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Item 2. Management’s Discussion and Analysis

2023-11-14 compared with 2023-08-14 · 54 added, 39 removed, 138 unchanged (40% 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 the Company’s financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q, the audited financial statements (and notes thereto, 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 for the year ended December 31, 2022 filed with the SEC on February 24, 2023, and Private GRI’s financial statements and related notes which are filed as Exhibit 99.1 of Amendment No.

2 to the Current Report on Form 8-K filed with the SEC on July 6, 2023.

As a result of many factors, including those factors set out under the section entitled “Risk Factors” which is included in the Quarterly Report on Form 10-Q filed by the Combined Company, GRI’s actual results could differ materially from the results described in or implied by these forward-looking statements.

Except as otherwise indicated, references herein to “GRI Bio,” the “Company,” or the “Combined Company,” refer to GRI Bio, Inc.

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 the related notes appearing elsewhere in this Quarterly Report on Form 10-Q, the audited financial statements and notes thereto, as well as management’s discussion and analysis of financial condition and results of operations, included in Vallon’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023, and Private GRI’s financial statements and related notes which are filed as Exhibit 99.1 of Amendment No.

2 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2023.

Some of the information contained in this discussion and analysis, including information with respect to GRI’s plans and strategy for its business and related financing, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 12E of the Securities Exchange Act, as amended, that involve risks and uncertainties.

As a result of many factors, including those factors set out under the section entitled “Risk Factors” included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 and this Quarterly Report on Form 10-Q, GRI’s actual results could differ materially from the results described in or implied by these forward-looking statements.

Except as otherwise indicated, references herein to “GRI Bio,” or the “Company,” refer to GRI Bio, Inc.

on a post-Merger basis, and references to “Private GRI” refer to the business of GRI Bio, Inc.

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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 March 31, 2023, it has been evaluated in over 1,700 patients as an oral product for up to 52-weeks.

As of September 30, 2023, it has been evaluated in over 1,700 patients as an oral product for up to 52-weeks.

We are 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.

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The fair value of the warrants is measured at each reporting date and changes in fair value are recognized in the consolidated statements of operations in the period of change.

Interest Expense, net

On August 22, 2023, we entered into Asset Purchase Agreement (the Aardvark Agreement) with Aardvark Therapeutics, Inc.

(Aardvark), pursuant to which Aardvark agreed to purchase (i) our license agreement with Medice Arzneimittel Pűtter GmbH & Co.

KG, dated January 6, 2020, (ii) certain patents related to our ADAIR product candidate, and (iii) files (of contract manufacturing and FDA correspondence) for a formulation described in IND No.

133072, ADAIR for the Treatment of ADHD and Narcolepsy, filed with the United States FDA.

Under the terms of the Agreement, we received an upfront cash payment of $0.3 million, which was recognized as other income.

We are also eligible to receive potential additional milestone payments contingent upon Aardvark achieving certain future ADAIR regulatory and sales milestones.

Other than the upfront payment, we do not anticipate the receipt of any milestone payments from Aardvark in the near term, which potential milestone payments may or may not be achieved, paid or received in the future.

The foregoing description of the Aardvark Agreement contained herein does not purport to be complete and is qualified in its entirety by reference to the text of the Aardvark Agreement that is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q.

Interest Income (Expense), net

Interest expense consists of amortization of debt discounts, debt issuance costs and interest expense related to the TEP Notes and the Bridge Notes.

Interest income consists of interest earned on our cash and cash equivalents held with institutional banks.

Results of Operations

Comparison of the Three Months Ended June 30, 2023 and 2022

Comparison of the Three Months Ended September 30, 2023 and 2022

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

Three Months Ended June 30,

Three Months Ended September 30,

Operating expenses:

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Change in fair value of warrant liability 46 —

Interest expense, net (934) (106)

Other income 250 —

Interest income (expense) 6 (165)

Net loss $ (2,137) $ (351)

Research and Development Expenses

Research and development expenses were $0.9 million and $0.1 million for the three months ended June 30, 2023 and 2022, respectively.

Research and development expenses were $1.2 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively.

The $1.1 million increase in research and development expenses was primarily due to increases of $0.8 million in expenses related to the development program of GRI-0621, $0.1 million in consulting fees and $0.2 million in personnel expenses.

General and Administrative Expenses

General and administrative expenses were $5.1 million and $0.1 million for the three months ended June 30, 2023 and 2022, respectively.

The $5.0 million increase was primarily related to increased costs for professional fees, including legal, accounting and investment banking fees associated with the Merger of $3.8 million, personnel expenses of $0.8 million as a result of increased headcount, and increases in consulting, administrative and insurance expenses of $0.3 million as a result of operating as a public company.

General and administrative expenses were $1.3 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively.

The $1.2 million increase was primarily related to increased costs for professional fees, including legal, accounting and investor relations fees of $0.4 million, personnel expenses of $0.6 million as a result of increased headcount, and increases in administrative and insurance expenses of $0.2 million as a result of operating as a public company.

Change in Fair Value of Warrant Liability

The change in fair value of $0.1 million represents a decrease in the fair value of the warrants outstanding during the three months ended June 30, 2023.

Interest Expense, net

Interest expense, net, was $0.9 million and $0.1 million for the three months ended June 30, 2023 and 2022, respectively and related to the outstanding promissory notes.

The increase in interest expense, net, was due to interest related to the Bridge Notes.

Comparison of the Six Months Ended June 30, 2023 and 2022

The change in fair value of $0.1 million represents a decrease in the fair value of the warrants outstanding during the three months ended September 30, 2023.

Other income was $0.3 million for the three months ended September 30, 2023 as a result of payments received under the terms of the Aardvark Agreement entered into in August 2023.

Interest Income (Expense)

Interest expense was $0.2 million for the three months ended September 30, 2022 and related to the outstanding promissory notes.

Interest income was $6,000 for the three months ended September 30, 2023.

Comparison of the Nine Months Ended September 30, 2023 and 2022

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

Six Months Ended June 30,

Nine Months Ended September 30,

Operating expenses:

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Change in fair value of warrant liability 167 —

Other income 250 —

Interest expense, net (2,089) (376)

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Research and Development Expenses

Research and development expenses were $1.0 million and $0.1 million for the six months ended June 30, 2023 and 2022, respectively.

Research and development expenses were $2.2 million and $0.2 million for the nine months ended September 30, 2023 and 2022, respectively.

The $2.0 million increase in research and development expenses was primarily due to i ncreases of $1.1 million in expenses related to the development program of GRI-0621, $0.4 million in consulting fees and $0.5 million in personnel expenses.

General and Administrative Expenses

General and administrative expenses were $5.9 million and $0.3 million for the six months ended June 30, 2023 and 2022, respectively.

General and administrative expenses were $7.2 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively.

The $6.8 million increase was primarily related to increased costs for professional fees, including legal, accounting and investment banking fees associated with the Merger of $4.9 million, personnel expenses of $1.5 million as a result of increased headcount, and increases in consulting, administrative and insurance expenses of $0.4 million as a result of operating as a public company.

Change in Fair Value of Warrant Liability

The change in fair value of $0.1 million represents an increase in the fair value of the warrants outstanding during the six months ended June 30, 2023.

The change in fair value of $0.2 million represents a decrease in the fair value of the warrants outstanding during the nine months ended September 30, 2023.

Other income was $0.3 million for the nine months ended September 30, 2023 as a result of payments received under the terms of the Aardvark Agreement entered into in August 2023.

Interest Expense, net

Interest expense, net, was $2.1 million and $0.2 million for the six months ended June 30, 2023 and 2022, respectively, and related to the outstanding promissory notes.

Interest expense, net, was $2.1 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively, and related to the outstanding promissory notes.

The increase in interest expense, net, was due to interest related to the Bridge Notes.

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

We incurred net losses of $8.9 million and $0.6 million for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, we had an accumulated deficit of $27.4 million.

We incurred net losses of $11.0 million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, we had an accumulated deficit of $29.5 million.

We have financed our working capital requirements to date through the issuance of common stock, warrants, convertible notes and promissory notes.

As of June 30, 2023, we had $4.8 million in cash.

As of September 30, 2023, we had $3.5 million in cash.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash provided by (used in):

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Financing activities 6,917 255

Net increase (decrease) in cash and cash equivalents $ 4,790 $ (81)

Net increase in cash and cash equivalents $ 3,479 $ 14

Cash Flows from Operating Activities

For the six months ended June 30, 2023 and 2022, $2.1 million was provided by and $0.1 million was used in operating activities, respectively.

The $2.0 million increase was primarily due to a $8.3 million increase in net loss and a $0.7 million decrease in prepaid and other assets, offset by an increase in non-cash adjustments of $2.1 million related to the amortization of debt discounts and debt issuance costs and $0.1 million related to the revaluation of the warrant liability, as well as a $4.1 million increase in accounts payable and a $0.7 million increase in accrued expenses.

For the nine months ended September 30, 2023 and 2022, $3.4 million and $0.2 million were used in operating activities, respectively.

The $3.2 million increase was primarily due to a $10.1 million increase in net loss and a $0.8 million decrease in prepaid and other assets, offset by an increase in non-cash adjustments of $2.1 million related to the amortization of debt discounts and debt issuance costs and $0.4 million related to stock-based compensation expenses, as well as a $4.8 million increase in accounts payable and a $0.5 million increase in accrued expenses.

Cash Flows from Investing Activities

Net cash used in investing activities was $8 thousand for the six months ended June 30, 2023, which was related to the purchase of computer equipment.

Net cash used in investing activities was $8,000 for the nine months ended September 30, 2023, which was related to the purchase of computer equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities was $6.9 million for the six months ended June 30, 2023.

The $6.9 million increase was primarily due to $12.3 million of proceeds from the Equity SPA and $1.3 million of proceeds from the funding of the second tranche of the Bridge Notes.

The increase was offset by $2.9 million of net liabilities assumed in the connection with the Merger, $3.0 million in costs associated with the Merger, the payment of $0.5 million of debt issuance costs related to the Bridge Notes and $0.1 million of stock issuance costs related the Equity SPA.

Net cash provided by financing activities was $6.9 million for the nine months ended September 30, 2023 as a result of $12.3 million of proceeds from the Equity SPA and $1.3 million of proceeds from the funding of the second tranche of the Bridge Notes.

These proceeds were offset by $2.9 million of net liabilities assumed in the connection with the Merger, $3.0 million in costs associated with the Merger, the payment of $0.5 million of debt issuance costs related to the Bridge Notes and $0.2 million of stock issuance costs related the Equity SPA.

Net cash provided by financing activities was $0.3 million for the nine months ended September 30, 2022 and related to proceeds from promissory notes.

Equity Securities Purchase Agreement

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Future Funding Requirements

Our net losses were $8.9 million and $0.6 million for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, we had $4.8 million in cash and an accumulated deficit of $27.4 million.

Our net losses were $11.0 million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023, we had $3.5 million in cash and an accumulated deficit of $29.5 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 and cash equivalents, which include the proceeds from the Equity SPA, will be sufficient to fund our operating expenses and capital expenditure requirements for twelve months from the date of the Merger, not including the exercise of the Series T Warrants (the Series T Warrant Exercises).

Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2024.

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.

The Series T Warrants issued in connection with the Merger are not presently subject to forced exercise by the Company as the equity conditions for their forced exercise, which include (among other things) a requirement that shares of the Company’s common stock have a value weighted average price of at least $9.21 per share for the periods specified in the Series T Warrants, are not met.

We intend to raise capital through additional issuances of equity securities and/or short-term or long-term debt arrangements, but there can be no assurances any such financing will be available when needed, even if our research and development efforts are successful.

These actions could materially impact our business, results of operations and future prospects and the value of shares of our common stock.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis