GRI Bio, Inc. 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes beginning on page F-1 of this Annual Report. Some of the information contained in this 37 Ta b le of Contents discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled “Item 1A. Risk Factors” and “Special Note Regarding Forward-Looking Statements” of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a clinical-stage biopharmaceutical company primarily focused on the development and commercialization of proprietary biopharmaceutical products. We are developing novel medications for central nervous system (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 (the FDA) 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. In the second quarter of 2021, we completed a 13-week preclinical toxicology study on the final formulation of ADAIR that showed no safety findings of concern. We are currently conducting the SEAL study, a pivotal intranasal abuse study, and have recently completed its patient enrollment and treatment phases. The SEAL study enrolled 55 subjects who successfully passed the qualification phase with a total of 53 completing the study. We expect to report top-line results of the SEAL study in the first quarter of 2022. Additionally, we continue to conduct preclinical studies and manufacturing work and continue to evaluate the potential for any additional studies to support the submission of a New Drug Application (NDA) for ADAIR to the FDA. In January 2020, we entered into the Medice License Agreement, 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 completed formulation development work and selected the final formulation of 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, drops in vaccination rates, and the spread of various coronavirus strains such as the Delta and Omicron variants. 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, clinical research organizations (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 situation 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. Critical Accounting Policies Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be 38 Ta b le of Contents reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Marketable Securities Marketable securities consist of debt securities that are designated as available-for-sale. Marketable debt securities are recorded at fair value and unrealized holding gains or losses are reported as a component of accumulated other comprehensive income (loss). The amortization of discounts and premiums on marketable securities is included in interest expense, net on the statements of operations and comprehensive loss. Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a debt security below the amortized cost basis is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below the amortized cost basis, any adverse changes in the financial condition of the issuers and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Revenue Recognition We account for revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers . This standard applies to all contracts with customers with the exception of contracts that are within the scope of other standards, such as leases, insurance and financial instruments. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services. We perform the following five steps to recognize revenue under ASC Topic 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only recognize revenue when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services that will be transferred to the customer. To date, our revenues have been generated by a single license agreement (the Medice License Agreement) with Medice (Note 13). The Medice License Agreement included an exclusive license to develop, use, manufacture, market and sell ADAIR throughout Europe, a non-refundable up-front payment, regulatory and sales milestones and royalty payments. Stock-based Compensation We recognize expense for employee and non-employee stock-based compensation in accordance with ASC Topic 718, Compensation - Stock Compensation . ASC Topic 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. We account for forfeitures as incurred. Estimating the fair value of option shares issued under the employee stock purchase plan requires the input of subjective assumptions, including the estimated fair value of our common stock, the expected life of the option, stock price volatility, the risk-free interest rate and expected dividends. The assumptions used in our Black-Scholes option-pricing model represent management's best estimates and involve a number of variables, uncertainties and assumptions and the application of management's judgment, as they are inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future. These assumptions used in our Black-Scholes option-pricing model are estimated as follows: • Expected Term . Due to the lack of sufficient company-specific historical data, the expected term of employee options is determined using the "simplified" method, as prescribed in SEC’s Staff Accounting Bulletin (SAB) No. 107, whereby the expected life equals the arithmetic average of the vesting term and the original contractual term of the option. The expected term of nonemployee options is equal to the contractual term. 39 Ta b le of Contents • Expected Volatility . The expected volatility is based on historical volatilities of similar entities within our industry which were commensurate with the expected term assumption as described in SAB No. 107. • Risk-Free Interest Rat e. The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term. • Expected Dividends . The expected dividend yield is 0% because we have not historically paid, and do not expect for the foreseeable future to pay, a dividend on our common stock. Leases We account for leases in accordance with Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and 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 ASUs 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. We entered into one lease for manufacturing equipment for ADAIR which we determined was a finance lease. Financial Operations Overview Revenue To date, we have not generated any revenues from product sales. All of our revenue to date has been derived from the Medice License Agreement. We do not expect to generate significant product revenue until we obtain approval and commercialize ADAIR. Under the terms of the Medice License Agreement, we received $0.1 million in licensing revenues in connection with the initial signing of the license agreement in the first quarter of 2020. 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. We accrue 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. 40 Ta b le of Contents 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 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 Expense, net Interest expense, net, consists of interest earned on our cash, cash equivalents and marketable securities held with institutional banks, the amortization of discounts and premiums on marketable securities and interest expense on our finance lease of equipment utilized in the commercial scale manufacturing of ADAIR. Recently Issued Accounting Pronouncements We consider 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 the financial statements. On January 1, 2021, we adopted 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 GAAP for other areas of Topic 740 by clarifying and amending the existing guidance. The adoption of this standard did not have a material impact on our financial statements. JOBS Act We are an “emerging growth company,” as defined in Section 2(a) the Securities Act, as modified by the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.” For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). After we become a reporting company under the Exchange Act, we will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of 41 Ta b le of Contents the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act. Results of Operations Comparison of the Years Ended December 31, 2021 and 2020 The following table sets forth our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 (in thousands): Year Ended December 31, 2021 2020 License revenue – from related party $ — $ 100 Operating expenses: Research and development 5,187 3,707 General and administrative 4,072 1,181 Total operating expenses 9,259 4,888 Loss from operations (9,259) (4,788) Other income 61 — Change in fair value of derivative liability (89) — Interest expense, net (16) (34) Net loss $ (9,303) $ (4,822) License Revenue – From Related Party Licensing revenues were $0.1 million for the year ended December 31, 2020 as a result of the upfront payment received under the terms of the Medice License Agreement. No licensing revenues were recognized during the year ended December 31, 2021. Research and Development Expenses Research and development expenses were $5.2 million and $3.7 million for the years ended December 31, 2021 and 2020, respectively. The $1.5 million increase in research and development expenses was primarily due to increases of $1.5 million in expenses related to the registration development program of ADAIR and $0.1 million in consulting fees, 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 $4.1 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively. The $2.9 million increase was primarily related to increased costs for directors and officers insurance of $1.3 million, personnel expense, including non-cash stock compensation, of $1.0 million, and public company expenses of $0.5 million. Other Income In May 2020, we issued a promissory note under the PPP totaling $61,000. As of December 31, 2020, we had utilized the entire proceeds from such note for payroll costs (greater than 75%), costs related to health care benefits and rent payments. In January 2021, we were notified that the note along with accumulated interest had been forgiven. As a result, we recorded income from the extinguishment of the obligation in accordance with ASC 405-20-40-1. Revaluation of Derivative Liability During the year ended December 31, 2021, pursuant to ASC 815, we revalued the embedded derivative liability associated with the 2021 Convertible Notes, resulting in an $89,000 decrease in the fair value of the derivative liability associated with the 2021 Convertible Notes. Interest Expense, net Interest expense, net, was $16,000 and $34,000 for the years ended December 31, 2021 and 2020, respectively. 42 Ta b le 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 $9.3 million and $4.8 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $21.9 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 December 31, 2021, we had $3.7 million in cash and cash equivalents. The following table summarizes our cash flows for the periods indicated (in thousands): Year Ended December 31, 2021 2020 Net cash provided by (used in): Operating activities (8,312) $ (3,706) Investing activities (3,842) (2) Financing activities 15,747 (4) Net increase (decrease) in cash and cash equivalents $ 3,593 $ (3,712) Cash Flows from Operating Activities For the years ended December 31, 2021 and 2020, $8.3 million and $3.7 million were used in operating activities, respectively. The $4.6 million increase was primarily due to a $4.5 million increase in our net loss, a $0.5 million increase in non-cash stock compensation expense, as well as increases in accrued and prepaid expenses of $0.1 million, offset by a $0.3 million decrease in accounts payable. Cash Flows from Investing Activities Net cash used in investing activities was $3.8 million for the year ended December 31, 2021, which was related to the purchase of marketable securities. Net cash used in investing activities was $2,000 for the year ended December 31, 2020, which was related to the purchase of computer equipment. Cash Flows from Financing Activities Net cash provided by financing activities was $4,000 during the year ended December 31, 2020, which was related to proceeds received from a PPP note of $61,000, offset by payments related to our finance lease of $65,000. Net cash provided by financing activities was $15.8 million for the year ended December 31, 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, 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 IPO 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. We will require substantial additional financing to fund our research and development activities. No assurance can be given that any such financing will be available when needed or that our research and development efforts will be successful. If the we are not able to obtain additional financing on acceptable terms and in the amounts necessary to fully fund our future operating requirements, we may be forced 43 Ta b le of Contents to reduce or discontinue our operations entirely. 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 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. Contractual Obligations and Other Commitments We enter into contracts in the normal course of business with third-party contract organizations for clinical trials, preclinical studies, manufacturing and other services and products for operating purposes. These contracts generally provide for termination following a certain period after notice and therefore we believe that our non-cancelable obligations under these agreements are not material. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable to a smaller reporting company. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required pursuant to this item are incorporated by reference herein from the applicable information included in Item 15 of this annual report and are presented beginning on page F-1. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.