GRI Bio, Inc. 10-Q

Item 1. Financial Statements. Vallon Pharmaceuticals, Inc. Balance Sheets (in thousands, except share and per share amounts) June 30, 2021 December 31, 2020 Assets (unaudited) Current assets: Cash and cash equivalents $ 10,460 $ 109 Prepaid expenses and other current assets 944 565 Total current assets 11,404 674 Other assets 243 279 Property and equipment, net — 2 Total assets $ 11,647 $ 955 Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 886 $ 1,226 Accrued expenses 694 847 Note payable, current — 47 Other current liabilities 91 105 Total current liabilities 1,671 2,225 Note payable, non-current — 14 Other liabilities 123 170 Total liabilities 1,794 2,409 Commitments and contingencies (Note 9) Stockholders' equity (deficit): Common stock, $ 0.0001 par value; 250,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 6,812,836 and 4,506,216 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively — — Additional paid-in-capital 27,402 11,145 Accumulated deficit ( 17,549 ) ( 12,599 ) Total stockholders’ equity (deficit) 9,853 ( 1,454 ) Total liabilities and stockholders' equity (deficit) $ 11,647 $ 955 See accompanying notes to unaudited interim financial statements. 3 Table of Contents Vallon Pharmaceuticals, Inc. Statements of Operations (in thousands, except share and per share amounts) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 License revenue-related party $ — $ — $ — $ 100 Operating expenses: Research and development 1,202 808 2,974 1,694 General and administrative 1,108 327 1,938 701 Total operating expenses 2,310 1,135 4,912 2,395 Loss from operations ( 2,310 ) ( 1,135 ) ( 4,912 ) ( 2,295 ) Other income — — 61 — Revaluation of derivative liability — — ( 89 ) — Interest expense, net ( 2 ) ( 12 ) ( 10 ) ( 13 ) Net loss $ ( 2,312 ) $ ( 1,147 ) $ ( 4,950 ) $ ( 2,308 ) Net loss per share of common stock, basic and diluted $ ( 0.34 ) $ ( 0.25 ) $ ( 0.79 ) $ ( 0.51 ) Weighted-average common shares outstanding, basic and diluted 6,812,836 4,506,216 6,264,854 4,506,216 See accompanying notes to unaudited interim financial statements. 4 Table of Contents Vallon Pharmaceuticals, Inc. Statements of Changes in Stockholders’ Equity (Deficit) (in thousands, except shares) (Unaudited) Common Stock Shares Amount Additional Paid-in Capital Accumulated Deficit Stockholders’ Equity Balance, December 31, 2019 4,506,216 $ — $ 10,991 $ ( 7,777 ) $ 3,214 Stock-based compensation — — 35 — 35 Net loss — — — ( 1,161 ) ( 1,161 ) Balance, March 31, 2020 4,506,216 — 11,026 ( 8,938 ) 2,088 Stock-based compensation — — 28 — 28 Net loss — — — ( 1,147 ) ( 1,147 ) Balance, June 30, 2020 4,506,216 $ — $ 11,054 $ ( 10,085 ) $ 969 Common Stock Shares Amount Additional Paid-in Capital Accumulated Deficit Stockholders’ Equity (Deficit) Balance, December 31, 2020 4,506,216 $ — $ 11,145 $ ( 12,599 ) $ ( 1,454 ) Issuance of common stock for convertible notes 54,906 — 439 — 439 Issuance of common stock for IPO, net of issuance expenses 2,250,000 — 15,104 — 15,104 Issuance of common stock for services 1,714 — 9 — 9 Issuance of Underwriters Warrants — — 399 — 399 Stock-based compensation — — 168 — 168 Net loss — — — ( 2,638 ) ( 2,638 ) Balance, March 31, 2021 6,812,836 — 27,264 ( 15,237 ) 12,027 Stock-based compensation — — 138 — 138 Net loss — — — ( 2,312 ) ( 2,312 ) Balance, June 30, 2021 6,812,836 $ — $ 27,402 $ ( 17,549 ) $ 9,853 See accompanying notes to unaudited interim financial statements. 5 Table of Contents Vallon Pharmaceuticals, Inc. Statements of Cash Flows (in thousands) (Unaudited) Six Months Ended June 30, 2021 2020 Operating activities: Net loss $ ( 4,950 ) $ ( 2,308 ) Adjustments to reconcile net loss to cash used in operating activities: Amortization of finance lease right-of-use asset 36 37 Stock-based compensation expense 306 63 Revaluation of derivative liability 89 — Forgiveness of PPP note ( 61 ) — Non-cash interest, depreciation and other expense 2 1 Change in operating assets and liabilities: Prepaid expenses and other current assets ( 379 ) ( 17 ) Accounts payable ( 330 ) 262 Accrued expenses ( 153 ) 128 Cash used in operating activities ( 5,440 ) ( 1,834 ) Investing activities: Purchase of property and equipment — ( 2 ) Cash used in investing activities — ( 2 ) Financing activities: Proceeds from PPP loan — 61 Proceeds from common stock, net of offering expenses 15,503 — Proceeds from convertible notes 350 — Payment of finance lease liability ( 62 ) ( 47 ) Cash provided by financing activities 15,791 14 Net increase (decrease) in cash and cash equivalents 10,351 ( 1,822 ) Cash and cash equivalents, at beginning of period 109 3,821 Cash and cash equivalents, at end of period $ 10,460 $ 1,999 Supplemental disclosure of cash flows information: Noncash financing activities: Conversion of convertible notes to common stock $ 350 $ — See accompanying notes to unaudited interim financial statements. 6 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Unaudited Interim Financial Statements (in thousands, except share and per share data) 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Vallon Pharmaceuticals, Inc. (Vallon or the Company), based in Philadelphia, PA was incorporated in Delaware on January 11, 2018, which is the date of inception. The Company is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel abuse-deterrent medications for CNS disorders. The Company’s lead investigational product candidate, ADAIR, is a proprietary, abuse-deterrent oral formulation of immediate-release dextroamphetamine (the main active ingredient in Adderall®) for the treatment of attention-deficit/hyperactivity disorder (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. In February 2021, the Company completed an initial public offering (IPO) of its common stock, selling 2,250,000 shares at $ 8.00 per share. As a result of the IPO, the Company received approximately $ 15,500 in net proceeds, after deducting discounts and commissions of approximately $ 1,600 and estimated offering expenses of approximately $ 905 payable by the Company. In January 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 (the 2021 Convertible Notes) for cash proceeds of $ 350 . 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 were convertible into shares of our capital stock 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 were convertible at a twenty percent ( 20 %) discount to the price per share offered in such Qualified Financing. Such Qualified Financing included the IPO and as a result, the 2021 Convertible Notes converted into an aggregate of 54,906 shares of our common stock immediately prior to the closing of IPO. 2. LIQUIDITY These 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 since its inception and has incurred $ 17,549 in accumulated deficit through June 30, 2021. 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 (PPP) promissory note. In January 2021, the Company completed a $ 350 convertible note financing and in February 2021, the Company completed the IPO, raising net proceeds of $ 15,500 . As of June 30, 2021, the Company had cash and cash equivalents of approximately $ 10,460 , which management expects will provide funding for its ongoing business activities into the third quarter of 2022. However, the Company has based this estimate on assumptions that may prove erroneous, and it could use capital resources sooner than it expects, therefore, there is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that these financial statements are being issued. 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 the Company will be successful in this regard. Therefore, the Company intends to raise capital through additional issuances of common stock and /or short-term notes. If the Company is not able to obtain additional financing on acceptable terms and in the amounts necessary to fully fund its future operating requirements, it may be forced to reduce or discontinue its operations entirely. These 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. 7 Table of Contents 3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial periods and pursuant to the rules of the Securities and Exchange Commission. References in this Quarterly Report on Form 10-Q to “authoritative guidance” is meant to refer to GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). The December 31, 2020 balance sheet was derived from audited financial statements. In the opinion of management, the unaudited interim financial statements furnished herein include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of June 30, 2021, and the results of operations and stockholders’ equity (deficit) for the three and six months ended June 30, 2021 and 2020 and cash flows for the six months ended June 30, 2021 and 2020. Results of operations for the three and six months ended June 30, 2021, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2021. The unaudited interim financial statements, presented herein, do not contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited interim financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2021. Recapitalization Immediately prior to the closing of the IPO (Note 6), 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 Quarterly Report on Form 10-Q give retroactive effect to the reverse split. Use of Estimates The preparation of financial statements in conformity with GAAP 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 unaudited interim 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, the embedded derivative of convertible notes, warrant issuance, 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. Stock-based Compensation The Company recognizes expense for employee and non-employee stock-based compensation in accordance with ASC Topic 718, Stock-Based Compensation (ASC 718). 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 Company uses the expected term, rather than the contractual term, for both employee and consultant options issued. Recent Accounting Pronouncements The Company considers the applicability and impact of all ASUs. ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on these financial statements. 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 8 Table of Contents amendments also improve consistent application of and simplify 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 adoption of this standard, effective January 1, 2021, did not have a material impact on these financial statements. 4. ACCRUED EXPENSES Accrued expenses consist of the following: June 30, 2021 December 31, 2020 Research and development $ 283 $ 259 General and administrative 144 156 Payroll and related 196 342 Licensing related 71 81 Other — 9 Total accrued expenses $ 694 $ 847 5. PPP NOTE AND CONVERTIBLE NOTES In May 2020, the Company issued a promissory note under the PPP (the PPP Note) totaling $ 61 . The PPP Note had a stated interest rate of 1 % and had a two-year maturity. Payments were required to be made over a 1.5-year period beginning November 1, 2020 unless forgiven. In January 2021, the Company was notified that the loan along with accumulated interest had been forgiven. As a result, the Company recorded income from the extinguishment of its obligation in accordance with ASC 405-20-40-1, disclosed in the amount of $ 61 included in other income on the accompanying Statements of Operations. 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, the Company’s Chief Executive Officer, pursuant to which the Company issued the 2021 Convertible Notes, for cash proceeds of $ 350 . The 2021 Convertible Notes bore an interest rate of 7.0 % per annum, non-compounding, and had a maturity date of September 30, 2021. The 2021 Convertible Notes converted into 54,906 shares of the Company’s common stock upon completion of the IPO. The Company identified the mandatory conversion into shares of the Company’s common stock as a redemption feature, which requires bifurcation from the 2021 Convertible Notes and treated it as a derivative liability under ASC 815 as the redemption feature was not clearly and closely related to the debt. The Company evaluated the fair value of the derivative liability. Upon the conversion of the 2021 Convertible Notes to common stock at the closing of the IPO, the embedded derivative liability was remeasured and removed from the balance sheet. 6. STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock On February 12, 2021, the Company completed the IPO of 2,250,000 shares of common stock at a public offering price of $ 8.00 per share. The gross proceeds from the IPO, before deducting underwriting discounts, commissions and other offering expenses payable by the Company, were $ 18,000 . Underwriting discounts and expenses totaled $ 1,600 and the Company incurred approximately $ 905 of additional expenses related to completing the IPO, of which $ 494 were incurred as of December 31, 2020 and included prepaid expenses and other current assets on the Company’s balance sheet; thus aggregate net proceeds were approximately $ 15,500 . Common Stock Warrants In connection with the IPO, the Company granted the underwriters warrants (the Underwriters' Warrants) to purchase an aggregate of 112,500 shares of common stock at an exercise price of $ 10.00 per share. The Underwriters’ Warrants have a five -year term and are not exercisable prior to August 12, 2021. All of the Underwriters’ Warrants were outstanding as of June 30, 2021. The warrants were 9 Table of Contents classified as equity and the fair value of $ 399 is reflected as additional paid-in capital. The Black-Scholes option-pricing model was used to estimate the fair value of the warrants with the following weighted-average assumptions: Volatility 85.0 % Expected term in years 2.5 Dividend rate 0.0 % Risk-free interest rate 0.155 % 7. STOCK-BASED COMPENSATION The Company recorded stock-based compensation related to stock options issued under the Company’s 2018 Equity Incentive Plan (2018 Plan) in the following expense categories of its accompanying statements of operations for the three and six months ended June 30, 2021 and 2020 : For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 Research and development $ 18 $ 18 $ 39 $ 53 General and administrative 120 10 267 10 Total $ 138 $ 28 $ 306 $ 63 The Company has granted stock options to purchase its common stock to employees and consultants under the 2018 Plan, under which the Company may issue stock options, restricted stock and other equity-based awards. The Company has also granted certain stock options outside of the 2018 Plan. Stock options granted by the Company generally have a contractual life of up to 10 years. As of June 30, 2021, all equity awards granted from the 2018 Plan were in the form of stock options. The Company measures equity-based awards granted to employees, and non-employees based on their fair value on the date of the grant and recognizes compensation expense for those awards over the requisite service period or performance-based period, which is generally the vesting period of the respective award. The measurement date for equity awards is the date of grant, and equity-based compensation costs are recognized as expense over the requisite service period, which is the vesting period or for certain performance-based awards. The Company records the expense for these awards if it concludes that it is probable that the performance condition will be achieved. The table below represents the activity of stock options granted to employees and non-employees for the six months ended June 30, 2021: Number of options Weighted average exercise price Weighted average remaining contractual term (years) Outstanding at December 31, 2020 266,250 $ 2.94 8.22 Granted 397,240 $ 3.87 Exercised — — Forfeited — — Outstanding at June 30, 2021 663,490 $ 3.50 9.07 Exercisable at June 30, 2021 206,380 $ 2.83 8.00 10 Table of Contents The Black-Scholes option-pricing model was used to estimate the grant date fair value of each stock option grant at the time of grant using the following weighted-average assumptions: For the Six Months Ended June 30, 2021 2020 Volatility 83.50 % 85.00 % Expected term in years 5.90 5.80 Dividend rate 0.00 % 0.00 % Risk-free interest rate 0.99 % 0.43 % Fair value of option on grant date $ 3.87 $ 3.28 At June 30, 2021, the unrecognized compensation cost related to unvested stock options expected to vest was $ 1,046 . This unrecognized compensation is expected to be recognized over a weighted-average amortization period of 2.94 years. 8. RELATED PARTY TRANSACTIONS In January 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 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. In January 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, the Company’s Chief Executive Officer, pursuant to which the Company issued the 2021 Convertible Notes for cash proceeds of $ 350 . The 2021 Convertible Notes bore an interest rate of 7.0 % per annum, non-compounding, and had a maturity date of September 30, 2021. The 2021 Convertible Notes converted into 54,906 shares of the Company’s common stock upon completion of the IPO. 9. COMMITMENTS AND CONTINGENCIES Employment Agreements The Company has entered into employment contracts with its officers that provide for severance and continuation of benefits in the event of termination of employment by the Company without cause or by the employee for good reason. In addition, in the event of termination of employment following a change in control, the vesting of certain equity awards may be accelerated. COVID-19 Impact The global COVID-19 pandemic continues to present uncertainty and unforeseeable new risks to the Company’s operations and business plan. The Company has closely monitored recent COVID-19 developments, including states’ lifting COVID-19 safety measures, drop in vaccination rates, and spread of various coronavirus strains such as the Delta variant. In light of these developments, the full impact of the COVID-19 pandemic on the Company’s business, operations and clinical development plans remains uncertain and will vary depending on the pandemic’s future impact on its clinical trial enrollment, clinical trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as any legal or regulatory consequences resulting therefrom. To the extent possible, the Company is conducting business as usual, with necessary or advisable modifications to employee travel and with most of its employees and consultants working remotely. The Company will continue to actively monitor the COVID-19 outbreak and may take further actions that alter its operations, including those that may be required by federal, state or local authorities, or that the Company determines are in the best interests of its employees and other third parties with whom the Company does business. 11 Table of Contents 10. FAIR VALUE MEASUREMENTS The fair value of the embedded derivative liability identified in the 2021 Convertible Notes was a Level 3 fair value measurement. As of February 12, 2021, the embedded derivative was remeasured based upon the conversion price of $ 8.00 per share upon closing of the IPO. As such, an expense of $ 89 was recorded during the six months ended June 30, 2021. The following table presents the activity for the liability measured at estimated fair value using unobservable inputs for the six months ended June 30, 2021: Beginning balance as of January 1, 2021 $ — Additions during the six months ended June 30, 2021 89 Transfer out of Level 3 ( 89 ) Balance as of June 30, 2021 $ — 12 Table of Contents