GRI Bio, Inc. 10-K

Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to 44 Tabl e of Contents ensure that such information is accumulated and communicated to a company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. 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 control system, misstatements due to error or fraud may occur and not be detected. Our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer) evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a 15(e) and 15d 15(e) under the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2021. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance of the reliability of financial reporting and of the preparation of financial statements for external reporting purposes, in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of its management and directors; and (3) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on its financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Management’s assessment included documentation, evaluating and testing the design and operating effectiveness of its internal controls over financial reporting. Based on management’s processes and assessment, as described above, management has concluded that, as of December 31, 2021, our internal control over financial reporting was effective. Remediation of Material Weakness in Internal Control Over Financial Reporting The closing of our IPO occurred on February 12, 2021. As a newly public company under the Exchange Act, we were 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 for those periods. 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. 45 Tabl e of Contents We have remediated the material weaknesses by hiring additional accounting and finance staff, and implementing new controls, processes and technologies to formalize internal controls frameworks and procedures. 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 have taken actions and remediated 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 quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. OTHER INFORMATION None. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. 46 Tabl e of Contents 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 58 President, Chief Executive Officer and Director (Principal Executive Officer) Leanne Kelly 45 Chief Financial Officer (Principal Financial and Accounting Officer) Penny S. Toren 55 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) 50 Director Richard Ammer 51 Director Marella Thorell (1)(2) 54 Director Key Consultant Timothy Whitaker, M.D. 63 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 of directors from that time until August 23, 2019, and upon the consummation of the IPO 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. Leanne M. Kelly has served as our Chief Financial Officer since May 2021. She brings over 20 years of experience leading private and publicly traded companies across life science, technology and e-Commerce sectors with a foundation in public accounting. Prior to joining Vallon, she most recently served as the Controller and Executive Director, Global Financial Reporting at OptiNose, Inc, a $50 million revenue specialty pharmaceutical company. Over the course of her career, she has held Senior Vice President of Finance, Controller and Chief Financial Officer positions in private and public companies such as 47 Tabl e of Contents Flower Orthopedics, Iroko Pharmaceuticals, LLC, and Genaera Corporation. Ms. Kelly began her career as an auditor with KPMG LLP. While serving in those roles, Ms. Kelly's work included multi-million dollar financings, M&A diligence and support. She also has experience in financial oversight, internal and external financial reporting, forecasting, and financial analysis, as well as investor and public relations. Ms. Kelly received her Bachelor of Science degree in Business Economics with a concentration in Accounting from Lehigh University, and is a licensed CPA (inactive status) in the state of Pennsylvania. 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 of directors since inception and has served as the Chairman of the board of directors 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 IPO of our common stock. 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. joined our board of directors in July 2019 in connection with the July 2019 private placement. Since 2003, Dr. Ammer served 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 48 Tabl e of Contents 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. Marella Thorell has served as a director and as the chairperson of our audit committee since February 12, 2021. Ms. Thorell has more than 30 years of accomplishments in finance and operations having successfully led multiple M&A, licensing, and fundraising transactions. She currently serves as the Chief Accounting Officer of Centessa Pharmaceuticals plc (Nasdaq: CNTA) and previously served as Head of Finance. Prior to that, Ms. Thorell was the Chief Financial Officer of Palladio Biosciences, leading their finance operations and capital strategy and execution. Before joining Palladio, she served in various capacities at Realm Therapeutics, PLC, (Nasdaq: RLM), including Chief Financial Officer, Chief Operating Officer and Executive Director. In this role, she led accounting and financial reporting operations and helped transition Realm’s focus to drug development following a strategic overhaul. She was also responsible for divesting domestic and international operating businesses and in-licensing and out-licensing assets. Earlier in her career Ms. Thorell worked for Campbell Soup Company (NYSE: CPB) in finance and operational roles of increasing responsibility and at Ernst & Young, LLP where she earned a C.P.A. Ms. Thorell also serves on the Board of Essa Pharm (Nasdaq: EPIX) and on the Board of Living Beyond Breast Cancer (lbbc.org). Ms. Thorell earned a B.S. 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 our 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. 49 Tabl e of Contents 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 2022; • 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. With respect to the Class I directors, their terms were originally scheduled to expire at last year’s annual meeting. Because we did not hold an annual meeting of stockholders in 2021, the Class I directors will continue to serve as directors through this year’s annual meeting, whereby both Class I and Class II directors will be subject to re-election. Upon re-election, each Class I director will serve a term expiring at our annual meeting of stockholders in 2024, while each Class II director will serve the full three-year term. 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. 50 Tabl e of Contents 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. 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. 51 Tabl e of Contents 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). 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. 52 Tabl e of Contents 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 ($) (1) Non-Equity Incentive Compensation (2) All Other Compensation ($) (3) Total ($) David Baker 2021 391,553 259,136 150,000 12,000 812,689 President and Chief Executive Officer 2020 330,000 122,999 206,250 9,900 669,149 Leanne M. Kelly 2021 177,604 259,136 55,772 6,347 498,859 Chief Financial Officer Penny S. Toren 2021 256,871 64,784 30,174 7,544 359,373 Senior Vice President, Regulatory Affairs & Program Management 2020 235,000 57,399 58,750 7,050 358,199 (1) Reflects the aggregate grant date fair value of stock options granted during the fiscal year calculated in accordance with FASB ASC Topic 718. These amounts do not necessarily correspond to the actual value that may be realized by the executive in connection with the option awards.The assumptions made in valuing the option awards reported in this column are described in our audited financial statements (Note B. Summary of Significant Accounting Policies - [3] Stock-based compensation and Note F, Equity incentive plan ). (2) The amounts in this column represent performance bonuses earned by the named executive officers in the year shown based upon the achievement of pre-established performance objectives. See "— Non-Equity Incentive Plan Compensation" below. (3) The amounts reflect matching contributions to the named executive officers’ accounts under our SIMPLE IRA plan. Elements of Compensation 2021 Base Salaries Effective as of April 1, 2021, Mr. Baker’s annual salary was increased to $400,000. Effective as of March 1, 2021, Ms. Toren’s annual salary was increased to $251,450. Ms. Kelly’s base salary, which was negotiated in connection with her appointment as Chief Financial Officer on May 10, 2021, was set at $275,000. Non-Equity Incentive Plan Compensation Each of our named executive officers is eligible to receive an annual performance bonus based on the achievement of corporate and personal objectives as determined by our board of directors or compensation committee. Each executive officer is assigned a target bonus expressed as a percentage of base salary. For 2021, the target bonus opportunities for Mr. Baker, Ms. Kelly (prorated to her May 10, 2021 start date) and Ms. Toren, expressed as a percentage of base salary, were 50%, 35% and 20%, respectively. Actual performance bonus payments depend on the extent to which we achieve pre-established corporate objectives for the year, along with an overall assessment of each officer’s personal performance, as determined by our board of directors or compensation committee. For 2021, the corporate objectives, consisted primarily of: (i) IPO completion; (ii) execution of the SEAL study; (iii) determination of ADMIR ; (iv) execution of key non-clinical studies; and (v) manufacture of ADAIR. In the first quarter of 2022, our compensation committee assessed our level of achievement of these objectives. Based on this assessment, our compensation committee determined that our performance relative to the corporate objectives warranted a payout of 75% of the target bonus opportunity, subject to adjustments for personal performance. Actual bonus amounts paid with respect to 2021 are reflected in the "Non-Equity Incentive Plan Compensation" column of the Summary Compensation Table above. In addition, pursuant to her employment agreement, Ms. Toren is 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 , which occurred in July 2018 (ii) $25,000 on the date that we successfully complete the human abuse liability study for ADAIR , (iii) $30,000 on the date that we submit an NDA filing for ADAIR , 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. 53 Tabl e of Contents Option Awards Granted During 2021 On May 14, 2021, each of Mr. Baker and Ms. Toren was granted a non-qualified stock option to purchase 100,000 and 25,000 shares of our common stock, respectively, with an exercise price of $3.66 per share, which was equal to the closing price of our common stock on the date of grant. Subject to the executive's continued employment on each applicable vesting date, 25% of the shares underlying these options vest on May 14, 2022, with the remainder vesting in equal quarterly installments thereafter through May 14, 2025. Additionally, on May 14, 2021, in conjunction with the commencement of her employment with the Company, Ms. Kelly was granted non-qualified options to purchase 100,000 shares of our common stock, with an exercise price of $3.66 per share, which was equal to the closing price of our common stock on the date of grant. Subject to Ms. Kelly's continued employment on each applicable vesting date, 70,000 shares underlying these options will vest as follows: (i) 17,500 shares on May 14, 2022, and (ii) the remainder vesting in equal quarterly installments thereafter through May 14, 2025. An additional 30,000 shares underlying these options will vest, if at all, following the achievement of certain performance conditions related to regulatory submissions to the FDA for ADAIR, subject to Ms. Kelly’s continued employment. Qualified Retirement Plan We offer our employees, including our named executive officers, 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 of our 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, we make 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 2021, Mr. Baker, Ms. Kelly 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. Employment Agreements We have entered into an employment agreement with each of our named executive officers. The employment agreements provide that the executive will receive a base salary and be eligible to receive an annual cash bonus contingent upon the attainment of certain company milestones and/or individual objectives. Pursuant to the employment agreements, each executive's base salary and target bonus will be reviewed periodically by our compensation committee or board of directors. The employment agreements also provide for certain termination benefits, which are described below in the section entitled "Potential Payments Upon a Termination or Change in Control . " Our named executive officers are also entitled to participate in all of our retirement and group welfare plans available to our senior level executives as a group or our employees generally, subject to the terms and conditions applicable to such plans. Further, each such executive's employment agreement contains restrictive covenants relating to non-disclosure of confidential information, mutual non-disparagement, assignment of inventions, non-competition and non-solicitation provisions. Potential Payments Upon a Termination or Change in Control David Baker Pursuant to his employment agreement with us, if Mr. Baker’s employment were terminated by us without cause or terminated by Mr. Baker for good reason, in either case not in connection with a change in control, then Mr. Baker is entitled to the following severance benefits: • continued base salary for a period of 12 months, plus a pro-rated bonus for the year of termination, based on actual performance results for the entire year, and provided he was employed for at least six months during that year; and • subsidized premiums for COBRA continuation coverage for a period of 12 months (or such earlier date that he obtains alternative coverage). Pursuant to his employment agreement with us, if Mr. Baker’s employment were terminated by us without cause or terminated by Mr. Baker for good reason,in either case withing the one-year period following a change in control, then Mr. Baker would be entitled to the following severance benefits: • continued base salary for a period of 18 months, plus a lump sum payment equal to 150% of his target bonus, without proration, for the fiscal year of termination; 54 Tabl e of Contents • subsidized premiums for COBRA continuation coverage for a period of 18 months (or such earlier date that he obtains alternative coverage); and • accelerated vesting of all outstanding stock-based awards held by the executive as of the date of termination, with any performance awards deemed satisfied at the “target” performance level, and any stock options remaining outstanding for their full term. Leanne M. Kelly Pursuant to her employment agreement with us, if Ms. Kelly’s employment were terminated by us without cause or terminated by Ms. Kelly for good reason, in either case not in connection with a change in control, then Ms. Kelly would be entitled to the following severance benefits: • continued base salary for a period of nine months, plus a pro-rated bonus for the year of termination, based on actual performance results for the entire year, and provided she was employed for at least six months during that year; and • subsidized premiums for COBRA continuation coverage for a period of nine months (or such earlier date that she obtains alternative coverage). Pursuant to her employment agreement with us, if Ms.Kelly’s employment were terminated by us without cause or terminated by Ms. Kelly for good reason, in ether case within the one-year period following a change in control transaction, then Ms. Kelly would be entitled to the following severance benefits: • continued base salary for a period of 12 months, plus a lump sum payment equal to 100% of her target bonus, without proration, for the fiscal year of termination; • subsidized premiums for COBRA continuation coverage for a period of 12 months (or such earlier date that she obtains alternative coverage); and • accelerated vesting of all outstanding stock-based awards held by the executive as of the date of termination, with any performance awards deemed satisfied at the “target” performance level, and any stock options remaining outstanding for their full term. Penny S. Toren Pursuant to her employment agreement with us, if Ms. Toren’s employment were terminated by us without cause or terminated by Ms. Toren for good reason, then Ms. Toren would be entitled to the following severance benefits: • continued base salary for a period equal to two months, plus an additional one month for every whole year of service performance by Ms. Toren for the Company and its affiliates, up to a maximum of six months. Outstanding Equity Awards at Fiscal Year-End Stock Option Awards The following table sets forth the outstanding stock option awards as of December 31, 2021 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) 55 Tabl e of Contents exercisable, but not yet exercised, (ii) unexercisable and not yet exercised, and (iii) total aggregate amount underlying each award. 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)(2) Total securities underlying the stock options Option exercise price Option expiration date David Baker 46,875 — — 46,875 (3) $ 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 — 100 — 100,000 (4) $ 3.66 5/14/2031 Leanne Kelly — 70 30,000 100,000 (5) $ 3.66 5/14/2031 Chief Financial Officer Penny Toren 7,813 — 39,062 46,875 (6) $ 1.84 10/1/2028 SVP, Regulatory Affairs and Project Management 3,334 2 — 5,000 (7) $ 3.82 10/11/2029 — 17,500 17,500 $ 4.72 5/22/2030 — 25 — 25,000 (4) $ 3.66 5/14/2031 __________________ (1) All stock option awards were granted under our 2018 Equity Incentive Plan. (2) The stock option award will vest upon satisfaction of certain performance milestones. (3) The stock option award is fully vested. (4) The stock options award will vest 25% on the first anniversary of the vesting start date (May 14, 2021) and 6.25% (1/16th of such shares) for each subsequent full quarter that the executive remains employed with us. (5) 70% of the stock option award will vest 25% on the first anniversary of the vesting start date (May 14, 2021) and 6.25% (1/16th of such shares) for each subsequent full quarter that the executive remains employed with us. The remaining 30% of the stock option award will vest upon the satisfaction of certain performance milestones. (6) The stock option award vests as to one-sixth of the underlying shares of common stock upon the date of grant, then upon satisfaction of certain performance milestones. (7) The stock option award vests as to one-third of the underlying shares of common stock on each of October 11, 2020, October 11, 2021 and October 11, 2022. Stock Awards We have not granted any stock awards to any of our named executive officers. Director Compensation and Compensation Table Our director compensation program is designed to enhance our ability to attract and retain highly qualified directors and to align their interests with the long-term interests of our shareholders. The program generally includes a cash component, which is designed to compensate non-employee directors for their service on our board of directors and an equity component, which is designed to align the interests of non-employee directors and shareholders. Directors who are employees of the Company receive no additional compensation for their service on our board of directors. The compensation committee annually reviews compensation paid to our non-employee directors and makes recommendations for adjustments, as appropriate, to the full board of directors. As part of this annual review, the committee considers the significant time commitment and skill level required by each non-employee director in serving on our board of directors and its various committees. The compensation committee seeks to maintain a market competitive director compensation program and benchmarks our director compensation program against those maintained by our peer group. For 2021, each of our non-employee directors was eligible to receive an annual retainer of $25,000, and the chair of the audit committee was eligible to receive an additional retainer of $10,000. The annual retainer was payable in cash, or at the election of a director, in the form of an equivalent amount of stock options. In addition, each non-employee director serving in 2021 received an initial stock option grant to purchase 15,000 shares, which generally vests in quarterly or monthly installments over two years. 56 Tabl e of Contents In January 2022, the board of directors, upon recommendation of the compensation committee, increased the annual retainer for each non-employee director to $30,000, increased the annual retainer for the chair of the audit committee to $15,000, and provided an annual retainer for the chair of the compensation committee of $10,000 and for the chair of the nominating and governance committee of $5,000. Going forward, non-employee directors who are first appointed or elected to the board will receive an initial stock option grant to purchase 15,000 shares, which generally will vest in quarterly installments over two years. The following table provides information on compensation paid to our non-employee directors in 2021: Name Fees Earned or Paid in Cash (US$) Option Awards ($) (1)(7) Total Richard Ammer $ — $ 62,607 (2)(3) $ 62,607 Ofir Levi — 111,964 (4) 111,964 Joseph Payne — 72,609 (2)(5) 72,609 Marella Thorell 30,973 80,235 (6) 111,208 _________________ (1) Reflects the aggregate grant date fair value of stock options granted during the fiscal year calculated in accordance with FASB ASC Topic 718. These amounts do not necessarily correspond to the actual value that may be realized by the executive in connection with the option awards.The assumptions made in valuing the option awards reported in this column are described in our audited financial statements (Note B. Summary of Significant Accounting Policies - [3] Stock-based compensation and Note F, Equity incentive plan ). (2) Options to purchase 15,000 shares of common stock were granted on May 14, 2021 and vest monthly over a 24-month period. (3) Options to purchase 10,204 shares of common stock were granted on May 14, 2021 of which 25% vested immediately and an additional 25% vested on each of June 30, 2021, September 30, 2021 and December 31, 2021. (4) Options to purchase 30,000 shares of common stock were granted on May 14, 2021 which vest monthly over a 24-month period. An additional 15,000 options to purchase common stock were grantedon May 14, 2021 of which 25% vested immediately and an additional 25% vested on each of June 30, 2021, September 30, 2021 and December 31, 2021. (5) Options to purchase 14,286 were granted on May 14, 2021 of which 25% vested immediately and an additional 25% vested on each of June 30, 2021, September 30, 2021 and December 31, 2021. (6) 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. (7) The following table shows the aggregate number of outstanding shares of common stock underlying outstanding options held by our non-employee directors as of December 31, 2021: Name Outstanding Option Awards Richard Ammer 45,000 Ofir Levi 25,204 Joseph Payne 29,286 Marella Thorell 15,000 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 December 31, 2021, as adjusted to reflect the sale of common stock offered by us in this offering, 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 our director nominees; and • all of our executive officers, and directors and director nominees 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 December 31, 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 6,812,836 shares of common stock deemed to be outstanding as of December 31, 2021. 57 Tabl e of Contents 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 Number of Shares and Nature of Beneficial Ownership Percentage of Total Common Stock Name and Address of Beneficial Owner Greater than 5% Stockholders SALMON Pharma GmbH (1) 1,523,797 22.4 % Arcturus Therapeutics, Inc. (fka successor to Arcturus Therapeutics Ltd.) (2) 843,750 12.4 % Tomer Feingold (4)(11)(12) 509,781 7.5 % Dov Malnik (3)(4)(11)(12) 509,781 7.5 % Directors, Director Nominees and Named Executive Officers (5) David Baker (6) 128,468 1.9 % Leanne Kelly (7) 6,250 * Ofir Levi (8) 223,125 3.3 % Richard Ammer (9) 1,539,626 22.6 % Joseph Payne (10) 881,161 12.9 % Marella Thorell (11) 7,500 * All directors, director nominees, and executive officers as a group (6 persons) 2,786,130 39.8 % ________________ * Represents beneficial ownership of less than one percent of our outstanding common stock. (1) SALMON Pharma GmbH’s address is Sankt-Jakobs-Strasse 90, CH-9002 Basel, Switzerland. (2) Arcturus Therapeutics Ltd.’s address is 10628 Science Center Drive, Suite 250, San Diego, California 92121. (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. As of November 23, 2021, the action has been settled with regard to Mr. Malnik. Vallon Pharmaceuticals, Inc. is not a named party or identified in this action. (5) The address for each of our executive officers, directors and director nominees is c/o Vallon Pharmaceuticals, 100 N. 18th Street, Suite 300, Philadelphia, PA 19103. (6) Consists of (i)7,843 shares of common stock and (ii) 120,625 shares of common stock issuable pursuant to stock options exercisable within 60 days of December 31, 2021. (7) Consists of 6,250 shares of common stock. (8) Consists of (i) 196,875 shares of common stock and (ii) 26,250 shares of common stock issuable pursuant to stock options exercisable within 60 days of December 31, 2021. (9) Consists of (i) 1,523,797 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, and (ii) 15,829 shares of common stock issuable pursuant to stock options exercisable within 60 days of December 31, 2021. (10) 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, (ii) 17,500 shares of common stock and (iii) 19,911 shares of common stock issuable pursuant to stock options exercisable within 60 days of December 31, 2021. (11) Includes 7,500 shares of common stock issuable pursuant to stock options exercisable within 60 days of December 31, 2021. (12) On December 30, 2020, we entered into the 2020 Voting Agreement with Dov Malnik and Tomer Feingold, pursuant to which, following the date of effectiveness of this registration statement, 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. 58 Tabl e of Contents The following table presents information as of December 31, 2021 with respect to compensation plans or arrangements under which shares of our common stock may be issued. 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) 690,365 $ 3.57 657 (3) Equity compensation plans not approved by security holders 18,125 (2) $ 4.72 — Total 708,490 $ 3.60 ________________ (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. (3) Excludes 70,000 shares of common stock issuable upon the exercise of options for which the Company can, at its discretion, issue cash in lieu of shares to the extent the authorized option pool is depleted when exercised. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The following is a summary of each transaction or series of similar transactions since January 1, 2019, to which we have been a party that: • The amount involved exceeded or exceeds $120,000 or is greater than 1% of our total assets as of December 31, 2020 and 2019; 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. 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. 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. Under the license agreement, Medice paid Vallon a minimal upfront payment and will pay milestone payments of up to $6.3 million in the aggregate 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. 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 (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 ownership of our common stock falls below 9.99%, (ii)the third anniversary of the effectiveness 59 Tabl e of Contents of our registration statement relating to the IPO, or (iii) 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 2019 Convertible Note Financing In April 2019, we entered into a Convertible Promissory Note Purchase Agreement (the 2019 Contrvertible Notes) 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. In July 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. 2019 Private Placement In July 2019, we entered into a Stock Purchase Agreement with Salmon Pharma (the July 2019 Financing), 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 and David Baker, our Chief Executive Officer, pursuant to which we issued convertible promissory 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, or Qualified Financing, after the date of their issuance in which we issued any of our equity securities and were convertible at a 20.0% discount to the price per share offered in such Qualified Financing. On February 12, 2021, we consummated the IPO of our common stock, which was considered a Qualified Financing. Accordingly, the 2021 Convertible Notes converted into an aggregate of 54,906 shares of our common stock immediately prior to the closing of the IPO at a conversion price of $6.40 per share. The following table sets forth the principal amounts under the 2019 Convertible Notes and 2021 Convertible Notes, or the Convertible Notes, acquired by 5% holders in the financing transaction described above, and the number of shares of common stock such Convertible Notes converted into in connection with the July 2019 Financing and IPO. Participants Principal Amount under the Convertible Notes Shares of Common Stock upon Conversion of Convertible Notes Greater than 5% Stockholders (1) Tomer Feingold $ 200,000 66,812 Dov Malnik $ 200,000 66,812 SALMON Pharma GmbH (2) $ 800,000 213,936 __________________ (1) Additional details regarding these stockholders and their equity holdings are provided in this report under the caption “Principal Stockholders.” (2) Dr. Ammer is affiliated with Salmon Pharma. 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 the our general counsel, or, if we do not then have a general counsel, our principal executive, financial, or accounting officer (each a Designated Officer), must be notified of any request for us to enter into a transaction with such parties in which the amount involved exceeds $120,000 as well as 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 60 Tabl e of Contents 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.” 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 (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 • 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, 61 Tabl e of Contents 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 Our independent registered public accounting firm is EisnerAmper LLP , Iselin, New Jersey , Auditor Firm ID: 274 . The following table represents aggregate fees incurred for EisnerAmper LLP services during the years ended December 31, 2021 and 2020 by us. December 31, 2021 2020 Audit Fees (1) $ 180,760 $ 171,984 Audit Related Fees (2) — — Tax Fees (3) — — All Other Fees (4) — — Total $ 180,760 $ 171,984 (1) Audit Fees represent the aggregate fees billed for professional services rendered by our independent registered public accounting firm for the audit of our annual financial statements, review of financial statements included in our quarterly reports or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years as well as the issuance of consents in connection with registration statement filings with the SEC and comfort letters in connection with securities offerings. (2) Audit Related Fees represent the aggregate fees billed for assurance and related professional services rendered by our independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported under "Audit Fees" . (3) Tax Fees represent the aggregate fees billed for professional services rendered by our independent registered public accounting firm for tax compliance, tax advice and tax planning services. (4) All Other Fees represent the aggregate fees billed for all other products and services rendered by our independent registered public accounting firm other than the services reported in the other categories 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. 62 Tabl e of Contents 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 twelve 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. 63 Tabl e of Contents 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. Incorporated by Reference Exhibit No. Description Form Date Number 1.1 Underwriting Agreement 8-K 2/16/21 1.1 3.1 Amended and Restated Certificate of Incorporation of Vallon Pharmaceuticals, Inc. 8-K 2/16/21 3.1 3.2 Amended and Restated Bylaws of Vallon Pharmaceuticals, Inc. 8-K 2/16/21 3.3 4.1 Specimen certificate evidencing shares of common stock S-1 10/23/20 4.1 4.2 Convertible Promissory Note Purchase Agreement, dated as of April 11, 2019 S-1 10/23/20 4.2 4.3 Form of Convertible Promissory Note S-1 10/23/20 4.3 4.4 Form of Representative ’ s Warrant 8-K 2/16/21 4.1 4.5 Description of the S ecurities of Vallon Pharmaceuticals, Inc. 10-K 3/29/21 4.5 9.1 Voting Agreement, dated as of December 30, 2020, by and among Vallon Pharmaceuticals, Inc. and certain of its stockholders S-1/A 1/14/21 10.17 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. S-1/A 1/14/21 10.1 10.2# Consulting Agreement with Whitaker Biopharmaceutical Consulting LLC, dated April 2, 2018 S-1/A 1/14/21 10.2 10.3# Employment Agreement between Vallon Pharmaceuticals, Inc. and Penny S. Toren, dated April 2, 2018 S-1/A 1/14/21 10.3 10.4# Employment Agreement between Vallon Pharmaceuticals, Inc. and David Baker, dated January 15, 2019 S-1/A 1/14/21 10.4 10.5# Vallon Pharmaceuticals, Inc. 2018 Equity Incentive Plan S-1 10/23/20 10.5 10.6# Form of Stock Option Agreement under Vallon Pharmaceuticals, Inc. 2018 Equity Incentive Plan S-1 10/23/20 10.6 10.7# Form of Incentive Stock Option Agreement under Vallon Pharmaceuticals, Inc. 2018 Equity Incentive Plan S-1 10/23/20 10.7 10.8# Form of Nonqualified Stock Option Agreement under Vallon Pharmaceuticals, Inc. 2018 Equity Incentive Plan S-1/A 1/14/21 10.8 10.9# Form of Directors’ and Officers’ Indemnity Agreement S-1/A 1/14/21 10.9 10.10 Patent and Patent Application Assignment Agreement between Arcturus Therapeutics, Ltd. and Vallon Pharmaceuticals, Inc., dated June 22, 2018 S-1/A 1/14/21 10.10 10.11 Form of Subscription Agreement S-1/A 1/14/21 10.11 10.12 Form of Stock Purchase Agreement, dated June 7, 2018, among Vallon Pharmaceuticals, Inc. and the investors listed therein S-1/A 1/14/21 10.12 10.13 Form of Stock Purchase Agreement, dated July 25, 2019, between Vallon Pharmaceuticals, Inc. and SALMON Pharma GmbH S-1/A 1/14/21 10.13 10.14 Investor’s Rights Agreement, dated as of July 25, 2019, by and between Vallon Pharmaceuticals, Inc. and SALMON Pharma GmbH S-1/A 1/14/21 10.14 10.15† License Agreement, effective as of January 6, 2020, by and between Vallon Pharmaceuticals, Inc. and MEDICE Arzneimittel Putter GmbH & Co. KG S-1/A 11/16/20 10.15 10.16 Form of Lock Up Agreement S-1/A 1/14/21 10.16 64 Tabl e of Contents 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 S-1/A 1/14/21 10.18 10.18 Form of Convertible Promissory Note S-1/A 1/14/21 10.19 10.19 Employment Agreement between Vallon Pharmaceuticals, Inc. and David Baker , dated April 2 0, 2021 10-Q 5/13/21 10.1 10.20 Employment Agreement between Vallon Pharmaceuticals, Inc. and Leanne M. Kelly , dated May 10 , 20 21 10-Q 5/13/21 10.2 21.1 List of subsidiaries S-1 10/23/20 21.1 23.1 Consent of Independent Registered Public Accounting Firm 24.1 Powers of Attorney for directors and certain executive officers (contained on the signature page) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15a-14(a) under the Exchange Act. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15a-14(a) under the Exchange Act. 32.1+ Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2+ Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101 INS XBRL Instance Document 101 SCH XBRL Taxonomy Extension Schema Linkbase Document 101 CAL XBRL Taxonomy Extension Calculation Linkbase Document 101 DEF XBRL Taxonomy Extension Definition Linkbase Document 101 LAB XBRL Taxonomy Extension Label Linkbase Document 101 PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 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. 65 Tabl e of Contents 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: February 14, 2022 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 (Principal Executive Officer) February 14, 2022 David Baker /s/ Leanne Kelly Chief Financial Officer (Principal Financial and Accounting Officer) February 14, 2022 Leanne Kelly /s/ Ofir Levi Director, Chairman of the Board February 14, 2022 Ofir Levi /s/ Joseph Payne Director February 14, 2022 Joseph Payne /s/ Richard Ammer Director February 14, 2022 Richard Ammer /s/ Marella Thorell Director February 14, 2022 Marella Thorell 66 Tabl e of Contents INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F- 2 Balance Sheets a s of December 31, 202 1 and December 31, 20 20 F- 3 Statements of Operations and Comprehensive Loss for the y ears e nded December 31, 202 1 and 20 20 F- 4 Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2021 and 20 20 F- 5 Statements of Cash Flows for the y ears e nded December 31, 202 1 and 20 20 F- 6 Notes to Financial Statements F- 7 F-1 Tabl e of Contents 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, 2021 and 2020, and the related statements of operations and comprehensive loss, changes in stockholders’ equity (deficit), 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, 2021 and 2020, 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 2 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 2. 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 February 14, 2022 F-2 Tabl e of Contents Vallon Pharmaceuticals, Inc. Balance Sheets (in thousands, except share and per share amounts) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 3,702 $ 109 Marketable securities, available-for-sale 3,808 — Prepaid expenses and other current assets 619 565 Total current assets 8,129 674 Other assets 206 279 Property and equipment, net — 2 Total assets $ 8,335 $ 955 Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 918 $ 1,226 Accrued expenses 1,430 847 Note payable, current — 47 Other current liabilities 97 105 Total current liabilities 2,445 2,225 Note payable, non-current — 14 Other liabilities 72 170 Total liabilities 2,517 2,409 Commitments and contingencies (Note 9) Stockholders' equity (deficit): Common stock, $ 0.0001 par value; 250,000,000 shares authorized; 6,812,836 and 4,506,216 shares issued and outstanding as of December 31, 2021 and 2020, respectively — — Additional paid-in-capital 27,722 11,145 Accumulated other comprehensive loss ( 2 ) — Accumulated deficit ( 21,902 ) ( 12,599 ) Total stockholders' equity (deficit) 5,818 ( 1,454 ) Total liabilities and stockholders' equity (deficit) $ 8,335 $ 955 See accompanying notes to financial statements. F-3 Tabl e of Contents Vallon Pharmaceuticals, Inc. Statements of Operations and Comprehensive Loss (in thousands, except share and per share amounts) Year Ended December 31, 2021 2020 Licensing revenue – 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 — Revaluation of derivative liability ( 89 ) — Interest expense, net ( 16 ) ( 34 ) Net loss $ ( 9,303 ) $ ( 4,822 ) Other comprehensive loss: Unrealized loss on marketable securities, available-for-sale $ ( 2 ) $ — Total comprehensive loss $ ( 9,305 ) $ ( 4,822 ) Net loss per share of common stock, basic and diluted $ ( 1.42 ) $ ( 1.07 ) Weighted-average common shares outstanding, basic and diluted 6,541,097 4,506,216 See accompanying notes to financial statements. F-4 Tabl e of Contents Vallon Pharmaceuticals, Inc. Statements of Changes in Stockholders’ Equity (Deficit) (in thousands, except shares) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Stockholders’ Equity (Deficit) Shares Amount Balance, December 31, 2019 4,506,216 $ — $ 10,991 $ — $ ( 7,777 ) $ 3,214 Stock-based compensation expense — — 154 — — 154 Net loss — — — — ( 4,822 ) ( 4,822 ) 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 expense — — 626 — — 626 Unrealized loss on marketable securities, available-for sale — — — ( 2 ) — ( 2 ) Net loss — — — — ( 9,303 ) ( 9,303 ) Balance, December 31, 2021 6,812,836 $ — $ 27,722 $ ( 2 ) $ ( 21,902 ) $ 5,818 See accompanying notes to financial statements. F-5 Tabl e of Contents Vallon Pharmaceuticals, Inc. Statements of Cash Flows (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 9,303 ) $ ( 4,822 ) Adjustments to reconcile net loss to cash used in operating activities: Amortization of finance lease right-of-use asset 73 74 Amortization of marketable securities premiums 32 — Revaluation of derivative liability 89 — Stock-based compensation expense 626 154 Forgiveness of PPP note ( 61 ) — Non-cash interest, depreciation and other expense 12 1 Change in operating assets and liabilities: Prepaid expenses and other current assets ( 55 ) ( 464 ) Accounts payable ( 308 ) 980 Accrued expenses 583 371 Cash used in operating activities ( 8,312 ) ( 3,706 ) Investing activities: Purchase of marketable securities ( 3,842 ) — Purchase of property and equipment — ( 2 ) Cash used in investing activities ( 3,842 ) ( 2 ) Financing activities: Proceeds from common stock issuance, net of offering expenses 15,104 — Proceeds from issuance of warrants 399 — Proceeds from PPP loan — 61 Proceeds from convertible notes 350 — Payment of finance lease liability ( 106 ) ( 65 ) Cash provided by (used in) financing activities 15,747 ( 4 ) Net increase (decrease) in cash and cash equivalents 3,593 ( 3,712 ) Cash and cash equivalents at beginning of period 109 3,821 Cash and cash equivalents at end of period $ 3,702 $ 109 Supplemental disclosure of cash flow information: Cash paid for interest $ 29 $ 41 Non-cash financing activities: Conversion of convertible notes to common stock $ 350 $ — See accompanying notes to financial statements F-6 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Vallon Pharmaceuticals, Inc. (Vallon or the Company) was incorporated in Delaware in January 2018 (inception) and is based in Philadelphia, PA. The Company is a biopharmaceutical company focused on the development and commercialization of novel abuse-deterrent medications for central nervous system (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 has completed formulation development work. 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 inception and has incurred $ 21,902 in accumulated deficit through December 31, 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) note. In January 2021, the Company completed a $ 350 convertible note financing and in February 2021, the Company closed on its initial public offering (IPO) raising net proceeds of approximately $ 15,500 . As of December 31, 2021, the Company had cash, cash equivalents and marketable securities of approximately $ 7,510 , which management expects will provide funding for its ongoing business activities into the third quarter of 2022. The Company’s ability to continue as a going concern is dependent on its ability to raise substantial additional capital to fund its business activities, including its research and development program. The Company intends to raise capital through additional issuances of common stock and /or short-term notes, but there can be no assurances any such financing will be available when needed or that the Company’s research and development efforts will be successful. 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. Therefore, there is substantial doubt about the Company’s ability to continue as a going concern. 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. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES References in this Annual Report on Form 10-K to “authoritative guidance” is meant to refer to accounting principles generally accepted in the United States of America (GAAP) as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). Recapitalization Immediately prior to the closing of the IPO (Note 10), 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. 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 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. F-7 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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. 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, 2021 and 2020 included investment in money market funds. 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). Amortization of premiums and discounts on marketable securities are 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. The Company considers 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 the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Fair value of financial instruments The Company follows ASC 820, Fair Value Measurements and Disclosures (ASC 820), 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. 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-8 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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. 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. Licensing revenues The Company has a license agreement (the Medice License Agreement) with MEDICE Arzneimittel Pütter GmbH & Co. KG (Medice), a related party (Note 13). The license agreement provides for an exclusive license to develop, use, manufacture, market and sell ADAIR throughout Europe, a non-refundable up-front payment, potential regulatory and sales milestones and potential royalty payments. The Company analyzed the performance obligations under the license agreements, the consideration received to date and the consideration the Company could receive in the future as part of its analysis in accordance with ASC 606– Revenue from Contracts with Customers (ASC 606). The Company recognized $ 100 as licensing revenue during the year ended December 31, 2020. No licensing revenue was recognized during the year ended December 31, 2021. 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. 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. 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. F-9 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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. Income taxes Income taxes are accounted for under the asset and liability method. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and the expected benefits of net operating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the period in which temporary differences are expected to be settled, is reflected in the Company's financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if, based on the weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. As of December 31, 2021 and 2020, the Company concluded that a full valuation allowance was necessary for all of its net deferred tax assets. The Company had no amounts recorded for uncertain tax positions, interest or penalties in the accompanying consolidated financial statements. Net loss per common share Basic net loss per common share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net loss per common 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 . 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 the financial statements. On January 1, 2021, the Company 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 the Company’s financial statements. 4. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS Marketable Securities The following is a summary of the Company’s available-for-sale securities as of the dates indicated: As of December 31, 2021 Adjusted Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Marketable Securities: Debt securities: Corporate bonds $ 1,153 $ — $ ( 1 ) $ 1,152 Municipal bonds 2,657 — ( 1 ) 2,656 Total $ 3,810 $ — $ ( 2 ) $ 3,808 All of the Company’s investments in marketable debt securities are accounted for as available-for-sale securities and have contractual maturity dates of one year or less. 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. As of December 31, 2021, all of the Company’s marketable securities were classified as Level 2 assets. F-10 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) 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 in the first quarter of 2021. The following table presents the activity for the liability measured at estimated fair value using unobservable inputs for the year ended December 31, 2021: Beginning balance, January 1, 2021 $ — Additions during the year ended December 31, 2021 89 Transfer out of Level 3 89 Balance at December 31, 2021 $ — 5. LEASES The Company has a financing lease in relation to equipment utilized in the commercial scale manufacturing of ADAIR . The Company evaluates renewal options at lease inception on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. Lease agreements generally do not require material variable lease payments, residual value guarantees or restrictive covenants. 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. The table below presents the finance lease assets and liabilities recognized on the Company's balance sheets: December 31, Balance Sheet Line Item 2021 2020 Non-current finance lease assets Other assets $ 206 $ 279 Finance lease liabilities: Current finance lease liabilities Other current liabilities 97 105 Non-current finance lease liabilities Other liabilities 72 170 Total finance lease liabilities $ 169 $ 275 The Company’s weighted average remaining lease term and weighted average discount rate for its financing lease as of December 31, 2021 are: December 31, 2021 Weighted-average remaining lease term - finance lease 1.75 years Weighted-average discount rate - finance lease 13.50 % Cash flows related to the measurement of financing lease assets and liabilities were as follows: Year Ended December 31, 2021 2020 Operating cash flows from finance lease amortization $ 73 $ 74 Financing cash flows from finance lease payments $ 106 $ 65 F-11 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) The maturities of the finance lease liability as of December 31, 2021 are as follows: December 31, 2021 2022 $ 114 2023 76 Total lease payments 190 Less: Imputed interest 21 Present value of lease liability $ 169 6. ACCRUED EXPENSES Accrued expenses consisted of: December 31, 2021 2020 Accrued expenses: Research and development $ 894 $ 259 General and administrative 183 156 Payroll and related 291 342 Licensing related 62 81 Other — 9 Total accrued expenses $ 1,430 $ 847 7. PPP NOTE AND CONVERTIBLE NOTES In May 2020, the Company issued a promissory note under the PPP (the PPP Note) totaling $ 61 . The note had a stated interest rate of 1 % and had a two -year maturity. Payments were required to be made over a 1.5 years period beginning in November 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 the amount of $ 61 as other income on the accompanying statements of operations and comprehensive loss. 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. 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. 8. EMPLOYEE BENEFIT PLANS The Company maintains a tax-qualified SIMPLE IRA retirement plan which covers all employees. Pursuant to the SIMPLE IRA program, employees are eligible to contribute to an individual SIMPLE IRA account on a tax-deferred basis. The Company makes matching contributions 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). Expenses related to Company contributions were $ 24 and $ 17 for the years ended December 31, 2021 and 2020, respectively. 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. F-12 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) Litigation In November 2021, the Company was named as a defendant in a putative class action lawsuit filed in the California Superior Court, County of Los Angeles, styled Rendon v. Vallon, Inc., et al . The complaint brought one claim for violation of California’s Unruh Civil Rights Act (Unruh Act), alleging that the Company’s website is not compatible with software used by vision-impaired individuals. The Company settled the lawsuit for an immaterial amount . 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, 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 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, clinical research organizations (CROs), third-party manufacturers, and other third parties with whom the Company does 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 situation 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 is in the best interests of its employees and other third parties with whom the Company does business. 10. STOCKHOLDERS EQUITY (DEFICIT) Common Stock In February 2021, the Company completed its IPO of 2,250,000 shares of common stock at a public offering price of $ 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 $ 1,600 and offering expenses of approximately $ 905 . 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 became exercisable after August 12, 2021. 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 % As of December 31, 2021, all of the Underwriters’ Warrants were outstanding. 11. STOCK-BASED COMPENSATION The Company issues stock-based awards pursuant to its 2018 Equity Incentive Plan (the 2018 Plan). The 2018 Plan provides for the granting of stock options, restricted stock, or restricted stock units. The Company's employees, officers, directors and other persons are eligible to receive awards under the Plan. The number of shares of the Company's common stock authorized under the 2018 Plan will automatically increase on January 1st of each year until the expiration of the 2018 Plan, in an amount equal to four percent of the total number of shares of the Company's common stock outstanding on December 31st of the preceding calendar year, subject to the discretion of the Company's board of directors or compensation committee to determine a lesser number of shares shall be added for such year. The total number of shares authorized for issuance under the 2018 Plan was 621,022 as of December 31, 2021. The amount, terms of grants, and exercisability provisions are determined and set by the Company's board of directors or compensation committee. The Company measures employee stock-based awards at grant-date fair value and records compensation F-13 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) expense on a straight-line basis over the vesting period of the award. Stock-based awards issued to non-employees are revalued until the award vests. The Company recorded stock-based compensation related to stock options issued under the 2018 Plan in the following expense categories of its accompanying statements of operations for the years ended December 31, 2021 and 2020 : For the Year Ended December 31, 2021 2020 Research and development $ 83 $ 103 General and administrative 543 51 Total $ 626 $ 154 The Company has granted stock options to purchase its common stock to employees and consultants under the 2018 Plan that generally have a contractual life of up to 10 years. The Company has also granted certain stock options outside of the 2018 Plan. As of December 31, 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 year ended December 31, 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 442,240 $ 4.00 Exercised — — Forfeited — — Outstanding at December 31, 2021 708,490 $ 3.60 8.64 Exercisable at December 31, 2021 205,888 $ 2.94 7.80 Vested and expected to vest at December 31, 2021 708,490 $ 3.60 8.64 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 Year Ended December 31, 2021 2020 Volatility 83.78 % 85.00 % Expected term in years 5.85 5.80 Dividend rate 0.00 % 0.00 % Risk-free interest rate 1.01 % 0.64 % Fair value of common stock on grant date $ 4.00 $ 4.72 The aggregate intrinsic value of stock options outstanding and stock options exercisable as of December 31, 2021 was $ 1,716 and $ 640 , respectively. At December 31, 2021, the unrecognized compensation cost related to unvested stock options expected to vest was $ 885 . This unrecognized compensation is expected to be recognized over a weighted-average amortization period of 2.49 years. F-14 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) 12. INCOME TAX A reconciliation of income tax expense (benefit) at the US federal statutory income tax rate and the income tax provision in the financial statements is as follows: December 31, 2021 2020 Expected income tax benefit at the federal statutory rate 21.0 % 21.0 % State and local taxes, net of federal benefit 10.6 12.8 Non-deductible items and other ( 0.5 ) — Prior year provision to return adjustments — 6.4 Change in valuation allowance ( 31.1 ) ( 40.2 ) 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 and liabilities are as follows: December 31, 2021 2020 Deferred tax assets: Federal and state net operating loss carryforwards $ 6,617 $ 3,939 Share based compensation 308 97 Lease liabilities 57 96 Accruals and other 98 108 Gross deferred tax assets 7,080 4,240 Less: deferred tax liabilities ( 70 ) ( 94 ) Less: valuation allowance ( 7,010 ) ( 4,146 ) 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, 2021 and 2020. The Company increased its valuation allowance by approximately $ 2,864 for the year ended December 31, 2021. The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support a reversal of the allowance. As of December 31, 2021, the Company had federal, state and local net operating loss carryforwards of $ 20,125 , $ 20,362 , and $ 15,866 , respectively. 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 (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. 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, 2021 and 2020, 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. F-15 Table of Contents Vallon Pharmaceuticals, Inc. Notes to Financial Statements (in thousands, except share and per share data) 13. RELATED PARTY TRANSACTIONS On 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. F-16