold 442,969 $ 750,000 Dov Malnik 442,969 $ 750,000 Adamas Health Care Fund(2) 280,547 $ 475,000 (1) Additional details regarding these stockholders and their equity holdings are provided in this Annual Report under the section entitled “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” (2) Mr. Malnik, Mr. Feingold, and Dr. Levi were affiliated with Adamas Health Care Fund at the time of the 2018 Private Placement. 2019 Convertible Note Financing In April 2019, we entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders and Salmon Pharma, an affiliate of Medice, pursuant to which we issued the 2019 Convertible Notes for cash proceeds of $1,150,000. The 2019 Convertible Notes bore an interest rate of 7.0% per annum, non-compounding, and had a maturity date of January 1, 2020. The terms of the 2019 Convertible Notes included a mandatory conversion upon a qualified financing, such as the July 2019 Financing discussed below, and were convertible into shares of our capital stock that are offered to investors in a subsequent equity financing at a discount to the price per share offered in such subsequent financing. On July 25, 2019, upon the closing of the July 2019 Financing, the 2019 Convertible Notes converted into an aggregate of 383,849 shares of our common stock at a conversion price of $3.04 per share. The following table sets forth the principal amounts under the 2019 Convertible Notes acquired by 5% holders in the financing transaction described above, and the number of shares of common stock such 2019 Convertible Notes converted into in connection with the July 2019 Financing. 90 Participants Principal Amount under 2019 Convertible Notes Number of Shares of Common Stock upon Conversion in July 2019 Greater than 5% Stockholders(1) ​ ​ Tomer Feingold $ 200,000 66,812 Dov Malnik $ 200,000 66,812 SALMON Pharma GmbH(2) $ 500,000 166,873 ​ (1) Additional details regarding these stockholders and their equity holdings are provided in this Annual Report under the section entitled “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” (2) Dr. Ammer is affiliated with Salmon Pharma. 2019 Private Placement On July 25, 2019, we consummated the July 2019 Financing, in which we entered into a Stock Purchase Agreement with Salmon Pharma, pursuant to which we sold and issued 1,309,861 shares of our common stock for aggregate cash proceeds of $5.0 million. 2021 Convertible Note Financing In January 2021, we entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including Salmon Pharma, an affiliate of Medice, and David Baker, our Chief Executive Officer, pursuant to which we issued the 2021 Convertible Notes, for cash proceeds of $350,000. The 2021 Convertible Notes bear an interest rate of 7.0% per annum, non-compounding, and had a maturity date of September 30, 2021. The 2021 Convertible Notes are convertible into shares of our capital stock that are offered to investors in any subsequent equity financing after the date of their issuance in which we issued any of our equity securities (a “ Qualified Financing ”) and are convertible at a twenty percent (20%) discount to the price per share offered in such Qualified Financing. Such Qualified Financing included the initial public offering of our common stock, consummated on February 12, 2021; therefore, the 2021 Convertible Notes converted into an aggregate of 54,906 shares of our common stock immediately prior to the closing of the initial public offering, as agreed upon among the parties thereto. The following table sets forth the principal amounts under the 2021 Convertible Notes acquired by our directors and officers, and 5% holders in the financing transaction described above, and the number of shares of common stock such 2021 Convertible Notes converted into in connection with the initial public offering. Participants Principal Amount under 2021 Convertible Notes Approximate Number of Shares of Common Stock upon Conversion Greater than 5% Stockholders(1) ​ ​ SALMON Pharma GmbH(2) $ 300,000 47,063 David Baker $ 50,000 7,843 (1) Additional details regarding these stockholders and their equity holdings are provided in this Annual Report under the section entitled “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” (2) Dr. Ammer is affiliated with Salmon Pharma. 91 Review, Approval or Ratification of Transactions with Related Parties Our written related party transactions policy states that our employees, officers and directors, and any members of the immediate family of and any entity affiliated with any of the foregoing persons are not permitted to enter into a material related party transaction with us without the review and approval of our Audit Committee. The policy provides that any request for us to enter into a transaction with such parties in which the amount involved exceeds $120,000 must be notify the Company’s general counsel, or, if the Company does not then have a general counsel, the Company’s principal executive, financial, or accounting officer (each a “ Designated Officer ”) , of the facts and circumstances of the proposed transaction. Should an employee of the Company become aware of a related party transaction, regardless of whether such employee is a party to such transaction, such employee will report the Related Party Transaction to the Designated Officer. The Designated Officer shall report such Related Party Transaction to the Committee for review. In approving or rejecting any such proposal, our Audit Committee considers the relevant facts and circumstances available and deemed relevant to the committee, including, but not limited to, (i) whether the transaction was undertaken in the ordinary course of business; (ii) whether the related party transaction was initiated by us, a subsidiary, or the related party; (iii) whether the transaction with the related party is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; (iv) the purpose of, and the potential benefits to us of, the Related Party Transaction; (v) the approximate dollar value of the amount involved in the related party transaction, particularly as it relates to the related party; (vi) the related party’s interest in the related party transaction; (vii) whether the related party transaction would impair the independence of an otherwise independent director; and (viii) any other information regarding the related party transaction or the related party that would be material to investors in light of the circumstances of the particular transaction. Employment Agreements We have entered into employment agreements with certain of our executive officers. See “Item 11-Executive Compensation—Compensation Arrangements for Executive Officers—Employment Agreements.” Equity Grants We have granted stock options to certain of our executive officers and members of our board of directors. See “Item 11-Executive Compensation.” Indemnification and Limitation on Liability Section 145 of the Delaware General Corporation Law (the “ DGCL ”) authorizes a corporation to indemnify its directors and officers against liabilities arising out of actions, suits and proceedings to which they are made or threatened to be made a party by reason of the fact that they have served or are currently serving as a director or officer to a corporation. The indemnity may cover expenses (including attorneys’ fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by the director or officer in connection with any such action, suit or proceeding. Section 145 permits corporations to pay expenses (including attorneys’ fees) incurred by directors and officers in advance of the final disposition of such action, suit or proceeding. In addition, Section 145 provides that a corporation has the power to purchase and maintain insurance on behalf of its directors and officers against any liability asserted against them and incurred by them in their capacity as a director or officer, or arising out of their status as such, whether or not the corporation would have the power to indemnify the director or officer against such liability under Section 145. We have adopted provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that limit or eliminate the personal liability of our directors to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for: • any breach of the director’s duty of loyalty to us or our stockholders; ​ • any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; ​ • any unlawful payments related to dividends or unlawful stock purchases, redemptions or other distributions; or ​ • any transaction from which the director derived an improper personal benefit. ​ These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission. In addition, our bylaws provide that: • we will indemnify our directors, officers and, in the discretion of our board of directors, certain employees to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended; and 92 • we will advance reasonable expenses, including attorneys’ fees, to our directors and, in the discretion of our board of directors, to our officers and certain employees, in connection with legal proceedings relating to their service for or on behalf of us, subject to limited exceptions. We have entered into indemnification agreements with each of our directors, and intend to enter into such agreements with our executive officers. These agreements provide that we will indemnify each of our directors, our executive officers and, at times, their affiliates to the fullest extent permitted by Delaware law. We will advance expenses, including attorneys’ fees (but excluding judgments, fines and settlement amounts), to each indemnified director, executive officer or affiliate in connection with any proceeding in which indemnification is available and we will indemnify our directors and officers for any action or proceeding arising out of that person’s services as a director or officer brought on behalf of us or in furtherance of our rights. Additionally, certain of our directors or officers may have certain rights to indemnification, advancement of expenses or insurance provided by their affiliates or other third parties, which indemnification relates to and might apply to the same proceedings arising out of such director’s or officer’s services as a director referenced herein. Nonetheless, we have agreed in the indemnification agreements that our obligations to those same directors or officers are primary and any obligation of such affiliates or other third parties to advance expenses or to provide indemnification for the expenses or liabilities incurred by those directors are secondary. Insurance We also maintain general liability insurance which covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act of 1933, as amended, or the Securities Act. Director Independence See “Item 10. Directors, Executive Officers and Corporate Governance Management—Director Independence.” Committees of our Board of Directors Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which operates pursuant to a written charter adopted by our board of directors. See “Item 10. Directors, Executive Officers and Corporate Governance Management—Board Committees.” Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table represents aggregate fees incurred for EisnerAmper LLP services during the years ended December 31, 2020 and 2019 by us. December 31, December 31, 2020 2019 Audit Fees (1) $ 196,070 $ 82,000 Audit Related Fees (2) — — Tax Fees (3) — — All Other Fees (4) — — Total $ 196,070 $ 82,000 (1) Audit fees consist of fees billed for professional services performed by EisnerAmper LLP for the audit of our annual financial statements, the review of interim financial statements, and review of the Registration Statement on Form S-1 for the initial public offering of our common stock, and related services that are normally provided in connection with statutory and regulatory filings or engagements. (2) Audit related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. (3) Tax fees consist of fees for professional services, including tax consulting, compliance, and transfer pricing services. The Audit Committee will approve in advance the engagement and fees of the independent registered public accounting firm for all audit services and non-audit services, based upon independence, qualifications and, if applicable, performance. The Audit Committee may form and delegate to subcommittees of one or more members of the Audit Committee the authority to grant pre-approvals for audit and permitted non-audit services, up to specific amounts. All audit services provided by EisnerAmper LLP for the periods presented were ratified by our board of directors. 93 Pre-Approval of Audit and Non-Audit Services Our audit committee has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by our registered public accounting firm. These policies and procedures generally provide that we will not engage our registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by our audit committee or the engagement is entered into pursuant to one of the pre-approval procedures described below. From time to time, our audit committee may pre-approve specified types of services that are expected to be provided to us by our registered public accounting firm during the next 12 months. Any such pre-approval is detailed as to the particular service or type of services to be provided and is also generally subject to a maximum dollar amount. Consistent with requirements of the SEC and the Public Company Accounting Oversight Board regarding auditor independence, our Audit Committee is responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. In recognition of this responsibility, our Audit Committee, or the chair if such approval is needed between meetings of the audit committee, pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. 94 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Financial Statements. The financial statements of the Company, together with the report thereon of EisnerAmper LLP, an independent registered public accounting firm, are included in this Annual Report beginning on page F-1. (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. (3) Exhibits. See (b) below. (b) Exhibits The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report. Exhibit No. ​ ​ Description 1.1 ​ ​ Underwriting Agreement (incorporated by reference to Exhibit 1.1 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021) 3.1 ​ ​ Amended and Restated Certificate of Incorporation of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021) 3.2 ​ ​ Amended and Restated Bylaws of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021) 3.3 ​ ​ Certificate of Incorporation of Vallon Pharmaceuticals, Inc., as amended (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 3.4 ​ ​ Bylaws of Vallon Pharmaceuticals, Inc (incorporated by reference to Exhibit 3.4 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 3.5 ​ ​ Certificate of Amendment of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021) 4.1 ​ ​ Specimen certificate evidencing shares of common stock (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended on January, 28, 2021) 4.2 ​ ​ Convertible Promissory Note Purchase Agreement, dated as of April 11, 2019 (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 4.3 ​ ​ Form of Convertible Promissory Note (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 4.4 ​ ​ Form of Underwriter Warrant (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021) 4.5 ​ ​ Description of the securities of Vallon Pharmaceuticals, Inc. registered under Section 12 of the Exchange Act. 9.1 ​ ​ Voting Agreement, dated as of December 30, 2020, by and among Vallon Pharmaceuticals, Inc. and certain of its stockholders (incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.1 ​ ​ Amended and Restated Asset Purchase Agreement, dated as of June 22, 2017, by and among Arcturus Therapeutics, Ltd. (and its subsidiary, Arcturus Therapeutics, Inc.), Amiservice Development Ltd. and Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.2# ​ ​ Consulting Agreement with Whitaker Biopharmaceutical Consulting LLC, dated April 2, 2018 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.3# ​ ​ Employment Agreement between Vallon Pharmaceuticals, Inc. and Penny S. Toren, dated April 2, 2018 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 95 10.4# ​ ​ Employment Agreement between Vallon Pharmaceuticals, Inc. and David Baker, dated January 15, 2019 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.5# ​ ​ Vallon Pharmaceuticals, Inc. 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.6# ​ ​ Form of Stock Option Agreement under Vallon Pharmaceuticals, Inc. 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.7# ​ ​ Form of Incentive Stock Option Agreement under Vallon Pharmaceuticals, Inc. 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.8# ​ ​ Form of Nonqualified Stock Option Agreement under Vallon Pharmaceuticals, Inc. 2018 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.9# ​ ​ Form of Directors’ and Officers’ Indemnity Agreement (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.10 ​ ​ Patent and Patent Application Assignment Agreement between Arcturus Therapeutics, Ltd. and Vallon Pharmaceuticals, Inc., dated June 22, 2018 (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.11 ​ ​ Form of Subscription Agreement (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.12 ​ ​ Form of Stock Purchase Agreement, dated June 7, 2018, among Vallon Pharmaceuticals, Inc. and the investors listed therein (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.13 ​ ​ Form of Stock Purchase Agreement, dated July 25, 2019, between Vallon Pharmaceuticals, Inc. and SALMON Pharma GmbH (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.14 ​ ​ Investor’s Rights Agreement, dated as of July 25, 2019, by and between Vallon Pharmaceuticals, Inc. and SALMON Pharma GmbH (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.15† ​ ​ License Agreement, effective as of January 6, 2020, by and between Vallon Pharmaceuticals, Inc. and MEDICE Arzneimittel Putter GmbH & Co. KG (incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.16 ​ ​ Form of Lock Up Agreement (incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.17 ​ ​ Form of Convertible Promissory Note Purchase Agreement, dated as of January 11, 2021, by and among Vallon Pharmaceuticals and the investors named therein (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 10.18 ​ ​ Form of Convertible Promissory Note (incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1, initially filed with the SEC on October 23, 2020, as amended) 21.1 ​ ​ List of subsidiaries 24.1 ​ ​ Powers of Attorney for directors and certain executive officers (contained on the signature page) 31.1 Certification of Principal Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1+ Certification of Principal Executive and Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 96 Unless otherwise indicated, exhibits are filed herewith. # Indicates a management contract or any compensatory plan, contract or arrangement. † Indicates that portions of this exhibit (indicated by bracketed asterisks) are omitted in accordance with the rules of the Securities and Exchange Commission because they are both (i) not material and (ii) would be competitively harmful if publicly disclosed. + The certification attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. Item 16. Form 10-K Summary None. 97 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. VALLON PHARMACEUTICALS, INC. Date: March 29, 2021 By: /s/ David Baker Name: David Baker Title: President and Chief Executive Officer SIGNATURES AND POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David Baker as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and all documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ David Baker President, Chief Executive Officer and Director March 29, 2021 David Baker (Principal Executive, Financial and Accounting Officer) /s/ Ofir Levi Director, Chairman of the Board March 29, 2021 Ofir Levi /s/ Joseph Payne Director March 29, 2021 Joseph Payne /s/ Richard Ammer Director March 29, 2021 Richard Ammer /s/ Marella Thorell Director March 29, 2021 Marella Thorell 98 INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-1 Balance Sheets at December 31, 2020 and December 31, 2019 F-2 Statements of Operations for the Years Ended December 31, 2020 and 2019 F-3 Statements of Stockholders’ (Deficit) Equity for the Years Ended December 31, 2020 and 2019 F-4 Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-5 Notes to Financial Statements F-6 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Vallon Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Vallon Pharmaceuticals, Inc. (the “Company”) as of December 31, 2020 and 2019, and the related statements of operations, stockholders’ (deficit) equity, and cash flows for each of the years then ended, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A[3] to the financial statements, the Company has sustained a net loss and has experienced cash outflows from operations since inception that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note A[3]. 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 the Company’s 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/ EisnerAmper LLP We have served as the Company’s auditors since 2018. EISNERAMPER LLP Iselin, New Jersey March 29, 2021 F- 1 VALLON PHARMACEUTICALS, INC. BALANCE SHEETS (in thousands, except share and per share amounts) December 31, December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 109 $ 3,821 Prepaid expenses and other current assets 565 101 Total current assets 674 3,922 Finance lease right-of-use asset, net 279 353 Property and equipment, net 2 1 Total assets $ 955 $ 4,276 Liabilities and Stockholders' (Deficit) Equity Current liabilities: Accounts payable $ 1,226 $ 246 Accrued expenses 847 476 Note payable, current 47 - Finance lease liability, current 105 86 Total current liability 2,225 808 Note payable, non-current 14 - Finance lease liabilities, non-current 170 254 Total liabilities 2,409 1,062 Commitments and contingencies (Note E) Stockholders' (deficit) equity: Common stock, $0.0001 par value; 250,000,000 shares authorized; 4,506,216 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively, which gives retroactive effect to the one-for-40 reverse stock split. See Notes A and K to these financial statements. — — Additional paid-in-capital 11,145 10,991 Accumulated deficit (12,599 ) (7,777 ) Total stockholders' (deficit) equity (1,454 ) 3,214 Total liabilities and stockholders' (deficit) equity $ 955 $ 4,276 See accompanying notes to these financial statements. F- 2 VALLON PHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Year Ended December 31, 2020 2019 Licensing revenue – related party $ 100 $ — Operating expenses: Research and development 3,707 1,882 General and administrative 1,181 1,272 Total operating expenses 4,888 3,154 Loss from operations (4,788 ) (3,154 ) Change in fair value of derivative liability - (113 ) Interest expense, net (34 ) (197 ) Net loss $ (4,822 ) $ (3,464 ) Net loss per share attributable to common stockholders, basic and diluted $ (1.07 ) $ (0.98 ) Weighted-average common shares outstanding basic and diluted 4,506,216 3,550,313 See accompanying notes to these financial statements. F- 3 VALLON PHARMACEUITACLS STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY (in thousands, except shares) Common Stock Stockholders’ Shares(1) Amount Additional Paid in Capital Accumulated Deficit (Deficit) Equity Balance, December 31, 2018 2,812,506 $ - $ 4,466 $ (4,313 ) $ 153 Issuance of common stock for convertible notes 383,849 - 1,465 - 1,465 Issuance of common stock for July 2019 financing 1,309,861 - 4,980 - 4,980 Stock-based compensation - - 80 - 80 Net loss - - - (3,464 ) (3,464 ) Balance, December 31, 2019 4,506,216 - 10,991 (7,777 ) 3,214 Stock-based compensation - - 154 - 154 Net loss - - - (4,822 ) (4,822 ) Balance, December 31, 2020 4,506,216 $ - $ 11,145 $ (12,599 ) $ (1,454 ) (1) The number of shares above give retroactive effect to the one-for-40 reverse stock split. See Notes A and K to these financial statements. See accompanying notes to these financial statements. F- 4 VALLON PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ (4,822 ) $ (3,464 ) Adjustments to reconcile net loss to cash used in operating activities: Amortization of debt discount and deferred financing fees - 190 Amortization of finance lease right-of-use asset 74 15 Change in fair value of derivative liability - 113 Non-cash interest expense - 22 Stock-based compensation expense 154 80 Depreciation expense 1 1 Change in operating assets and liabilities: Prepaid expenses and other current assets (464 ) (77 ) Accounts payable 980 (40 ) Accrued expenses 371 276 Net cash used in operating activities (3,706 ) (2,884 ) Cash flows from investing activities: Purchase of property and equipment (2 ) - Net cash used in investing activities (2 ) - Cash flows from financing activities: Proceeds from common stock issuance, net of offering expenses - 4,980 Proceeds from notes payable 61 - Proceeds from convertible notes - 1,150 Deferred financing fees related to convertible notes - (10 ) Payment of finance lease liability (65 ) (28 ) Net cash (used in) provided by financing activities (4 ) 6,092 Net (decrease) increase in cash and cash equivalents (3,712 ) 3,208 Cash and cash equivalents, at beginning of year 3,821 613 Cash and cash equivalents, at end of year $ 109 $ 3,821 Supplemental disclosure of cash flows information: Interest paid $ - $ 4 Noncash financing activities: Finance lease ROU asset obtained in exchange for lease obligation $ - $ 368 Debt discount for derivative liability $ - $ 180 See accompanying notes to these financial statements F- 5 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note A - Nature of Operations, Business, Going Concern and Liquidity [1] Nature of operations: Vallon Pharmaceuticals, Inc. ("Vallon" or the "Company"), a Delaware corporation, is a biopharmaceutical company based in Philadelphia, PA, which is focused on the development and commercialization of proprietary biopharmaceutical products. The Company’s only clinical-stage product currently under development is ADAIR, a proprietary, abuse-deterrent oral formulation of immediate-release (short-acting) dextroamphetamine for the treatment of Attention-deficit/hyperactivity disorder, or ADHD, and Narcolepsy. The Company plans to develop other abuse-deterrent products which have potential for abuse in their current forms, beginning with the development of ADMIR, an abuse deterrent formulation of Ritalin, for which the Company is conducting formulation development work. Vallon Pharmaceuticals, Inc. was incorporated in Delaware on January 11, 2018, which is the date of inception. The Company's fiscal-year ends on December 31. Immediately prior to the closing of the IPO (as defined below), the Company effected a one-for-40 reverse stock split of its common stock. All share and per share amounts, excluding the number of authorized shares and par value, contained in these financial statements and accompanying notes, and this Annual Report on Form 10-K give retroactive effect to the reverse split. [2] Business formation: On November 15, 2017, before the Company’s formation, Amiservice Development Ltd., a BVI corporation (“Amiservice”) entered into an agreement for the purchase of the ADAIR product rights for a payment of $250,000. The Asset Purchase Agreement (“the APA”), by and between Amiservice and Arcturus Therapeutics Ltd. (”Arcturus”), was subject to several closing conditions. One of the key terms and conditions of the APA was that the purchasers provide funding of at least $2.75 million towards the development of ADAIR. On February 11, 2018, Ofir Levi, Chairman of the newly formed Vallon, purchased 196,875 common shares from the Company at par value for $788. On June 7, 2018, Vallon entered into a stock purchase agreement with several investors pursuant to which Vallon issued 1,771,881 common shares for $3.0 million (“Private Placement”). Subsequently, on June 22, 2018, the Company executed the amended APA, by and between Arcturus Therapeutics Ltd. Such APA was amended and restated from the initial agreement discussed above, dated as of November 15, 2017. In exchange for the ADAIR product rights, Vallon issued 843,750 common shares to Arcturus, valued at approximately $1.4 million based upon the price at which the common shares were issued and sold in the Private Placement, which comprised approximately 30% of the then-outstanding common stock of the Company, on a fully diluted basis. In addition, Amiservice signed a consent and release agreement to all rights to the APA in exchange for approximately $562,000 which represented a reimbursement for expenses Amiservice incurred on Vallon’s behalf in the amount of approximately $310,000, the repayment of two promissory notes totaling approximately $192,000 including interest, and approximately $60,000 of other operating expenses incurred. The assets acquired in the ADAIR acquisition are classified as in-process research and development (“IPR&D”). Accounting for IPR&D assets in an asset acquisition follows the guidance in Accounting Standards Codifications (“ASC”) 730, Research and Development , which requires that both tangible and intangible identifiable research and development assets with no alternative future use be allocated a portion of the consideration transferred and charged to expense at the acquisition date. The Company recorded $1.7 million to research and development expense on June 22, 2018, the date of acquisition, which included $1.4 million of common shares issued for the acquisition, as well as, the original $250,000 exclusivity payment and approximately $60,000 in transaction fees. F- 6 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note A - Nature of Operations, Business and Going Concern Liquidity (continued) [3] Going Concern and Liquidity: The accompanying financial statements have been prepared on the basis that the Company is a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not generated any significant revenues from operations since inception, and does not expect to do so in the foreseeable future. The Company has incurred operating losses in the amount of $4.8 million for the year ended December 31, 2020 and negative operating cash flows since inception, and expects to continue to do so for at least the next few years. The Company has financed its working capital requirements to date through the issuance of common stock, convertible notes, short-term promissory notes, and a Paycheck Protection Program note (PPP) as described in Note A[2] and C. On December 31, 2020, the Company had cash and cash equivalents totaling approximately $109,000. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are being issued. On January 11, 2021, the Company completed a $350,000 convertible note financing and on February 12, 2021, the Company closed on its initial public offering (IPO) raising net proceeds of $15.5 million as described in Note K. The Company’s ability to continue as a going concern is dependent on its ability to raise additional capital to fund its business activities, including its research and development program. The Company’s objective is to develop and commercialize biopharmaceutical products that treat central nervous system disorders, but there can be no assurances that we will be successful in this regard. Therefore, the Company intends to raise capital through additional issuances of common stock and /or short-term notes. Furthermore, the Company may not be able to obtain additional financing on acceptable terms and in the amounts necessary to fully fund its future operating requirements. If the Company is unable to obtain sufficient cash resources to fund its operations, it may be forced to reduce or discontinue its operations entirely. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty. Note B - Summary of Significant Accounting Policies [1] Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of share options, valuation allowances relating to deferred tax assets, revenue recognition, accrued expenses and estimation of the incremental borrowing rate for the finance lease. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate. F- 7 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note B - Summary of Significant Accounting Policies (continued) [2] Revenue recognition: The Company has accounted for its license agreement with MEDICE Arzneimittel Pütter GmbH & Co. KG, or Medice, described in Note G in accordance with ASC 606– Revenue from Contracts with Customers (adopted by the Company in 2019) as it determined that a contract does exist and Medice, a related party, is a customer in the context of the Company’s business. The Company determined there is a single performance obligation with respect to its involvement in the joint development committee and thus the entire $100,000 allocable consideration was assigned to that accounting unit and recognized in the first quarter of 2020. The Company estimated the estimated costs of the Company’s participation on the JDC (which is estimated to occur from the first quarter of 2020 through the first quarter of 2025), at $100,000 and accrued for this at the date of agreement. The accrual will be released on a straight-line basis of an initially estimated period of 5.25 years through the first quarter of 2025. [3] Stock-based compensation: The Company recognizes expense for employee and non-employee stock-based compensation in accordance with Accounting Standards Codification (“ASC”) Topic 718, Stock-Based Compensation . ASC 718 requires that such transactions be accounted for using a fair value based method. The estimated fair value of the options is amortized over the vesting period, based on the fair value of the options on the date granted, and is calculated using the Black-Scholes option-pricing model. The Company accounts for forfeitures as incurred. In considering the fair value of the underlying stock when the Company granted options, the Company considered several factors including the fair values established by market transactions. Stock option-based compensation includes estimates and judgments of when stock options might be exercised and stock price volatility. The timing of option exercises is out of the Company's control and depends upon a number of factors including the Company's market value and the financial objectives of the option holders. These estimates can have a material impact on the stock compensation expense but will have no impact on the cash flows. The estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period the estimates are revised. The stock options granted, other than the 61,250 granted to Mr. Baker described in Note E[1], as of December 31, 2020 vest primarily upon specified performance milestones. As Mr. Baker’s stock option grant is pursuant to milestones associated with an underwritten public offering or a listing on a national stock exchange, management determined that no expense should be recognized for this grant until such time that the milestone becomes probable. The options vested on February 12, 2021, concurrent with the closing of the Company’s IPO. The Company elected to use the expected term, rather than the contractual term, for both employee and consultant options issued. [4] Concentration of credit risk: The Company from time to time during the period covered by these financial statements may have had bank account balances in excess of federally insured limits. The Company has not experienced losses in such accounts. The Company believes that it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. [5] Research and development: Research and development costs are expensed as incurred. Research and development expenses include personnel costs associated with research and development activities, including third party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company accrues for costs incurred by external service providers, including contract research organizations and clinical investigators, based on its estimates of service performed and costs incurred. F- 8 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note B - Summary of Significant Accounting Policies (continued) [6] Deferred financing fees: Deferred financing fees related to a recognized debt liability are presented in the balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Debt discounts and deferred financing fees are amortized to interest expense over the term of the related debt using the effective interest method. [7] Cash equivalents: Cash equivalents are highly-liquid investments that are readily convertible into cash with original maturities of three months or less when purchased and as of December 31, 2020 and 2019 included investment in money market funds. [8] Fair value measurements: The Company follows ASC 820, Fair Value Measurements and Disclosures , to measure the fair value of its financial statements and disclosures about fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of fair value hierarchy defined by ASC 820 are described below: Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 3: Pricing inputs that are generally unobservable inputs and not corroborated by market data. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lower priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The Company uses this framework for measuring fair value and disclosures about fair value measurement. The Company uses fair value measurements in areas that include derivative instruments. The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. The carrying amounts reported in the balance sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses, and note payable approximate their fair value based on the short-term maturity of these instruments. F- 9 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note B - Summary of Significant Accounting Policies (continued) [9] Derivative Instruments: The Company evaluated its convertible notes to determine if those contracts or embedded components of those contracts qualified as derivatives to be separately accounted for in accordance with ASC 815, Derivatives and Hedging . The result of this accounting treatment is that the fair value of the embedded derivative is marked to market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheets as current or non-current to correspond with its host instrument. [10] Income taxes: The Company accounts for income taxes using the asset-and-liability method in accordance with ASC Topic 740, Income Taxes . Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rate is recognized in the period that includes the enactment date. A valuation allowance is recorded if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized in future periods. The Company follows the guidance in ASC Topic 740-10 in assessing uncertain tax positions. The standard applies to all tax positions and clarifies the recognition of tax benefits in the financial statements by providing for a two-step approach of recognition and measurement. The first step involves assessing whether the tax position is more-likely-than-not to be sustained upon examination based upon its technical merits. The second step involves measurement of the amount to be recognized. Tax positions that meet the more-likely-than-not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization with the taxing authority. The Company’s policy is to record income tax related interest and penalties as a component of income tax expense, in which there were no amounts recorded for the years ended December 31, 2020 or 2019. The Company did not identify any uncertain tax positions taken or expected to be taken that would require an adjustment or disclosure in the financial statements. [11] Property and equipment: Property and equipment are stated at cost. The Company commences depreciation when the asset is placed in service. Computers and peripheral equipment are depreciated on a straight-line method over useful lives of three years. F- 10 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note B - Summary of Significant Accounting Policies (continued) [12] Loss per share: Basic loss per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted loss per share is computed based on the weighted average number of shares of common stock outstanding during each year, plus the dilutive effect of options considered to be outstanding during each year, in accordance with ASC 260, Earnings Per Share . [13] Recent accounting pronouncements: The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on the financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . This new standard was issued to increase transparency and comparability among entities by recognizing for all leases lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. This new standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Subsequently, in July of 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases , and ASU 2018-11, Leases (Topic 842): Targeted Improvements , both of which clarify and enhance the certain amendments made in ASU 2016-02. The Company adopted these standards on January 1, 2019. Refer to Note H for further detail. On January 1, 2020, the Company adopted ASU 2018-13 – Fair Value Measurement (Topic 820) - Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. Certain amendments apply prospectively with all other amendments applied retrospectively to all periods presented upon their effective date. The adoption of this standard effective January 1, 2020 did not have a material impact on the Company’s financial statements. On January 1, 2020, the Company adopted ASU 2018-18 – Collaborative Arrangements — Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. The guidance has been applied retrospectively to all contracts that were not completed at the date of initial application of Topic 606. The adoption of this standard effective January 1, 2020 did not have a material impact on the Company’s financial statements. Accounting pronouncements yet to be adopted: In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principals in Topic 740. The amendments also improve consistent application of and simplify generally accepted accounting principles (GAAP) for other areas of Topic 740 by clarifying and amending the existing guidance. For public business entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact of ASU 2019-12 on the Company’s financial statements. F- 11 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note B - Summary of Significant Accounting Policies (continued) [14] Leases: The Company determines whether an arrangement is a lease at contract inception by establishing if the contract conveys the right to use, or control the use of, identified property, plant, or equipment for a period of time in exchange for consideration. Leases may be classified as finance leases or operating leases. Lease right-of-use (ROU) assets and lease liabilities recognized in the accompanying balance sheet represent the right to use an underlying asset for the lease term and an obligation to make lease payments arising from the lease respectively. The Company has a finance lease in relation to equipment that will be utilized in its commercial product manufacturing process. Financing lease ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. The Company utilized the interest rate implicit in the lease. The lease term is based on the non-cancellable period in the lease contract. Any termination fees are included in the calculation of the ROU asset and lease liability when it is assumed that the lease will be terminated. At each reporting date, the finance lease liabilities are increased by interest and reduced by repayments made under the lease agreements. The ROU asset is subsequently measured at the amount of the remeasured lease liability (i.e. the present value of the remaining lease payments), any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, and any unamortized initial direct costs. Note C – PPP Note and Convertible Notes There were no notes payable outstanding as of December 31, 2019. In May 2020, the Company entered into a note under the PPP totaling $61,000. As of December 31, 2020, the Company has utilized the entire proceeds from such note for payroll costs (greater than 75%), costs related to health care benefits and rent payments. As such, the Company believes the note meets the requirements for forgiveness under the program and intends to seek such note forgiveness. The Company has accounted for the note under ASC 470. The note has a stated interest rate of 1% and has a two year maturity. Payments are required to be made over a 1.5 year period beginning November 1, 2020 unless forgiven. The Company has not imputed interest on the note as the rate is determined to be a below-market rate due to the scope exception in ASC 835-30-15-3(e) for government-mandated interest rates. If all or a portion of the PPP note is ultimately forgiven, the Company will record income from the extinguishment of its obligation when it is legally released from being the primary obligor in accordance with ASC 405-20-40-1. Amounts due under the next twelve months are presented as notes payable – current on the Company’s balance sheet. In January 2021, the PPP note was entirely forgiven. See Note K. In April 2019, the Company entered into Convertible Promissory Note Purchase Agreements with certain existing stockholders and SALMON Pharma GmbH (“ Salmon Pharma ”), an affiliate of Medice, pursuant to which the Company issued Convertible Notes for cash proceeds of $1,150,000. The Convertible Notes had an interest rate of 7.0% per annum, non-compounding, and had a maturity date of January 1, 2020. Upon the maturity date, the principal amount was due and payable to the note holder in one lump sum. Accrued interest on these Convertible Notes as of July 25, 2019 was $22,000. These notes contained a mandatory conversion feature of the notes into a variable number of shares of the identical equity security issued to the investors upon future qualified financing at a price per share equal to 90% of the price per share paid by other investors purchasing the securities in the qualified financing if the qualified financing occurred on or prior to the 45 th day after April 11, 2019 and 80% of the price per share paid by other investors purchasing the securities in the qualified financing if the qualified financing occurred after the 45 th day after April 11, 2019. On July 25, 2019, the Company entered into a Stock Purchase Agreement with Salmon Pharma pursuant to which the Company sold and issued 1,309,861 shares of its common stock for aggregate cash proceeds of $5.0 million, the “July 2019 Financing”. Pursuant to the terms of the Convertible Notes, the Convertible Notes, inclusive of accrued interest, converted into an aggregate of 383,849 shares of the Company’s common stock at a conversion price of $3.04 per share upon closing of the July 2019 Financing. The Company identified the mandatory conversion into shares as a redemption feature, which requires bifurcation from the notes and treated it as a derivative liability under ASC 815 as the redemption feature is not clearly and closely related to the debt host. The Company evaluated the fair value of the derivative liability at inception and determined the value was $180,000. Such amounts are reflected at its fair value at the end of each reporting period. Each of the series of notes were subject to a conversion discount of 10% or 20%, respectively. The discounts have been accounted for as a debt discount and were amortized using the effective interest method over the term of the notes. Upon the closing of the July 2019 Financing, the embedded derivative liability was remeasured and then adjusted to zero as part of the conversion of the Convertible Notes to the Company’s common stock. F- 12 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note D - Fair Value Measurements The fair value of the embedded derivative liability identified in Convertible Notes was estimated using a Monte Carlo simulation. The derivative liability was a Level 3 fair value measurement. The significant probability is that of a qualified financing occurring. At the fair value determination date, the Company estimated a 65% probability of a qualified financing occurring before the 45 th day from April 11, 2019 and a 25% probability of a qualified financing occurring after the 45 th day from April 11, 2019. An increase (decrease) in the probability of a qualified financing occurring would result in an increase (decrease) to the fair value. As of July 25, 2019, the embedded derivative was remeasured based upon the conversion price of $3.04 per share upon closing of the July 2019 Financing. As such, an additional expense of $28,000 was recorded in the third quarter of 2019. For the year ended December 31, 2019, the Company recognized amortization of the debt discount as an additional interest charge in the amount of $180,000. The following table presents the activity for the liability measured at estimated fair value using unobservable inputs for the year ended December 31, 2019 (in thousands): Beginning balance at January 1, 2019 $ - Additions during the year 180 Change in fair value 113 Transfer in and/or out of Level 3 (293 ) Balance at December 31, 2019 $ - F- 13 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note E – Commitments, Contingencies and Uncertainties [1] Employment agreements: On January 15, 2019, the Company entered into an employment agreement with David Baker (the “Baker Agreement”), to serve as its President and Chief Executive Officer. The Baker Agreement includes a severance benefit equal to four months of base salary or one year of base salary after the listing of the Company’s common stock on a securities exchange, plus one additional month for each year of completed employment during the period commencing on the date of the first Exchange Listing (up to a maximum of nine additional months, so that total severance does not ever exceed twelve months), and twelve months after a change in control, with continued medical benefits during the applicable severance period and an opportunity to earn a pro-rated bonus in the year of termination. In addition, the Baker Agreement also provided for the acceleration of vesting of the stock options granted to Mr. Baker on October 1, 2018 covering 31,250 unvested shares of the Company’s common stock; and a grant of an additional option to purchase up to 2.0% of the fully diluted shares of common stock of the Company at an exercise price per share of $2.20, that shall vest in installments and become exercisable as follows: 50.0% on the date the Company closes a firm-commitment underwritten public offering of its common stock pursuant to an effective registration statement, and 50.0% on the earlier of (a) an Exchange Listing (which occurred on February 9, 2021), or (b) the achievement of a market capitalization for the Company equal to $50.0 million or more, with accelerated vesting on a change in control. Such options totaling 61,250 were granted on February 5, 2019. The acceleration of vesting of the stock options granted on October 1, 2018 resulted in stock compensation expense of $54,000 for the year ended December 31, 2019. Pursuant to the completion of the Company’s IPO discussed in Note K, the February 5, 2019 options were fully vested. [2] Clinical trial agreements : In May 2019, the Company entered into a service agreement with a clinical research organization to provide clinical trial management services to the Company to assist the Company in its now completed Phase 1 clinical trial of ADAIR, Study VAL-103. Approximately $50,000 and $592,000 was expensed under the agreement during the years ended December 31, 2020 and 2019, respectively. In January 2020, the Company entered into a service agreement, amended August 2020, with a clinical research organization to provide clinical trial management services to the Company to assist the Company in its Phase 3 clinical trial of ADAIR, Study VAL-104. The agreement may be terminated by either party upon thirty days prior written notice. The total clinical trial cost is expected to be $2.5 million of which approximately $870,000 and $6,000 was expensed to research and development under the agreement during the years ended December 31, 2020 and 2019, respectively. F- 14 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note E - Commitments, Contingencies and Uncertainties (Continued) [3] Consulting agreements : Effective January 15, 2018, the Company entered into a consulting agreement with a consultant to serve in the lead commercial and operating role in the development of ADAIR. Pursuant to the consulting agreement, the Company paid for monthly services and agreed to pay $150,000 in cash bonuses upon the achievement of certain development milestones. In addition, the Company granted the consultant 46,875 options. Effective January 1, 2019 the consultant became an employee of the Company as described in Note E[1]. Effective April 2, 2018, the Company entered into a consulting agreement with a consultant to serve as the Chief Medical Officer for the Company. Pursuant to the consulting agreement, the consultant is paid $10,000 per month for his services. On October 1, 2018, the Company granted the consultant 15,625 options. For the years ended December 31, 2020 and 2019, the Company has incurred consulting fees in the amount of approximately $122,000 and $121,000, respectively, under the agreement. The agreement may be terminated by either party with 30 days’ notice. [4] Manufacturing agreements: In August 2019, the Company entered into an agreement with a contract manufacturer for the commercial scale up and registration batches for ADAIR. The total contract is estimated at $1.4 million of which approximately $423,000 and $179,000 was expensed under the agreement during the years ended December 31, 2020 and 2019, respectively. In October 2019, the Company entered into an agreement with a contract manufacturer for the formulation and development for an abuse-deterrent formulation of Ritalin. The total contract is estimated at $232,000, of which $182,000 and $5,000 was expensed during the years ended December 31, 2020 and 2019, respectively. [5] Pre-clinical agreement included in research and development expense: In November 2019, the Company entered into an agreement with a clinical research organization for pre-clinical services. The total contract currently authorized is estimated at $1.1 million of which $808,000 and $6,000 was expensed during the year ended December 31, 2020 and 2019, respectively. [6] COVID-19 impact The global COVID-19 pandemic continues to rapidly evolve, and the Company continues to monitor the COVID-19 situation closely. The COVID-19 pandemic caused some delays at the Company’s clinical trial sites, contract research organizations, or CROs, and third-party manufacturers, which in turn resulted in some delays in the FDA approval process; however, these delays have been largely remediated. However, the extent of the impact of the COVID-19 on the Company’s business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its future impact on the Company’s clinical trial enrollment, clinical trial sites, CROs, third-party manufacturers, and other third parties with whom it does business, as well as its impact on regulatory authorities and the Company’s key scientific and management personnel. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, the Company is conducting business as usual, with necessary or advisable modifications to employee travel and with many of its employees and consultants working remotely. The Company will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter its operations, including those that may be required by federal, state or local authorities, or that it determines are in the best interests of its employees and other third parties with whom the Company does business. At this point, the extent to which the COVID-19 pandemic may affect the Company’s business, operations and clinical development timelines and plans, including the resulting impact on its expenditures and capital needs, remains uncertain. F- 15 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note F - Equity Incentive Plan On October 1, 2018, the Company adopted the 2018 Equity Incentive Plan (the "Plan"). The Plan provides for the granting of stock options, restricted stock, or restricted stock units (collectively, the "Awards"). The Plan gives authority to the Board of Directors to administer and implement the Plan, including authority to determine the terms and conditions for all grants of Awards. The terms and conditions of each Award are determined by the Board or a committee designated by the Board. Under the Plan, the administrator may grant incentive stock options or non-qualified stock options with a term not to exceed 10 years from the grant date and at an exercise price per share that shall not be less than 100% of the fair market value of the share on the date of the grant. Restricted stock may be issued either alone or in conjunction with other awards. Any awards that expire, terminate or are cancelled or forfeited for any reason without having been exercised in full will again become available for grant under the Plan. The original maximum number of shares that may be subject to Awards under the Plan is 148,025. On January 1, 2020 and 2019 the Board authorized an increase to the Awards under the Plan by 4% of the then outstanding common shares pursuant to the terms of the Plan, totaling 180,248 and 112,500, respectively; thus the total number of shares authorized under the Plan as of December 31, 2020 was 440,773. On October 1, 2018, the Company granted 46,875 options to a consultant, who as of January 15, 2019 became an employee, which were to vest upon certain milestone events and one-sixth of which vested on grant; 15,625 options to a second outside consultant which vest upon certain milestone events and 46,875 options to a third outside consultant which vest upon certain milestone events. On January 15, 2019, the Company accelerated the 31,250 unvested options granted to the outside consultant pursuant to an employment agreement with the consultant. The weighted average grant date fair value of options granted under the Plan in October 2018, using the Finnerty option-pricing model and taking into account the lack of marketability was approximately $1.84 per share which the Company utilized for the exercise price of the granted options. The Company utilized an outside valuation firm to determine the overall value of the Company based upon a discounted cash flow analysis and a market approach. On February 5, 2019, pursuant to the January 15, 2019 employment agreement, the Company granted the employee 61,250 options. F- 16 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note F - Equity Incentive Plan (continued) For the calculation of the fair value of stock option awards upon grant, the Company utilized the Black-Scholes option valuation model. Expected stock price volatility was calculated based on the weighted-average of historical information of similar public entities. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. The average expected life was determined based on anticipated exercise strategy and cancellation behavior for employees and nonemployees. The Company has not paid and does not anticipate paying cash dividends; therefore, the expected dividend rate was assumed to be 0%. The following table provides the assumptions used for each grant date. Date of Grant October 1, 2018 February 5, 2019 October 11, 2019 January 2, 2020(1) May 22, 2020(2) Options granted 109,375 61,250 5,000 15,625 75,000 Weighted-average volatility 77.5% 89% 75 % 85% 85% Expected term 5.5-6.2 years 5.6 years 6.0 years 6.0 years 5.8 years Risk-free interest rate 3.0% 2.6% 1.6 % 2.2% 0.425% (1) Options granted outside the Plan. (2) 2,500 of the options were granted outside of the Plan. The table below represents the activity of stock options granted to employees and consultants: Period from December 31, 2018 through December 31, 2020 Number of options Weighted average exercise price Weighted average remaining contractual terms (years) Aggregate intrinsic value ($ 000) Outstanding at December 31, 2018 109,375 1.84 4.875 $ - Granted during 2019 66,250 2.32 - Outstanding at December 31, 2019 175,625 2.04 4.450 474 Granted during 2020 90,625 4.72 - Outstanding at December 31, 2020 266,250 $ 2.94 4.109 $ 474 Exercisable at December 31, 2020 71,981 $ 2.11 3.840 $ 180 F- 17 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note F - Equity Incentive Plan (continued) As of December 31, 2020, there was approximately $229,000 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted to employees. Of that amount $131,000 is expected to be recognized over a weighted-average period of one year. The unrecognized compensation cost related to one employee’s options totaling $98,000 will be recognized once the milestone events become probable. Upon the closing of the Company’s IPO, this milestone was achieved and therefore the $98,000 will be recognized in the first quarter of 2021. The aggregate intrinsic value of options is calculated as the difference between the exercise price of the underlying options and the deemed fair value of the Company’s common stock for those shares that had exercise prices lower than the deemed fair value of the Company’s common stock. As of December 31, 2020, there was approximately $51,000 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted to consultants. That cost is expected to be recognized over a weighted-average period of one year. Stock compensation expense included within the statement of operations includes ($ in thousands): Year Ended December 31, 2020 2019 Research and development $ 103 $ 25 General and administrative 51 55 $ 154 $ 80 Note G - Related Party Transactions The Company expensed approximately $186,000 for certain consulting services provided by O2 Capital Advisors which is owned by Ofir Levi, a member of the Company’s board of directors and a shareholder of the Company for the year ended December 31, 2019. Of these amounts $96,000 was included in accounts payable as of December 31, 2019. In April 2020, the Company’s board authorized payments of $6,000 per month, for four months, to Mr. Levi for his board work to the Company of which $24,000 was incurred and expensed for the year ended December 31, 2020. On January 6, 2020, the Company entered into a license agreement with Medice which grants Medice an exclusive license, with the right to grant sublicenses, to develop, use, manufacture, market and sell ADAIR throughout Europe. Medice is responsible for obtaining regulatory approval of ADAIR in the licensed territory. Under the license agreement, Medice paid Vallon a $100,000 upfront payment and is required to pay milestone payments upon first obtaining regulatory approval to market and sell ADAIR in any country, territory or region in the licensed territory and upon achieving certain annual net sales thresholds. Medice will also pay tiered royalties on annual net sales of ADAIR at rates in the low double-digits. The initial term of the license agreement will expire five years after the date on which Medice first obtains regulatory approval in any country, territory or region in the licensed territory. F- 18 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note H - Finance Lease The Company entered into a finance lease in October 2019 in relation to equipment utilized in the commercial scale manufacturing of ADAIR ($ in thousands). December 31, 2020 2019 Initial lease right-of-use asset $ 368 $ 368 Accumulated amortization $ 89 $ 15 Weighted-average remaining lease term - finance lease 2.75 years 3.75 years Weighted-average discount rate - finance lease 13.50 % 13.50 % Other information (in thousands): Year Ended December 31, 2020 2019 Operating cash flows from finance lease amortization $ 74 $ 15 Financing cash flows from finance lease payments $ 65 $ 28 The maturities of the finance lease liability as of December 31, 2020 (in thousands): 2021 $ 143 2022 114 2023 76 Total lease payments 333 Less: Imputed interest 58 Present value of lease liability $ 275 F- 19 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note I - Accrued Expenses December 31, 2020 (In thousands) Payroll and related $ 342 $ 221 Clinical and preclinical trial and regulatory related 137 204 Chemistry and manufacturing related 117 3 Financing related 97 - Licensing related 81 - Other 73 48 Total accrued $ 847 $ 476 F- 20 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note J - Income Tax The reconciliation of federal statutory income tax rate to the Company’s effective income tax rate is as follows: December 31, 2020 2019 Expected income tax benefit at the federal statutory rate 21.0 % 21.0 % State and local taxes, net of federal benefit 12.8 7.9 Non-deductible items — (9.6 ) Prior year provision to return adjustments 6.4 — Valuation allowance (40.2 ) (19.3 ) Total — % — % Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The principal components of the Company’s deferred tax assets consisted of the following as of December 31, 2020 and 2019 (in thousands): December 31, 2020 2019 Deferred tax assets: Federal and state net operating loss carryforwards $ 3,939 $ 2,052 Share based compensation 97 38 Lease liabilities 96 100 Accruals and other 108 120 Gross deferred tax assets 4,240 2,310 Less: deferred tax liabilities (94 ) (102 ) Less: valuation allowance (4,146 ) (2,208 ) Net deferred tax assets $ – $ – Based on the Company’s history of losses, the Company recorded a full valuation allowance against its deferred tax assets as of December 31, 2020 and 2019. The Company increased its valuation allowance by approximately $1.9 million for the year ended December 31, 2020. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support a reversal of the allowance. As of December 31, 2020, the Company had federal, state and local net operating loss carryforwards of $11.6 million. The federal net operating loss carryforwards do not expire. The state and local losses begin to expire in the year ending December 31, 2038. Under the provisions of Sections 382 and 383 of the Internal Revenue Code (the “IRC”), certain substantial changes in the Company’s ownership may have limited, or may limit in the future, the amount of net operating loss and credit carryforwards that can be used to reduce future income taxes if there has been a significant change in ownership of the Company, as defined by the IRC. Future owner or equity shifts could result in limitations on net operating loss and credit carryforwards. F- 21 VALLON PHARMACEUTICALS, INC. NOTES TO DECEMBER 31, 2020 AND 2019 FINANCIAL STATEMENTS Note J - Income Tax (continued) The Company evaluates tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information. As of December 31, 2020 and 2019, the Company had no unrecognized income tax benefits that would affect the Company’s effective tax rate if recognized. The Company would recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. The Company’s uncertain tax positions yet to be determined would be related to years that remain subject to examination by relevant tax authorities. Since the Company is in a loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available. Note K - Subsequent Events On January 1, 2021, the Company’s Board authorized an increase to Awards under the Plan by 4% of the then outstanding common shares pursuant to the terms of the Plan totaling 180,249 and thus the number of Awards available for issuance under the Plan as of January 1, 2021 totals 621,022. On January 5, 2021, the Company was notified that its PPP loan had been forgiven for the full $61,000 plus accrued interest. On January 11, 2021, the Company entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including Salmon Pharma, an affiliate of Medice, and David Baker, our Chief Executive Officer, pursuant to which we issued convertible promissory notes, or the 2021 Convertible Notes, for cash proceeds of $350,000. The 2021 Convertible Notes bear an interest rate of 7.0% per annum, non-compounding, and had a maturity date of September 30, 2021. The 2021 Convertible Notes are convertible into shares of our capital stock that are offered to investors in any subsequent equity financing after the date of their issuance in which we issued any of our equity securities, or a Qualified Financing, and are convertible at a twenty percent (20%) discount to the price per share offered in such Qualified Financing. Upon the closing of the IPO, described below, the 2021 Convertible Notes were converted into 54,906 shares of the Company’s common stock. On February 12, 2021, the Company completed its IPO of 2,250,000 shares of common stock at a public price offering of $8.00 per share. The gross proceeds from the offering, before deducting underwriting discounts, commissions and other offering expenses payable by Vallon, were $18.0 million. Underwriting discounts, commissions and expenses totaled $1.6 million and the Company incurred approximately $895,000 of additional expenses related to completing the IPO, of which $494,000 were incurred as of December 31, 2020 and included in prepaids and other current assets on the Company’s balance sheet; thus aggregate net proceeds are estimated at $15.5 million. Immediately prior to the closing of the IPO, the Company effected a one-for-40 reverse stock split of its common stock. All share and per share amounts, excluding the number of authorized shares and par value, contained in these financial statements and accompanying notes, and this Annual Report on Form 10-K give retroactive effect to the reverse split. F- 22