GRI Bio, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report, and the audited financial statements (and notes thereto), and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2020, included in our Annual Report on Form 10-K that was filed with the SEC on March 29, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, these forward-looking statements. Overview We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel medications for CNS disorders with a focus on abuse-deterrent medications. Our 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. According to the US Department of Health and Human Services’ 2018 National Survey on Drug Use and Health, over 5 million adolescents and adults misuse prescription stimulant medications on an annual basis. The misuse and abuse of prescription stimulants has substantial medical risk, including risk of irregular heartbeat, heart attack, seizures, hallucinations, hostile behavior and stroke, as well as increased risk of addiction. ADAIR is designed to deter attempts to crush and snort and to provide barriers to injection while still providing the expected therapeutic benefit when taken orally. We are developing ADAIR for registration with the U.S. Food and Drug Administration through the Section 505(b)(2) regulatory pathway, which is expected to obviate the need for large Phase 2 and Phase 3 efficacy and safety studies. In July 2018, our Investigational New Drug (IND) application for ADAIR was approved by the FDA. We have completed three Phase 1 trials of ADAIR including a proof-of-concept intranasal human abuse potential study. We recently completed a 13-week preclinical toxicology study on the final formulation of ADAIR that showed no safety findings of concern. We are currently conducting a pivotal intranasal abuse study which we expect to complete by the end of 2021. In January 2020, we entered into a license agreement with Medice, which grants Medice an exclusive license to develop, use, manufacture, market and sell ADAIR throughout Europe. Under the license agreement, Medice paid us a $0.1 million upfront payment and will pay milestone payments of up to $6.3 million in aggregate upon achieving certain regulatory and sales milestones. We are also entitled to low-double digit tiered royalties on net sales of ADAIR. In addition to ADAIR, we have begun formulation development work on our second product candidate, ADMIR, an abuse deterrent formulation of methylphenidate (Ritalin®), for the treatment of ADHD. We also plan to utilize the Section 505(b)(2) regulatory pathway for registration of ADMIR . In the future, we plan to use our abuse deterrent platform technology to develop other products that have potential for abuse in their current forms and will continue business development activities and seek partnering, licensing, merger and acquisition opportunities or other transactions to further develop our pipeline and drug-development capabilities. The global COVID-19 pandemic continues to present uncertainty and unforeseeable new risks to our operations and business plan. We have 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 our business, operations and clinical development plans remains uncertain and will vary depending on the pandemic’s future impact on our 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, we are conducting business as usual, with necessary or advisable modifications to employee travel and with most of our employees and consultants working remotely. We will continue to actively monitor the COVID-19 outbreak and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. 13 Table of Contents Financial Operations Overview Licensing Revenues - Related Party To date, we have not generated any revenue from the sale of any products, and we do not expect to generate significant revenues unless or until we obtain regulatory approval of and commercialize ADAIR. Substantially all of our revenue to date has been generated by the Medice license agreement from which we received a $0.1 million license fee during the six months ended June 30, 2020. We do not expect to generate any additional revenue from the Medice license agreement in the near future. Research and Development Expenses 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. Our research and development expenses have consisted primarily of in-process research and development expenses, costs incurred in preparing for and conducting the development program for ADAIR, working on commercial manufacturing of ADAIR and developing formulations for ADMIR. Research and development costs are expensed as incurred. These expenses include: • employee -related expenses, such as salaries, bonuses and benefits, consultant-related expenses such as consultant fees and bonuses, stock-based compensation, overhead related expenses and travel related expenses for our research and development personnel; • expenses incurred under agreements with contract research organizations (CROs), as well as consultants that support the implementation of our clinical and non-clinical studies; • manufacturing and packaging costs in connection with conducting clinical trials and for stability and other studies required to support the NDA filing as well as manufacturing drug product for commercial launch; • formulation, research and development expenses related to ADMIR; and other products we may choose to develop; and • costs for sponsored research. We typically use our employee, consultant and infrastructure resources across our research and development programs. Although we track certain outsourced development costs by product candidate, we do not allocate personnel costs or other internal costs to specific product candidates. We plan to incur research and development expenses for the foreseeable future as we expect to continue the development of ADAIR and our other product candidates. At this time, due to the inherently unpredictable nature of preclinical and clinical development and the early stage of our other product candidates, we are unable to estimate with any certainty the costs we will incur and the timelines we will require in our continued development efforts. General and Administrative Expenses General and administrative expenses consist primarily of compensation and consulting related expenses for executives and other administrative personnel, professional fees and other corporate expenses, including legal and accounting fees, travel expenses, facilities-related expenses, and consulting services relating to our formation and corporate matters. We anticipate that our general and administrative expenses will increase in the future as we support our continued research and development activities and operate as a public company. These increases will likely include increased costs related to the hiring of personnel, including compensation and employee-related expenses, including stock-based compensation, and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with The Nasdaq Capital Market and SEC requirements, directors and officers insurance, increased legal and accounting costs and investor relations costs. In addition, if ADAIR obtains regulatory approval for marketing, we expect that we would incur expenses associated with building a 14 Table of Contents commercialization team if we have not sold or licensed the rights to commercialize ADAIR to a third party in territories not under the license agreement with Medice. Other Income Other income consists of income recognized as a result of the extinguishment of the promissory note issued to us under the Paycheck Protection Program (PPP) as a result of the forgiveness of the note. Revaluation of Derivative Instruments In January 2021, we entered into a Convertible Promissory Note Purchase Agreement pursuant to which we issued $350,000 in convertible promissory notes (the 2021 Convertible Notes). The 2021 Convertible Notes automatically converted into 54,906 shares of our common stock concurrently with the closing of the IPO. We identified the mandatory conversion into shares our 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. We evaluated the fair value of the derivative liability at issuance. 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. Interest (Income) Expense, net Interest (income) expense consists of interest earned on our cash and cash equivalents held with institutional banks and interest expense is primarily related to our finance lease of equipment utilized in the commercial scale manufacturing of ADAIR. Results of Operations Comparison of the Three Months Ended June 30, 2021 and 2020 The following table summarizes the results of our operations for the periods indicated (in thousands): Three Months Ended June 30, 2021 2020 License revenue-from related party $ — $ — Operating expenses: Research and development 1,202 808 General and administrative 1,108 327 Total operating expenses 2,310 1,135 Loss from operations (2,310) (1,135) Interest expense, net (2) (12) Net loss $ (2,312) $ (1,147) Research and Development Expenses Research and development expenses were $1.2 million and $0.8 million for the three months ended June 30, 2021 and 2020, respectively. The $0.4 million increase in research and development expenses was primarily due to an increase of $0.5 million in expenses related to the registration development program of ADAIR offset by a decrease of $0.1 million in expenses related to the formulation work for ADMIR. General and Administrative Expenses General and administrative expenses were $1.1 million and $0.3 million for the three months ended June 30, 2021 and 2020, respectively. The $0.8 million increase was primarily related to increased costs for directors and officers insurance of $0.4 million, personnel expenses, including stock compensation, of $0.2 million, and public company expenses of $0.2 million. 15 Table of Contents Interest Expense, net Interest expense, net was $2,000 and $12,000 for the three months ended June 30, 2021 and 2020, respectively. Comparison of the Six Months Ended June 30, 2021 and 2020 The following table summarizes the results of our operations for the periods indicated (in thousands): Six Months Ended June 30, 2021 2020 License revenue-from related party $ — $ 100 Operating expenses: Research and development 2,974 1,694 General and administrative 1,938 701 Total operating expenses 4,912 2,395 Loss from operations (4,912) (2,295) Other income 61 — Revaluation of derivative liability (89) — Interest expense, net (10) (13) Net loss $ (4,950) $ (2,308) License Revenue – From Related Party Licensing revenues were $0.1 million for the six months ended June 30, 2020 as a result of the upfront payment received under the terms of the Medice license agreement. No licensing revenues were recognized during the six months ended June 30, 2021. Research and Development Expenses Research and development expenses were $3.0 million and $1.7 million for the six months ended June 30, 2021 and 2020, respectively. The $1.3 million increase in research and development expenses was primarily due to increases of $1.4 million in expenses related to the registration development program of ADAIR offset by a decrease of $0.1 million in expenses related to the formulation work for ADMIR. General and Administrative Expenses General and administrative expenses were $1.9 million and $0.7 million for the six months ended June 30, 2021 and 2020, respectively. The $1.2 million increase was primarily related to increased costs for directors and officers insurance of $0.6 million, personnel expense, including non-cash stock compensation, of $0.4 million, and public company expenses of $0.2 million. Other Income In May 2020, the Company issued a promissory note under the PPP totaling $61,000. As of December 31, 2020, the Company had utilized the entire proceeds from such note for payroll costs (greater than 75%), costs related to health care benefits and rent payments and in January 2021, the Company was notified that the note along with accumulated interest had been forgiven. As the PPP note was forgiven, the Company recorded income from the extinguishment of its obligation in accordance with ASC 405-20-40-1. Revaluation of Derivative Liability During the six months ended June 30, 2021, pursuant to ASC-815, we revalued the embedded derivative liability associated with the 2021 Convertible Notes, resulting in $89,000 in the fair value of the derivative liability associated with the 2021 Convertible Notes. Interest Expense, net Interest expense, net was $10,000 and $13,000 for the six months ended June 30, 2021 and 2020, respectively. 16 Table of Contents Liquidity and Capital Resources Since inception, we have incurred losses and expect to continue to incur losses for the foreseeable future. We incurred net losses of $4.9 million and $2.3 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, we had an accumulated deficit of $17.5 million. We have financed our working capital requirements to date through the issuance of common stock, convertible notes, short-term promissory notes, and a PPP promissory note. As of June 30, 2021, we had $10.5 million in cash and cash equivalents. The following table summarizes our cash flows for the periods indicated (in thousands): Six Months Ended June 30, 2021 2020 Net cash provided by (used in): Operating activities $ (5,440) $ (1,834) Investing activities — (2) Financing activities 15,791 14 Net increase (decrease) in cash and cash equivalents $ 10,351 $ (1,822) Cash Flows from Operating Activities For the six months ended June 30, 2021 and 2020, $5.4 million and $1.8 million were used in operating activities, respectively. The $3.6 million increase was primarily due to a $2.6 million increase in our net loss as well as increases in prepaid expenses, accounts payable and accrued expenses of $1.3 million, offset by $0.2 million increase in non-cash stock compensation expense. Cash Flows from Investing Activities Net cash used in investing activities was $2,000 for the six months ended June 30, 2020, which was related to the purchase of computer equipment. Cash Flows from Financing Activities Net cash provided by financing activities was $14,000 during the six-month period ended June 30, 2020, which was related to proceeds received from a PPP note of $61,000 offset by payments related to our finance lease of $47,000. Net cash provided by financing activities was $15.8 million for the six months ended June 30, 2021 and was primarily related to the net proceeds from our IPO and 2021 Convertible Notes financings. 2021 Convertible Note Financing In January 2021, we entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including SALMON Pharma GmbH (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 $350,000. 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 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 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 IPO, as agreed upon among the parties thereto. Future Funding Requirements Although it is difficult to predict future liquidity requirements, we expect that our existing cash and cash equivalents will provide funding for our ongoing business activities into the third quarter of 2022; however, we have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect therefore there is substantial doubt about our ability to continue as a going concern. We expect to continue to incur significant and increasing operating losses at least for the 17 Table of Contents foreseeable future. We do not expect to generate product revenue unless and until we successfully complete development, obtain regulatory approval for, and successfully commercialize ADAIR, or any other future products, including ADMIR. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of planned clinical trials and our expenditures on other research and development activities. We anticipate that our expenses will increase substantially as we: • conduct clinical trials and non-clinical studies; • scale up manufacturing capabilities with third-party contract manufacturer(s); • conduct ongoing stability studies of ADAIR; • seek to identify, acquire, develop and commercialize additional products, such as ADMIR; • integrate acquired technologies into a comprehensive regulatory and product development strategy; • maintain, expand and protect our intellectual property portfolio; • hire scientific, clinical, quality control and administrative personnel; • add operational, financial and management information systems and personnel, including personnel to support our drug development efforts; • seek regulatory approvals for any products that successfully complete clinical trials; • ultimately establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any drug candidates for which we may obtain regulatory approval, including through the license agreement with Medice; and • operate as a public company. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Critical Accounting Policies The Company’s critical accounting policies are described in Note B, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2021. There have been no material changes to the significant accounting policies during the six months ended June 30, 2021, except for items mentioned in Note 3 of the unaudited interim financial statements in this Quarterly Report on Form 10-Q. Emerging Growth Company Status We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include: • reduced disclosure about our executive compensation arrangements; • no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and • exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. We have taken advantage of reduced reporting requirements in this report and may continue to do so until such time that we are no longer an emerging growth company. We will remain an “emerging growth company” until the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (b) December 31, 2026, the last day of the fiscal year 18 Table of Contents following the fifth anniversary of the completion of the our IPO, (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable to a smaller reporting company.