What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-03 · 105 added, 151 removed, 55 unchanged (82% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report, and the audited financial statements (and notes thereto), and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2021, included in our Annual Report on Form 10-K that was filed with the SEC on February 14, 2022.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel abuse-deterrent medications for CNS disorders.

Our lead investigational product candidate, ADAIR, is a proprietary, abuse-deterrent oral formulation of immediate-release dextroamphetamine (the main active ingredient in Adderall®), which we were developing for the treatment of attention-deficit/hyperactivity disorder (ADHD) and narcolepsy.

In March 2022, we announced that our SEAL study for ADAIR did not reach its primary endpoint, and there is no assurance that ADAIR will receive approval by the U.S.

Food and Drug Administration (the FDA).

In addition to ADAIR, we completed formulation development work and selected the final formulation of our second product candidate, ADMIR, an abuse deterrent formulation of methylphenidate (Ritalin®), for the treatment of ADHD.

Recent Developments

The SEAL study ( S tudy to E valuate the A buse L iability, Pharmacokinetics, Safety and Tolerability of an Abuse-Deterrent d-Amphetamine Sulfate Immediate Release Formulation), was our pivotal intranasal human abuse liability study assessing the pharmacodynamics (PD), pharmacokinetics (PK), safety and tolerability of snorting professional laboratory-manipulated ADAIR 30 mg when compared to crushed d-amphetamine sulfate and placebo in recreational drug users.

ADAIR was prepared for snorting by a pharmacist using a multi-step technique that had been developed by a professional laboratory and agreed upon by the FDA.

The SEAL study enrolled 55 subjects, of whom 53 completed the study and 52 were included in the final analysis.

The study involved a four-way crossover design to evaluate professionally manipulated, intranasal ADAIR 30 mg, crushed intranasal dextroamphetamine, ADAIR 30 mg taken orally, and placebo.

All subjects were non-dependent recreational stimulant users with an additional history of recreational intranasal drug use.

The SEAL study did not meet its primary endpoint, which was Emax Drug Liking.

ADAIR scored similarly to what was observed in an earlier proof-of-concept study, however, reference dextroamphetamine did not score as high as expected and as seen in the previous study, thus driving the lack of statistical significance.

The SEAL study did meet all pharmacodynamic secondary endpoints including Overall Drug Liking and willingness to Take Drug Again at 12 and 24 hours post-dosing, demonstrating statistical significance.

We are continuing to assess the best path forward for the ADAIR and ADMIR development programs.

In addition, we have engaged Ladenburg Thalmann & Co.

(Ladenburg) to evaluate our strategic alternatives with the goal of maximizing stockholder value.

Ladenburg has been engaged to advise us on the strategic review process, which could include, without limitation, exploring the potential for a possible merger, business combination, investment into the Company, or a purchase, license or other acquisition of assets.

In the meantime, and in conjunction with the exploration of strategic alternatives, we are streamlining our operations in order to preserve our capital and cash resources.

License Agreement

In January 2020, we entered into a license agreement with Medice, which grants Medice an exclusive license to develop, use, manufacture, market and sell ADAIR throughout Europe.

Under the license agreement, Medice paid us a $0.1 million upfront payment and will pay milestone payments of up to $6.3 million in aggregate upon achieving certain regulatory and sales milestones.

We are also entitled to low-double digit tiered royalties on net sales of ADAIR.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, and the audited financial statements (and notes thereto), and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2022, included in Vallon’s Annual Report on Form 10-K that was filed with the SEC on February 24, 2023.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

All references in this section to “GRI,” the “Company,” “we,” “us,” or “our” mean GRI Bio, Inc.

and its subsidiary after completion of the Merger, unless stated otherwise or the context otherwise indicates.

In addition, references to “Vallon” refers to the Company prior to the completion of the Merger.

Pre-Merger Business

Historically, Vallon was primarily focused on the development and commercialization of novel abuse-deterrent medications for CNS disorders.

Vallon’s lead investigational product candidate, ADAIR, was a proprietary, abuse-deterrent oral formulation of immediate-release dextroamphetamine (the main active ingredient in Adderall®), which was being developed for the treatment of attention-deficit/hyperactivity disorder (ADHD) and narcolepsy.

In March 2022, Vallon announced that our Study to Evaluate the Abuse Liability, Pharmacokinetics, Safety and Tolerability of an Abuse-Deterrent d-Amphetamine Sulfate Immediate Release Formulation (SEAL) study for ADAIR did not reach its primary endpoint.

In addition to ADAIR, Vallon’s second product candidate, ADMIR, an abuse deterrent formulation of methylphenidate (Ritalin®), was also being developed for the treatment of ADHD.

While assessing the best path forward for the ADAIR and ADMIR development programs in relation to the results of the SEAL study, Vallon evaluated its strategic alternatives with the goal of maximizing stockholder value.

In conjunction with the exploration of strategic alternatives, Vallon streamlined operations to preserve its capital and cash resources.

After conducting a diligent and extensive process of evaluating strategic alternatives and identifying and reviewing potential candidates for a strategic acquisition or other transaction, and following extensive negotiation with a number of possible candidates, on December 13, 2022, Vallon and Private GRI entered into the Merger Agreement.

Post-Merger Business

GRI is a clinical-stage biopharmaceutical company focused on discovering, developing, and commercializing innovative therapies that target serious diseases associated with dysregulated immune responses leading to inflammatory, fibrotic, and autoimmune disorders.

Our goal is to be an industry leader in developing therapies to treat these diseases and to improve the lives of patients suffering from such diseases.

GRI’s lead product candidate, GRI-0621, is an oral inhibitor of type 1 Natural Killer T (iNKT) cells.

GRI-0621 is also an oral formulation of tazarotene, a synthetic retinoid acid receptor (RAR)-beta and gamma selective agonist, that is approved in the United States for topical treatment of psoriasis and acne.

As of December 31, 2022, it has been evaluated in over 1,700 patients as an oral product for up to 52-weeks.

GRI is developing GRI-0621 for the treatment of severe fibrotic lung diseases such as idiopathic pulmonary fibrosis (IPF), a life-threatening progressive fibrotic disease of the lung that affects approximately 140,000 people in the United States, with up to 40,000 new cases per year in the United States and some estimate that IPF affects 3 million globally.

While there are currently two approved therapies for the treatment of lung fibrosis, neither has been associated with improvements in overall survival, and both therapies have been associated with significant side effects leading to poor therapeutic adherence.

In preliminary data from GRI’s trials to date with GRI-0621, and earlier trials with oral tazarotene, GRI has observed GRI-0621 to be well-tolerated and to inhibit iNKT cell activity in subjects.

GRI and others have shown that activated iNKT are upregulated in IPF, primary sclerosing cholangitis (PSC), non-alcoholic steatohepatitis (NASH), alcoholic liver disease (ALD), Systemic Lupus Erythematosus Disease (SLE), multiple sclerosis (MS), ulcerative colitis (UC) patients as well as other indications.

In these patients activated iNKT

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cells are correlated with more severe disease.

GRI is initiating a Phase 2a trial in 36 IPF patients in the second half of 2023 and expects topline results from this trial to be available in the second half of 2024.

GRI’s product candidate portfolio also includes GRI-0803 and a proprietary library of 500+ compounds.

GRI-0803, the lead molecule selected from the library, is a novel oral agonist of type 2 Natural Killer T (type 2 NKT) cells.

GRI is developing GRI-0803 for the treatment of autoimmune disorders, with much of our preclinical work in SLE or lupus and MS.

In lupus, the immune system mistakenly attacks its own healthy tissues, especially joints and skin, but can affect almost every organ and tissue of the body.

The condition can be fatal, and often causes debilitating bouts of fatigue and pain that prevent nearly half of adult patients from working.

Lupus affects between 160,000 - 200,000 patients in the United States, with around 80,000 – 100,000 patients in the United States suffering from kidney nephritis, one of the most serious manifestations of SLE, typically within five years of diagnosis.

There is no cure for lupus, but medical interventions and lifestyle changes can help control it.

SLE treatment consists primarily of immunosuppressive drugs that inhibit the activity of the immune system.

Only two drugs have been approved for lupus in the past 50 years, and new treatment options are sorely needed.

Subject to IND clearance, GRI intends to evaluate GRI-0803 in a Phase 1a and 1b trial initially targeting SLE.

GRI expects to file an IND with respect to this Phase 1a and 1b trial in the first half of 2024.

GRI will continue to evaluate indications to select the best fit for further development of the program, but GRI’s initial focus is on lupus.

The global COVID-19 pandemic continues to present uncertainty and unforeseeable new risks to our operations and business plan.

We have closely monitored recent COVID-19 developments, including the lifting of COVID-19 safety measures, the drop in vaccination rates, the implementation of, and reaction to, vaccine mandates, the spread of new strains or variants of the coronavirus (such as the Delta and Omicron variants), and supply chain and labor shortages.

In light of these developments, the full impact of the COVID-19 pandemic on our business, operations and clinical development plans remains uncertain and will vary depending on the pandemic’s future impact on our clinical trial enrollment (including our ability to recruit and retain patients), clinical trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as any legal or regulatory consequences resulting therefrom.

We have closely monitored recent COVID-19 developments, including the lifting of COVID-19 safety measures, the drop in vaccination rates, the implementation of, and reaction to, vaccine mandates, the spread of various coronavirus strains such as the Delta variant, and supply chain and labor shortages.

In light of these developments, the full impact of the COVID-19 pandemic on our business, operations and clinical development plans remains uncertain and will vary depending on the pandemic’s future impact on our clinical trial enrollment, clinical trial sites, contract research organizations (CROs), third-party manufacturers, and other third parties with whom we do business, as well as any legal or regulatory consequences resulting therefrom.

To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and with most of our employees and consultants working remotely.

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Research and development expenses include personnel costs associated with research and development activities, including third party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials.

The Company accrues for costs incurred by external service providers, including contract research organizations and clinical investigators, based on its estimates of service performed and costs incurred.

Our research and development expenses have consisted primarily of in-process research and development expenses, costs related to the development program for ADAIR, commercial manufacturing of ADAIR and formulation development for ADMIR.

We accrue for costs incurred by external service providers, including contract research organizations and clinical investigators, based on its estimates of service performed and costs incurred.

Vallon’s research and development expenses have consisted primarily of in-process research and development expenses, costs related to the development program for ADAIR, commercial manufacturing of ADAIR and formulation development for ADMIR.

Research and development costs are expensed as incurred.

These expenses include:

• employee -related expenses, such as salaries, bonuses and benefits, consultant-related expenses such as consultant fees and bonuses, stock-based compensation, overhead related expenses and travel related expenses for our research and development personnel;

• expenses incurred under agreements with contract research organizations (CROs), as well as consultants that support the implementation of our clinical and non-clinical studies;

• expenses incurred under agreements with CROs, as well as consultants that support the implementation of its clinical and non-clinical studies;

• manufacturing and packaging costs in connection with conducting clinical trials and for stability and other studies required to support an NDA filing as well as manufacturing drug product for commercial launch;

• formulation, research and development expenses related to ADMIR;

and other products we may choose to develop;

and other products;

• costs for sponsored research.

We typically use our employee, consultant and infrastructure resources across our research and development programs.

Although we track certain outsourced development costs by product candidate, we do not allocate personnel costs or other internal costs to specific product candidates.

We plan to significantly decrease our research and development expenses as we consider our future plans regarding ADAIR and ADMIR programs as well as strategic alternatives.

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Vallon typically used its employee, consultant and infrastructure resources across its research and development programs.

Although Vallon tracked certain outsourced development costs by product candidate, it did not allocate personnel costs or other internal costs to specific product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and consulting related expenses for executives and other administrative personnel, professional fees and other corporate expenses, including legal and accounting fees, travel expenses, facilities-related expenses, and consulting services relating to our formation and corporate matters.

We incur costs associated with being a public company, including expenses related to services associated with maintaining compliance with The Nasdaq Capital Market and SEC requirements, directors and officers insurance, legal and accounting costs and investor relations costs.

Our general and administrative expenses may increase due to increases in professional and advisory fees as we evaluate our strategic alternatives.

Other income consists of income recognized as a result of the extinguishment of the promissory note issued to us under the Paycheck Protection Program (PPP) as a result of the forgiveness of the note.

Revaluation of Derivative Instruments

In January 2021, we entered into a Convertible Promissory Note Purchase Agreement pursuant to which we issued $350,000 in convertible promissory notes (the 2021 Convertible Notes).

The 2021 Convertible Notes automatically converted into 54,906 shares of our common stock concurrently with the closing of the IPO.

We identified the mandatory conversion into shares our common stock as a redemption feature, which requires bifurcation from the 2021 Convertible Notes and treated it as a derivative liability under ASC 815 as the redemption feature was not clearly and closely related to the debt.

We evaluated the fair value of the derivative liability at issuance.

Upon the conversion of the 2021 Convertible Notes to common stock at the closing of the IPO, the embedded derivative liability was remeasured and removed from the balance sheet.

Warrant Liability, Change in Fair Value and Warrant Conversion

We evaluated the warrants issued in connection with the May 2022 registered direct financing in accordance with ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity (ASC 815-40), and concluded that a provision in the warrants related to the reduction of the exercise price in certain circumstances precludes the warrants from being accounted for as components of equity.

Vallon evaluated the warrants issued in connection with the May 2022 registered direct financing in accordance with ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity (ASC 815-40), and concluded that a provision in the warrants related to the reduction of the exercise price in certain circumstances precludes the warrants from being accounted for as components of equity.

As the warrants meet the definition of a derivative as contemplated in ASC 815, the warrants are recorded as derivative liabilities on the Balance Sheets and measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the accompanying Statements of Operations and Comprehensive Loss in the period of change.

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Interest Income (Expense), net

Interest income (expense), net, consists of interest earned on our cash, cash equivalents and marketable securities held with institutional banks, the amortization of discounts and accretion of premiums on marketable securities and interest expense on our finance lease of equipment utilized in the commercial scale manufacturing of ADAIR.

Interest income (expense), net, consists of interest earned on Vallon’s cash and cash equivalents held with institutional banks, the amortization of discounts and accretion of premiums on marketable securities and interest expense on its finance lease of equipment utilized in the commercial scale manufacturing of ADAIR.

Results of Operations

Comparison of the Three Months Ended September 30, 2022 and 2021

The following table summarizes the results of our operations for the periods indicated (in thousands):

Comparison of the Three Months Ended March 31, 2023 and 2022

The following table summarizes the results of Vallon’s operations for the periods indicated (in thousands):

Three Months Ended

September 30,

Operating expenses:

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Change in fair value of warrant liability (63) —

Loss on warrant conversion (388) —

Interest income (expense), net 2 (4)

Net loss $ (1,033) $ (1,257)

Research and Development Expenses

Research and development expenses were $(18,000) and $0.2 million for the three months ended September 30, 2022 and 2021, respectively.

The $0.2 million decrease in research and development expenses was primarily due to a $0.2 million decrease in personnel expenses, including the reversal of stock compensation.

General and Administrative Expenses

General and administrative expenses were $1.4 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively.

The $0.4 million increase was primarily related an increase in expenses and fees of $0.6 million as a result of our evaluation of strategic alternatives, offset by a decrease in personnel expenses, including stock compensation, of $0.2 million.

Change in Fair Value of Warrant Liability and Loss on Warrant Conversion

In May 2022, we issued 3,700,000 shares of common stock pursuant to a securities purchase agreement at a purchase price of $1.0632 per share in a registered direct offering.

In connection with the registered direct offering, we issued warrants to purchase an aggregate of 3,700,000 shares of common stock at an exercise price of $0.9382 per share.

The warrants were classified as a liability in accordance with ASC 815-40 and the fair value of $1.3 million was recorded as a liability at inception.

On July 25, 2022, we amended the terms of the warrants issued in May 2022 to obligate each warrant holder who signed the warrant amendment (Applicable Holder) to effect a cashless exercise, in whole, by August 10, 2022 (the Expiration Date).

The warrant amendment entitled the Applicable Holder to receive one share of common stock for each warrant in lieu of the aggregate number of shares of common stock that would have been received using the cashless exercise formula set forth in the warrant agreement (Alternate Cashless Exercise).

If the warrants held by the Applicable Holders were not exercised by the Expiration Date, they were automatically exercised pursuant to the Alternate Cashless Exercise.

A total of 2,220,000 warrants were exercised pursuant to the Alternate Cashless Exercise.

As a result of the warrant conversion, we recognized a $0.6 million reversal of the warrant liability and a loss of $0.4 million.

The change in fair value of $0.8 million represents a decrease in the fair value of the warrants outstanding during the three months ended September 30, 2022.

Interest Income (Expense), net

Interest income, net, was $2,000 for the three months ended September 30, 2022.

Interest expense, net, was $4,000 for the three months ended September 30, 2021.

Comparison of the Nine Months Ended September 30, 2022 and 2021

The following table summarizes the results of our operations for the periods indicated (in thousands):

Nine Months Ended

September 30,

License revenue-from related party $ — $ —

Operating expenses:

Research and development 1,529 3,189

General and administrative 4,014 2,976

Total operating expenses 5,543 6,165

Loss from operations (5,543) (6,165)

Other income — 61

Revaluation of derivative liability — (89)

Change in fair value of warrant liability 490 —

Loss on warrant conversion (388) —

Interest expense, net 16 (1)

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Research and Development Expenses

Research and development expenses were $1.5 million and $3.2 million for the nine months ended September 30, 2022 and 2021, respectively.

The $1.7 million decrease in research and development expenses was primarily due to decreases of $1.3 million in expenses related to the registration development program of ADAIR, decreases in personnel expense, including non-cash stock compensation, of $0.3 million and decreases in consulting expenses of $0.1 million.

Research and development expenses were $(0.1) and $1.3 million for the three months ended March 31, 2023 and 2022, respectively.

The $1.4 million decrease in research and development expenses was primarily due to decreases of $1.1 million in expenses related to the registration development program of ADAIR, $0.2 million in consulting fees and $0.1 million in personnel expenses.

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General and Administrative Expenses

General and administrative expenses were $4.0 million and $3.0 million for the nine months ended September 30, 2022 and 2021, respectively.

The $1.0 million increase was primarily related to increased expenses and fees as a result of our evaluation of strategic alternatives.

In May 2020, the Company issued a promissory note under the PPP totaling $61,000.

As of December 31, 2020, the Company had utilized the entire proceeds from such note for payroll costs (greater than 75%), costs related to health care benefits and rent payments and in January 2021, the Company was notified that the note along with accumulated interest had been forgiven.

As the PPP note was forgiven, the Company recorded income from the extinguishment of its obligation in accordance with ASC 405-20-40-1.

Revaluation of Derivative Liability

During the nine months ended September 30, 2021, pursuant to ASC-815, we revalued the embedded derivative liability associated with the 2021 Convertible Notes, resulting in an $89,000 decrease in the fair value of the derivative liability associated with the 2021 Convertible Notes.

General and administrative expenses were $2.5 million and $1.4 million for the three months ended March 31, 2023 and 2022, respectively.

The $1.1 million increase was primarily related to increased costs for personnel expenses of $1.0 million and professional fees of $0.3 million as a result of the Merger.

These increases were offset by a decrease in consulting fees of $0.1 million.

Change in Fair Value of Warrant Liability and Loss on Warrant Conversion

In May 2022, we issued 3,700,000 shares of common stock pursuant to a securities purchase agreement at a purchase price of $1.0632 per share in a registered direct offering.

In connection with the registered direct offering, we issued warrants to purchase an aggregate of 3,700,000 shares of common stock at an exercise price of $0.9382 per share.

In May 2022, Vallon issued 123,333 shares of common stock pursuant to a securities purchase agreement at a purchase price of $31.896 per share in a registered direct offering.

In connection with the registered direct offering, Vallon issued warrants to purchase an aggregate of 123,333 shares of common stock at an exercise price of $28.146 per share (May 2022 Warrant Agreement).

The warrants were classified as a liability in accordance with ASC 815-40 and the fair value of $1.3 million was recorded as a liability at inception.

The May 2022 Warrant Agreement entitled the holders to receive one share of common stock for each warrant in lieu of the aggregate number of shares of common stock that would have been received using the cashless exercise formula set forth in the May 2022 Warrant Agreement (Alternate Cashless Exercise).

In July 2022, Vallon amended the terms of the May 2022 Warrant Agreement to obligate each warrant holder who signed the warrant amendment (Applicable Holder) to effect an Alternate Cashless Exercise, in whole, by August 10, 2022 (the Expiration Date).

If the warrants held by the Applicable Holders were not exercised by the Expiration Date, they were automatically exercised pursuant to the Alternate Cashless Exercise.

A total of 2,220,000 warrants were exercised pursuant to the Alternate Cashless Exercise.

As a result of the warrant conversion, we recognized a $0.6 million reversal of the warrant liability and a loss of $0.4 million.

The change in fair value of $0.5 million represents the decrease in the fair value of the warrant liability from inception to September 30, 2022.

Interest Expense, net

Interest expense was $50,000 and $24,000 for the nine months ended September 30, 2022 and 2021, respectively.

Interest income was $50,000 and $10,000 for the nine months ended September 30, 2022 and 2021, respectively.

A total of 74,000 warrants were exercised pursuant to the May 2022 Warrant Agreement amendment.

In December 2022, an additional 24,666 warrants were exercised pursuant to the Alternate Cashless Exercise under the original terms of the May 2022 Warrant Agreement.

The change in fair value of $0.1 million represents an increase in the fair value of the warrants outstanding during the quarter ended March 31, 2023.

Interest Income (Expense), net

Interest income, net, was $16,000 for the three months ended March 31, 2023.

Interest expense, net, was $1,000 for the three months ended March 31, 2022.

Liquidity and Capital Resources

Since inception, we have incurred losses and expect to continue to incur losses for the foreseeable future.

We incurred net losses of $5.4 million and $6.2 million for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, we had an accumulated deficit of $27.3 million.

We have financed our working capital requirements to date through the issuance of common stock, warrants, convertible notes, short-term promissory notes, and a PPP promissory note.

As of September 30, 2022, we had $4.7 million in cash and cash equivalents.

The following table summarizes our cash flows for the periods indicated (in thousands):

Nine Months Ended September 30, 2022

Vallon has incurred losses since inception and incurred net losses of $2.4 million for each the three months ended March 31, 2023 and 2022.

As of March 31, 2023, Vallon had an accumulated deficit of $31.3 million.

Vallon has financed its working capital requirements to date through the issuance of common stock, convertible notes, short-term promissory notes, and a PPP promissory note.

As of March 31, 2023, Vallon had $1.7 million in cash and cash equivalents.

The following table summarizes Vallon’s cash flows for the periods indicated (in thousands):

Three Months Ended March 31,

Net cash provided by (used in):

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Financing activities — (23)

Net increase in cash and cash equivalents $ 1,030 $ 5,775

Net decrease in cash and cash equivalents $ (2,116) $ (1,159)

Cash Flows from Operating Activities

For the nine months ended September 30, 2022 and 2021, $5.8 million and $6.7 million were used in operating activities, respectively.

The $0.9 million decrease was primarily due to a $0.8 million decrease in our net loss.

For the three months ended March 31, 2023 and 2022, $2.1 million and $2.3 million were used in operating activities, respectively.

The $0.2 million decrease was primarily due to a $0.1 million increase in prepaid and other current assets and a $0.8 million increase in accounts payable, offset by decreases accrued expenses of $0.9 million.

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Cash Flows from Investing Activities

Net cash used in investing activities was $3.4 million for the nine months ended September 30, 2022, which was primarily related to the net purchase of marketable securities.

Net cash provided by investing activities was $1.2 million for the three months ended March 31, 2022, which was related to the sale of marketable securities.

Cash Flows from Financing Activities

Net cash provided by financing activities was $3.4 million during the nine-month period ended September 30, 2022, which was related to the net proceeds from our registered direct financing in May 2022.

Net cash provided by financing activities was $15.8 million for the nine months ended September 30, 2021 and was primarily related to the net proceeds from our IPO and 2021 Convertible Notes financings.

2021 Convertible Note Financing

In January 2021, we entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including SALMON Pharma GmbH (Salmon Pharma), an affiliate of Medice, and David Baker, our Chief Executive Officer, pursuant to which we issued convertible promissory notes (the 2021 Convertible Notes) for cash proceeds of $350,000.

The 2021 Convertible Notes bear an interest rate of 7.0% per annum, non-compounding, and had a maturity date of September 30, 2021.

The 2021 Convertible Notes were convertible into shares of our capital stock offered to investors in any subsequent equity financing after the date of their issuance in which we issued any of our equity securities (a Qualified Financing) and were convertible at a twenty percent discount to the price per share offered in such Qualified Financing.

Such Qualified Financing included the initial public offering of our common stock, consummated on February 12, 2021;

therefore, the 2021 Convertible Notes converted into an aggregate of 54,906 shares of our common stock immediately prior to the closing of the IPO, as agreed upon among the parties thereto.

Net cash used in financing activities was $23,000 for the three months ended March 31, 2022, which was related to payments of Vallon’s finance lease.

Future Funding Requirements

To date, we have not generated any revenue from the sale of any products.

Substantially all of our revenue to date has been generated by the Medice license agreement from which we received a $0.1 million license fee in January 2020.

We do not know when, or if, we will generate any revenue.

In March 2022, we announced that the SEAL study of ADAIR for the treatment of ADHD did not meet statistical significance for its primary endpoint and that we are evaluating our strategic alternatives with the goal of maximizing stockholder value.

We are continuing to assess the best path forward for the development of the ADAIR and ADMIR programs and have no other product candidate undergoing clinical trials.

We expect to incur ongoing expenses as we assess these programs and evaluate our strategic options.

Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to the terms and timing of any strategic alternatives including a merger or business combination, asset acquisitions or sales, collaborations or licensing arrangements.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution.

Any future debt financing may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions.

Any equity or debt financing may contain terms that are not favorable to us or our stockholders.

If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development programs and clinical trials.

We may also be required to sell or license to other parties’ rights to develop or commercialize our drug candidates that we would prefer to retain.

Therefore, there is substantial doubt about our ability to continue as a going concern.

We expect to continue to incur expenses and operating losses at least for the foreseeable future as we evaluate future plans for the ADAIR and ADMIR programs as well as our strategic alternatives.

See the “Risk Factors” section on this Form 10-Q for additional risks associated with our substantial capital requirements.

Vallon’s net losses were $2.4 million and $2.6 million for the quarters ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, Vallon had $1.7 million in cash and cash equivalents and an accumulated deficit of $31.3 million.

We expect to devote substantial financial resources to our planned activities, particularly as we prepare for, initiate, and conduct our planned clinical trials of GRI-0621 and GRI-0803, advance our discovery programs and continue our product development efforts.

In addition, we expect to incur additional costs associated with operating as a public company.

Based on our current operating plan, we believe that our existing cash will be sufficient to fund our operating expenses and capital expenditure requirements for at least the twelve months following the Merger and financing contemplated by the Securities Purchase Agreement, dated as of December 13, 2022, by and between the Company and Altium Growth Fund, LP (the Equity Financing), not including the exercise of the Series T Warrants (the Series T Warrant Exercises).

Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations.

If we are unable to secure adequate additional funding, we will need to reevaluate our operating plans and may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, delay, scale back or eliminate some or all of our development programs, or relinquish rights to our technology on less favorable terms than we would otherwise choose.

These actions could materially impact our business, results of operations and future prospects.

In addition, attempting to secure additional financing may divert the time and attention of management from day-to-day activities and distract from our discovery and product development efforts.

See the “Risk Factors” section on this Quarterly Report on Form 10-Q for additional risks associated with our substantial capital requirements.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Vallon did not have during the periods presented, and the Company does not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited interim financial statements, which have been prepared in accordance with GAAP.

The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

We evaluate these estimates and judgments on an ongoing basis.

We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances.

The Company’s management’s discussion and analysis of its financial condition and results of operations is based on its unaudited interim financial statements, which have been prepared in accordance with GAAP.

The preparation of these condensed consolidated financial statements requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Management evaluates these estimates and judgments on an ongoing basis.

Management bases its estimates on historical experience and on various other factors that it believes are reasonable under the circumstances.

Actual results could differ from those estimates.

The Company’s critical accounting policies are described in Note 3, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K filed with the SEC on February 14, 2022.

There have been no material changes to the significant accounting policies during the nine months ended September 30, 2022, except for items mentioned in Note 3 of the unaudited interim financial statements in this Quarterly Report on Form 10-Q.

Vallon’s critical accounting policies are described in Note 3, “Summary of Significant Accounting Policies,” in Vallon’s Annual Report on Form 10-K filed with the SEC on February 24, 2023.

There have been no material changes to the significant accounting policies during the three months ended March 31, 2023, except for items mentioned in Note 3 of the unaudited interim financial statements in this Quarterly Report on Form 10-Q.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years.

For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies.

For so long as it remains an emerging growth company, it is permitted and

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intends to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies.

These exemptions include:

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• exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We have taken advantage of reduced reporting requirements in this report and may continue to do so until such time that we are no longer an emerging growth company.

We will remain an “emerging growth company” until the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (b) December 31, 2026, the last day of the fiscal year following the fifth anniversary of the completion of the our IPO, (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

We have taken advantage of reduced reporting requirements in this report and may continue to do so until such time that it is no longer an emerging growth company.

We will remain an “emerging growth company” until the earliest of (a) the last day of the fiscal year in which it has total annual gross revenues of $1.235 billion or more, (b) December 31, 2026, the last day of the fiscal year following the fifth anniversary of the completion of the IPO, (c) the date on which it has issued more than $1.0 billion in nonconvertible debt during the previous three years or (d) the date on which it is deemed to be a large accelerated filer under the rules of the SEC.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards.

We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Quantitative and Qualitative Disclosures About Market Risk.

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Item 2. Management’s Discussion and Analysis