For the quarterly period ended

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001
per share

VLON

The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧x No ◻o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧x No ◻o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

◻

Accelerated filer

◻

Non-accelerated filer

⌧

Smaller reporting company

⌧

Emerging growth company

⌧

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻☐ No ⌧x

As of ~~May 13, 2021, 6,812,836~~November 2, 2022, 12,742,342 shares of the Registrant’s Common Stock were outstanding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements in the sections captioned “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Quarterly Report contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about:

●

~~the likelihood of our clinical trials and non-clinical studies demonstrating safety and efficacy of our product candidates, and other positive results;~~

●

~~the timing of initiation of our future clinical trials, and the reporting of data from our completed, current and future preclinical and clinical trials;~~

●

~~the size of the market opportunity for our product candidates;~~

●

~~our plans relating to commercializing our product candidates, if approved, including the geographic areas of focus and sales strategy;~~

●

~~the success of competing therapies that are or may become available;~~

●

~~our estimates of the number of patients in the United States who suffer from ADHD or narcolepsy and the number of patients that will enroll in our clinical trials;~~

●

~~the beneficial characteristics, safety and efficacy of our product candidates;~~

●

~~the timing or likelihood of regulatory filings and approval for our product candidates;~~

●

~~our ability to obtain and maintain regulatory approval of our product candidates;~~

●

~~our plans relating to the further development and manufacturing of our product candidates, including ADMIR;~~

●

the expected potential benefits of strategic collaborations with third parties, including MEDICE Arzneimittel Putter GmbH & Co. KG (“Medice”), which is affiliated with one of our principal stockholders, Salmon Pharma, and represented by one member of our board of directors, and our ability to attract collaborators with development, regulatory and commercialization expertise;

●

~~existing regulations and regulatory developments in the United States, the European Union, and other geographic territories;~~

●

~~our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;~~

●

~~our continued reliance on third parties to conduct additional clinical trials of our product candidates, and for the manufacture of our product candidates for preclinical studies and clinical trials;~~

●

~~the need to hire additional personnel, and our ability to attract and retain such personnel;~~

●

~~the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;~~

●

~~our financial performance;~~

•the likelihood of our clinical trials and non-clinical studies demonstrating safety and efficacy of our product candidates, and other positive results;

•the timing of initiation of our future clinical trials, and the reporting of data from our completed, current and future preclinical and clinical trials;

•the size of the market opportunity for our product candidates;

•our plans relating to commercializing our product candidates, if approved, including the geographic areas of focus and sales strategy;

•the success of competing therapies that are or may become available;

•our estimates of the number of patients in the United States who suffer from ADHD or narcolepsy and the number of patients that will enroll in our clinical trials;

•the beneficial characteristics, safety and efficacy of our product candidates;

•the timing or likelihood of regulatory filings and approval for our product candidates;

•our ability to obtain and maintain regulatory approval of our product candidates;

•our plans relating to the further development and manufacturing of our product candidates, including ADMIR;

•the expected potential benefits of strategic collaborations with third parties, including MEDICE Arzneimittel Putter GmbH & Co. KG (Medice), which is affiliated with one of our principal stockholders, SALMON Pharma GMbH (Salmon Pharma), and represented by one member of our board of directors, and our ability to attract collaborators with development, regulatory and commercialization expertise;

•existing regulations and regulatory developments in the United States, the European Union, and other geographic territories;

•our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;

•our continued reliance on third parties to conduct additional clinical trials of our product candidates, and for the manufacture of our product candidates for preclinical studies and clinical trials;

•the need to hire additional personnel, and our ability to attract and retain such personnel;

•the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

•our financial performance;

•the sufficiency of our existing capital resources to fund our future operating expenses and capital expenditure requirements;

•the impacts of the COVID-19 pandemic on our operations;

•our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act or a smaller reporting company under the Exchange Act; and

•our ability to maintain the listing of our common stock on The Nasdaq Capital Market.

●

~~the sufficiency of our existing capital resources to fund our future operating expenses and capital expenditure requirements;~~

●

~~the impacts of the COVID-19 pandemic on our operations;~~

●

~~our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act; and~~

●

~~our ability to maintain the listing of our common stock on The Nasdaq Capital Market.~~

Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations and prospects, and these forward-looking statements are not guarantees of future performance or development. You should refer to the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 and this Quarterly Report for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. If the forward-looking statements prove to be inaccurate; the inaccuracy may be material. In light of the significant uncertainties in these forward- looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represents our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change, however, except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein ~~until~~ after we distribute this Quarterly Report, whether as a result of any new information, future events or otherwise. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.

This Quarterly Report includes trademarks and registered trademarks of Vallon Pharmaceuticals, Inc. Products or service names of other companies mentioned in this Quarterly Report may be trademarks or registered trademarks of their respective owners.

As used in this Quarterly Report, unless the context requires otherwise, the “Company,” “we,” “us” and “our” refer to Vallon Pharmaceuticals, Inc.

PART I—FINANCIAL INFORMATION

Item 1. ~~Financi~~alFinancial Statements.

Vallon Pharmaceuticals, Inc.

(in thousands, except share and per share amounts)

March 31, 2021

December 31, 2020
Assets

(unaudited)

Current assets:

Cash and cash equivalents

$
12,980

$
109
Prepaid expenses and other current assets

1,358

565
Total current assets

14,338

674

Finance lease right-of-use asset, net

261

279
Property and equipment, net

1

2
Total assets

$
14,600

$
955

Liabilities and Stockholders' Equity (Deficit)




Current liabilities:

Accounts payable

$
1,347

$
1,226
Accrued expenses

985

847
Note payable, current

—

47
Finance lease liability, current

95

105
Total current liabilities

2,427

2,225
Note payable, non-current

—

14
Finance lease liabilities, non-current

146

170
Total liabilities

2,573

2,409




Commitments and contingencies (Note 10)





Stockholders' equity (deficit):




Common stock, $0.0001 par value; 250,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 6,812,836 and 4,506,216 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively, which gives retroactive effect to the one-for-40 reverse stock split. See Note 1 to these financial statements.

—

—
Additional paid-in-capital

27,264

11,145
Accumulated deficit

(15,237)

(12,599)
Total stockholders’ equity (deficit)

12,027

(1,454)
Total liabilities and stockholders' equity (deficit)

$
14,600

$
955

September 30, 2022 December 31, 2021
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 4,732 $ 3,702
Marketable securities, available-for-sale 419 3,808
Prepaid expenses and other current assets 418 619
Total current assets 5,569 8,129
Other assets — 206
Total assets $ 5,569 $ 8,335
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,185 $ 918
Accrued expenses 700 1,430
Warrant liability 225 —
Other current liabilities — 97
Total current liabilities 2,110 2,445
Other liabilities — 72
Total liabilities 2,110 2,517
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $0.0001 par value; 250,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 12,732,836 and 6,812,836 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively 1 —
Additional paid-in-capital 30,802 27,722
Accumulated other comprehensive loss (1) (2)
Accumulated deficit (27,343) (21,902)
Total stockholders’ equity 3,459 5,818
Total liabilities and stockholders' equity $ 5,569 $ 8,335

See accompanying notes to ~~these~~unaudited interim financial statements.

Vallon Pharmaceuticals, Inc.

Statements of Operations

~~(unaudited)~~

and Comprehensive Loss

(in thousands, except share and per share amounts)

For the Three

For the Three

Months Ended

Months Ended

March 31,

March 31,

2021

2020
License revenue-related party

$
—

$
100
Operating expenses:

Research and development

1,772

883
General and administrative

830

375
Total operating expenses

2,602

1,258
Loss from operations

(2,602)

(1,158)
Other income

61

—
Revaluation of derivative liability

(89)

—
Interest expense, net

(8)

(2)
Net loss attributable to common stockholders

$
(2,638)

$
(1,160)
Net loss per share attributable to common stockholders, basic and diluted

$
(0.46)

$
(0.26)
Weighted-average common shares outstanding basic and diluted

5,710,270

4,506,216

Three Months Ended
September 30, Nine Months Ended
September 30,
2022 2021 2022 2021
Operating expenses:
Research and development $ (18) $ 215 $ 1,529 $ 3,189
General and administrative 1,422 1,038 4,014 2,976
Total operating expenses 1,404 1,253 5,543 6,165
Loss from operations (1,404) (1,253) (5,543) (6,165)
Other income — — — 61
Revaluation of derivative liability — — — (89)
Change in fair value of warrant liability 757 — 490 —
Loss on warrant conversion (388) — (388) —
Interest income (expense), net 2 (4) — (14)
Net loss (1,033) (1,257) (5,441) (6,207)
Other comprehensive income (loss):
Unrealized gain (loss) on investments 2 (1) 1 (1)
Total comprehensive loss $ (1,031) $ (1,258) $ (5,440) $ (6,208)
Net loss per share of common stock, basic and diluted $ (0.09) $ (0.18) $ (0.59) $ (0.96)
Weighted-average common shares outstanding, basic and diluted 12,105,445 6,812,836 9,219,869 6,449,522

See accompanying notes to ~~these~~unaudited interim financial statements.

Vallon Pharmaceuticals, Inc.

Statements of Changes in Stockholders’ Equity (Deficit)

~~(unaudited)~~

(in thousands, except shares)

Common Stock

Additional Paid-In

Accumulated

Stockholders’


Shares (1)

Amount

Capital

Deficit

Equity (Deficit)
Balance, December 31, 2019

4,506,216

$
—

$
10,991

$
(7,777)

$
(3,214)
Stock-based compensation expense

—

—

35

0

35
Net loss

—

—

0

(1,160)

(1,160)
Balance, March 31, 2020

4,506,216

$
—

$
11,026

$
(8,937)

$
(2,089)

Common Stock

Additional Paid-In

Accumulated

Stockholders’


Shares (1)

Amount

Capital

Deficit

Equity (Deficit)
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

—

—

168

—

168
Net loss

—

—

—

(2,638)

(2,638)
Balance, March 31, 2021

6,812,836

$
—

$
27,264

$
(15,237)

$
12,027

~~(1) The number of shares above give retroactive effect to the one-for-40 reverse stock split. See Note 1 to these financial statements.~~

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Stockholders’ Equity (Deficit)
Shares
Amount
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 — — 168 — — 168
Net loss — — — — (2,638) (2,638)
Balance, March 31, 2021 6,812,836 — 27,264 — (15,237) 12,027
Stock-based compensation — — 138 — — 138
Net loss — — — — (2,312) (2,312)
Balance, June 30, 2021 6,812,836 — 27,402 — (17,549) 9,853
Stock-based compensation — — 134 — — 134
Unrealized loss on investments — — — (1) — (1)
Net loss — — — — (1,257) (1,257)
Balance September 30, 2021 6,812,836 $ — $ 27,536 $ (1) $ (18,806) $ 8,729

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Stockholders’ Equity
Shares Amount
Balance, December 31, 2021 6,812,836 $ — $ 27,722 $ (2) $ (21,902) $ 5,818
Stock-based compensation — — 181 — — 181
Unrealized loss on marketable securities, available-for-sale — — — (4) (4)
Net loss — — — — (2,635) (2,635)
Balance, March 31, 2022 6,812,836 — 27,903 (6) (24,537) 3,360
Issuance of common stock, net of offering expenses 3,700,000 1 2,160 — — 2,161
Stock-based compensation — — (85) — — (85)
Unrealized gain on marketable securities, available-for-sale — — — 3 — 3
Net loss — — — — (1,773) (1,773)
Balance, June 30, 2022 10,512,836 1 29,978 (3) (26,310) 3,666
Issuance of common stock upon warrant exercise 2,220,000 — 960 — — 960
Stock-based compensation — — (136) — — (136)
Unrealized gain on marketable securities, available-for-sale — — — 2 — 2
Net loss — — — — (1,033) (1,033)
Balance, September 30, 2022 12,732,836 $ 1 $ 30,802 $ (1) $ (27,343) $ 3,459

See accompanying notes to ~~these~~unaudited interim financial statements.

Vallon Pharmaceuticals, Inc.

Statements of Cash Flows

~~(unaudited)~~

(in thousands)

Three Months Ended

Three Months Ended

March 31,

March 31,


2021

2020
Cash flows from operating activities:



Net loss

$
(2,638)

$
(1,160)
Adjustments to reconcile net loss to cash used in operating activities:

Amortization of finance lease right-of-use asset

18

18
Stock-based compensation expense

168

35
Revaluation of derivative liability

89

—
Forgiveness of PPP note

(61)

—
Non-cash interest, depreciation and other expense

10

—
Change in operating assets and liabilities:

Prepaid expenses and other current assets

(793)

(87)
Accounts payable

121

200
Accrued expenses

138

226
Net cash used in operating activities

(2,948)

(766)

Cash flows from investing activities:

Purchase of property and equipment

—

(2)
Net cash used in investing activities

—

(2)




Cash flows from financing activities:




Proceeds from common stock, net of offering expenses

15,503

—
Proceeds from convertible notes

350

—
Payment of finance lease liability

(34)

(29)
Net cash provided by (used in) financing activities

15,819

(29)




Net increase (decrease) increase in cash and cash equivalents

12,871

(797)
Cash and cash equivalents, at beginning of period

109

3,821
Cash and cash equivalents, at end of period

$
12,980

$
3,024
Supplemental disclosure of cash flows information:

Interest paid

$
—

$
—
Noncash financing activities:

Conversion of convertible notes to common stock

$
350

$
—

Nine Months Ended
September 30,
2022 2021
Operating activities:
Net loss $ (5,441) $ (6,207)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization of finance lease right-of-use asset 206 55
Amortization of marketable securities premiums 29 11
Stock-based compensation expense (40) 440
Revaluation of derivative liability — 89
Change in fair value of warrant liability (490) —
Loss on warrant conversion 388 —
Forgiveness of PPP note — (61)
Non-cash interest, depreciation and other expense — 2
Change in operating assets and liabilities:
Prepaid expenses and other current assets 200 (213)
Accounts payable 114 (729)
Accrued expenses (730) (116)
Cash used in operating activities (5,764) (6,729)
Investing activities:
Purchase of marketable securities (640) (3,266)
Sale of marketable securities 4,002 —
Cash provided by (used in) investing activities 3,362 (3,266)
Financing activities:
Proceeds from issuance of common stock and warrants, net of offering expenses 3,447 15,503
Proceeds from convertible notes — 350
Payment of finance lease liability (15) (83)
Cash provided by financing activities 3,432 15,770
Net increase in cash and cash equivalents 1,030 5,775
Cash and cash equivalents, at beginning of period 3,702 109
Cash and cash equivalents, at end of period $ 4,732 $ 5,884
Supplemental disclosure of cash flows information:
Noncash financing activities:
Conversion of convertible notes to common stock $ — $ 350
Finance lease liability costs included in accounts payable $ 154 $ —
Non-cash exercise of warrants $ 960 $ —

See accompanying notes to ~~these~~unaudited interim financial statements.

Vallon Pharmaceuticals, Inc.

Notes to Unaudited Interim Financial Statements

~~(unaudited)~~

~~NOTE 1~~ ~~– NATURE~~

(in thousands, except share and per share data)

1. ORGANIZATION AND DESCRIPTION OF ~~OPERATIONS,~~ BUSINESS ~~GOING CONCERN AND LIQUIDITY~~

Vallon Pharmaceuticals, Inc. ~~(“Vallon”~~(Vallon or the ~~“Company”)~~Company), ~~a Delaware corporation, is a biopharmaceutical company~~ based in Philadelphia, PA which is focused on the development and commercialization of proprietary biopharmaceutical products. The Company’s only clinical-stage product currently under development is ADAIR, a proprietary, abuse-deterrent oral formulation of immediate-release (short-acting) dextroamphetamine for the treatment of Attention-deficit/hyperactivity disorder, or 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 is conducting formulation development work.

~~Vallon Pharmaceuticals, Inc.~~ was incorporated in Delaware on January 11, 2018, which is the date of inception.

The Company is a biopharmaceutical company focused on the development and commercialization of novel abuse-deterrent medications for CNS disorders. The Company’s ~~fiscal-year ends on December 31.~~

~~Immediately prior~~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. In March 2022, the Company announced that its 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, the ~~closing~~Company completed formulation development work and selected the final formulation of its second product candidate, ADMIR, an abuse deterrent formulation of methylphenidate (Ritalin®), for the ~~initial public offering~~treatment of ADHD.

The SEAL study (Study to Evaluate the Abuse Liability, Pharmacokinetics, Safety and Tolerability of an Abuse-Deterrent d-Amphetamine Sulfate Immediate Release Formulation), was the Company’s ~~common stock (the “IPO”) (Note 5)~~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.

The Company ~~effected a one-for-~~40 ~~reverse stock split of its common stock. All share and per share amounts, excluding~~is continuing to assess the ~~number of authorized shares and par value, contained in these financial statements and accompanying notes, and this Quarterly Report on Form 10-Q give retroactive effect to the reverse split.~~

~~Business Formation:~~

On November 15, 2017, before the Company’s formation, Amiservice Development Ltd., a BVI corporation (“Amiservice”) entered into an agreement for the purchase of the ADAIR product rights for a payment of $250,000. The Asset Purchase Agreement (“the APA”), by and between Amiservice and Arcturus Therapeutics Ltd. (”Arcturus”), was subject to several closing conditions. One of the key terms and conditions of the APA was that the purchasers provide funding of at least $2.75 million towards the development of ADAIR.

On February 11, 2018, Ofir Levi, Chairman of the newly formed Vallon, purchased 196,875 common shares from the Company at par value for $788. On June 7, 2018, Vallon entered into a stock purchase agreement with several investors pursuant to which Vallon issued 1,771,881 common shares for $3.0 million (“Private Placement”). Subsequently, on June 22, 2018, the Company executed the amended APA, by and between Arcturus Therapeutics Ltd. Such APA was amended and restated from the initial agreement discussed above, dated as of November 15, 2017. In exchangebest path forward for the ADAIR ~~product rights, Vallon issued 843,750 common shares~~and ADMIR development programs. In addition, the Company has engaged Ladenburg Thalmann & Co. Inc. (Ladenburg) to ~~Arcturus, valued at approximately $1.4 million based upon~~evaluate its strategic alternatives with the ~~price at which the common shares were issued and sold in the Private Placement, which comprised approximately 30%~~goal of ~~the then-outstanding common stock of~~maximizing stockholder value. Ladenburg has been engaged to advise the Company on the strategic review process, which could include, without limitation, exploring the potential for a ~~fully diluted basis.~~possible merger, business combination, investment into the Company, or a purchase, license or other acquisition of assets. In ~~addition, Amiservice signed a consent~~the meantime, and ~~release agreement~~in conjunction with the exploration of strategic alternatives, the Company is streamlining its operations in order to all rights to the APA in exchange for approximately $562,000 which represented a reimbursement for expenses Amiservice incurred on Vallon’s behalf in the amount of approximately $310,000, the repayment of 2 promissory notes totaling approximately $192,000 including interest,preserve its capital and approximately $60,000 of other operating expenses incurred. The assets acquired in the ADAIR acquisition are classified as in-process research and development (“IPR&D”). Accounting for IPR&D assets in an asset acquisition follows the guidance in Accounting Standards Codifications (“ASC”) 730, ~~Research and Development~~, which requires that both tangible and intangible identifiable research and development assets with no alternative future use be allocated a portion of the consideration transferred and charged to expense at the acquisition date. The Company recorded $1.7 million to research and development expense on June 22, 2018, the date of acquisition, which included $1.4 million of common shares issued for the acquisition, as well as, the original $250,000 exclusivity payment and approximately $60,000 in transaction fees.

cash resources.

~~Table of Contents~~

2. LIQUIDITY

~~Going Concern and 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 its inception and has incurred ~~$15.2 million in~~and accumulated deficit of $27,343 through ~~March 31, 2021.~~September 30, 2022. The Company has financed its working capital requirements to date through the issuance of common stock, warrants, convertible notes, short-term promissory notes, and a Paycheck Protection Program ~~(“PPP”)~~(PPP) promissory ~~note, as described in Note 4.~~

Onnote.

In January ~~11,~~ 2021, the Company completed a ~~$350,000~~$350 convertible note financing and onin February ~~12,~~ 2021, the Company completed the ~~IPO,~~initial public offering (IPO), raising net proceeds of ~~$15.5 million, as described~~$15,500.

Table of Contents

On May 17, 2022, the Company entered into a Securities Purchase Agreement with certain investors (the Securities Purchase Agreement) for the sale of up to 3,700,000 shares of the Company’s common stock, par value $0.0001 per share (the Shares), at a purchase price of $1.0632 per Share in ~~Note 5. On March 31, 2021,~~a registered direct offering (the Offering). In a concurrent private placement also pursuant to the Securities Purchase Agreement (the Private Placement), for each Share of common stock purchased by an investor, such investor was entitled receive from the Company an unregistered warrant (the Warrant and, together with the Shares, the Securities) to purchase one Share of common stock. The gross proceeds from the Offering and Private Placement were approximately $3,900, before deducting fees payable to the placement agent and other estimated offering expenses payable by the Company of approximately $572, of which $85 related to the warrants was expensed.

As of September 30, 2022, the Company had cash, ~~and~~ cash equivalents ~~totaling~~and marketable securities of approximately ~~$13.0 million which management~~$5,151.

The Company expects ~~will provide funding~~to incur ongoing expenses as it evaluates its plans for the ADAIR and ADMIR programs and strategic alternatives after it announced in March 2022 that the SEAL study of ADAIR for the treatment of ADHD failed to meet statistical significance for its ~~ongoing~~primary endpoint. The Company is currently assessing the best path forward for the ADAIR and ADMIR programs and has no other product candidates undergoing clinical trials. The Company’s 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 ~~activities into the third quarter of 2022. However,~~combination, asset acquisitions or sales, collaborations or licensing arrangements.

If the Company ~~has based this estimate~~raises additional funds by issuing equity securities, its stockholders may experience dilution. Any future debt financing may impose upon it covenants that restrict our operations, including limitations on ~~assumptions~~its ability to incur liens or additional debt, pay dividends, repurchase its 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 the Company or its stockholders. If the Company is unable to raise additional funds when needed, it may ~~prove~~be required to delay, reduce or terminate some or all of its development programs and clinical trials. The Company may also be ~~wrong, and~~required to sell or license to other parties’ rights to develop or commercialize its drug candidates that it ~~could use capital resources sooner than it expects, therefore,~~would prefer to retain. Therefore, there is substantial doubt about the Company’s ability to continue as a going ~~concern within one year of the date that these financial statements are being issued.~~

concern. The ~~Company’s ability~~Company expects to continue to incur expenses and operating losses at least for the foreseeable future as ~~a going concern is dependent on~~it evaluates future plans for the ADAIR and ADMIR programs as well as its ability to raise additional capital to fund its business activities, including its research and development program. The Company’s objective is to develop and commercialize biopharmaceutical products that treat central nervous system disorders, but there can be no assurances that the Company will be successful in this regard. Therefore, the Company intends to raise capital through additional issuances of common stock and /or short-term notes. Furthermore, the Company may not be able to obtain additional financing on acceptable terms and in the amounts necessary to fully fund its future operating requirements. If the Company is unable to obtain sufficient cash resources to fund its operations, it may be forced to reduce or discontinue its operations entirely. 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.

~~NOTE 2 –~~strategic alternatives.

3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note B, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2021. There have been no material changes to the significant accounting policies during the period ended March 31, 2021, except for items mentioned below.

~~[A] Unaudited Interim Financial Statements~~

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ~~(“GAAP”)~~(GAAP) for interim financial ~~information~~periods and ~~with~~pursuant to the ~~instructions to~~rules of the Securities and Exchange Commission. References in this Quarterly Report on Form 10-Q to “authoritative guidance” is meant to refer to GAAP as found in the Accounting Standards Codification (ASC) and ~~Rule 8-03 of Regulation S-X. Accordingly, they do not include all~~Accounting Standards Updates (ASU) of the ~~information and notes required by generally accepted accounting principles in the United States of America for complete~~Financial Accounting Standards Board (FASB). The December 31, 2021 balance sheet was derived from audited financial statements.

In the opinion of management, the unaudited interim financial statements furnished herein include all normal and recurring adjustments considered necessary ~~for a fair presentation of~~to present fairly the Company’s financial position ~~at March 31, 2021~~as of September 30, 2022, and the results of operations and stockholders’ equity (deficit) for the three and nine months ended September 30, 2022 and 2021 and cash flows for the ~~three~~nine months ended ~~March 31, 2021~~September 30, 2022 and ~~2020. All such adjustments are of a normal and recurring nature. Interim financial statements are prepared on a basis consistent with the Company’s annual financial statements.~~2021. Results of operations for the ~~three-month period~~three and nine months ended ~~March 31, 2021,~~September 30, 2022, are not necessarily indicative of the operating results that may be expected for the year ending December 31, ~~2021.~~

2022. The ~~balance sheet as of December 31, 2020 has been derived from~~unaudited interim financial statements, presented herein, do not contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited interim financial statements should be read in conjunction with the annual audited financial statements ~~at that date but does not include all~~and related notes as of and for the ~~information and notes required by GAAP for complete financial statements.~~

~~References in this Quarterly Report on Form 10-Q to “authoritative guidance” is to the Accounting Standards Codification issued by the Financial Accounting Standards Board (“FASB”).~~

~~For further information, refer to the financial statements and notes thereto~~year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K ~~for~~filed with the ~~year ended December 31, 2020.~~

SEC on February 14, 2022.

Recapitalization

Immediately prior to the closing of the IPO (Note 7), 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 Quarterly Report on Form 10-Q give retroactive effect to the reverse split.

~~[B]~~ 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 unaudited interim 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 and subsequent warrant revaluations, 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.

~~[C]~~

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).

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.

Warrant Liabilities, Change in Fair Value and Warrant Conversion

The Company evaluated the warrants issued in connection with the May 2022 registered direct financing (Note 7) 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 accompanying 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. The derivative liabilities will ultimately be converted into the Company’s common stock when the warrants are exercised, or will be extinguished upon expiry of the warrant term. Upon exercise, the intrinsic value of the shares issued is transferred to stockholders’ equity. The difference between the intrinsic value of the stock issued and the fair value of the warrant is recorded as gain or loss on the exchange in the accompanying Statements of Operations and Comprehensive Loss in the period of exercise.

Stock-based Compensation

The Company recognizes expense for employee and non-employee stock-based compensation in accordance with ~~Accounting Standards Codification (“ASC”)~~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 stock options granted, other than the 61,250 granted to Mr. Baker described in Note 10[A], as of March 31, 2021 vest primarily upon specified performance milestones. As Mr. Baker’s stock option grant was pursuant to milestones associated with an underwritten public offering or a listing on a national stock exchange, management determined that no expense should be recognized for this grant until such time that the milestone becomes probable. The options vested on February 12, 2021, concurrent with the closing of the IPO and thus the expense for such options was recognized in the three months ended March 31, 2021. The Company ~~elected to use~~uses the expected term, rather than the contractual term, for both employee and consultant options issued.

~~[D]~~

Recent Accounting Pronouncements

The Company ~~considers~~considered the applicability and impact of all ~~Accounting Standards Updates (“ASUs”).~~ ASUs ~~not discussed below were assessed~~issued during the quarter ended September 30, 2022 and each was determined to be either not applicable or ~~are~~ expected to have minimal impact on these financial statements.

~~In December 2019,~~

4. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

Marketable Securities

The following is a summary of the ~~FASB issued ASU 2019-12, “Income Taxes (Topic 740)~~Company’s available for sale securities as of the dates indicated:


	As of September 30, 2022
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Marketable Securities:
Debt securities:
Corporate bonds	$	150	$	—	$	—	$	150
Municipal bonds	270		—		(1)		269
Total	$	420	$	—	$	(1)	$	419


	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

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, Fair Value Measurement, 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: ~~Simplifying~~Unadjusted quoted prices in active markets that are accessible at the ~~Accounting~~measurement date for ~~Income Taxes”. ASU 2019-12 simplifies~~identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the ~~accounting for income taxes by removing certain exceptions~~full term of the asset or liabilities.

Level 3: Prices or valuation techniques that require inputs that are both significant to the ~~general principals~~fair value measurement and unobservable (i.e., supported by little or no market activity).

As of September 30, 2022, the Company’s financial instruments included cash and cash equivalents, marketable securities, prepaid expenses and other current assets, accounts payable, accrued expenses, and the warrant liability. The carrying amounts reported in ~~Topic 740. The amendments also improve consistent application of~~the balance sheets for cash and ~~simplify generally accepted accounting principles (GAAP) for~~cash equivalents, prepaid expenses and other ~~areas of Topic 740 by clarifying~~current assets, accounts payable and amending the existing guidance. For public business entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The adoption of this standard, effective January 1, 2021, did not have a material impact on these financial statements.

~~NOTE~~approximate their fair value based on the short-term maturity of these 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 following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2022:


	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
Assets:
Marketable securities, available-for-sale	$	—	$	419	$	—
Liabilities:
Warrant liability	$	—	$	—	$	225

On May 17, 2022, the Company 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 (Note 7). In connection with the registered direct offering, the Company 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 $225 is reflected in warrant liability on the accompanying Balance Sheets. The warrant liability was measured at fair value at inception and is revalued at each financial statement date, with changes in fair value presented within change in fair value of warrant liability in the accompanying Statements of Operations and Comprehensive Loss.

On July 25, 2022, the Company 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, the Company recognized a $573 reversal of the warrant liability.

The following table presents the changes is the fair value of the Level 3 –liability:


	Warrant Liability
Fair value as of December 31, 2021	$	—
Initial measurement on May 17, 2022	1,288
Warrant conversion	(573)
Change in valuation	(490)
Balance as of September 30, 2022	$	225

The Black-Scholes valuation model was used to estimate the fair value of the warrants with the following weighted-average assumptions:


	(Initial Measurement)
	May 17, 2022	September 30, 2022
Volatility	130.8 %	133.3 %
Expected term in years	2.5	2.5
Dividend rate	0.0 %	0.0 %
Risk-free interest rate	2.665 %	4.240 %

The fair value of the embedded derivative liability identified in the 2021 Convertible Notes (Note 6) 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 during the nine months ended September 30, 2021.

The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:


	As of September 30, 2022
Due in 1 year	$	419
Due in 1-5 years	—
Due in 5-10 years	—
Due after 10 years	—
Total	$	419

Accrued expenses consist of the ~~following (in thousands):~~

March 31,

December 31,

2021

2020
Payroll and related

$
176

$
342
Clinical and preclinical trial and regulatory related

490

137
Chemistry and manufacturing

154

117
Financing related

—

97
Licensing related

76

81
Other

89

73
Total accrued expenses

$
985

$
847

~~NOTE 4 –~~following:


	September 30, 2022		December 31, 2021
Research and development	$	297	$	894
General and administrative	106		183
Payroll and related	297		291
Licensing related	—		62

Total accrued expenses	$	700	$	1,430

6. PPP NOTE AND CONVERTIBLE NOTES

In May 2020, the Company issued a promissory note under the PPP (the PPP Note) 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 loan along with accumulated interest had been forgiven. As the$61. The PPP note was forgiven, the Company recorded income from the extinguishment of its obligation in accordance with ASC 405-20-40-1, disclosed in the amount of $61,000 included in other income on the accompanying Statements of Operations. The Company had accounted for the note under ASC 470. The noteNote had a stated interest rate of 1% and had a two-year maturity. Payments were required to be made over a 1.5-year period beginning November 1, 2020 unless forgiven. ~~The~~In January 2021, the Company ~~did not impute~~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 accordance with ASC 405-20-40-1, disclosed in the amount of $61 included in other income on the ~~note as~~accompanying statements of operations and comprehensive loss. The Small Business Administration (SBA) reserves the ~~rate~~right to audit any PPP loan, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain the PPP loan documentation for six years after the PPP loan was ~~determined~~forgiven or repaid in full and to ~~be a below-market rate due~~provide that documentation to the scope exception in ASC 835-30-15-3(e) for government-mandated interest rates. Amounts due under the next twelve months are presented as notes payable – current on the Company’s balance sheet as of December 31, 2020.

OnSBA upon request.

In January ~~11,~~ 2021, the Company entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including ~~SALMON~~Salmon Pharma, ~~GmbH (“Salmon Pharma”),~~ an affiliate of Medice, and David Baker, the Company’s Chief Executive Officer, pursuant to which the Company issued ~~convertible promissory notes (the “2021~~the 2021 Convertible ~~Notes”),~~Notes, for cash proceeds of ~~$350,000.~~$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.

~~NOTE 5 –~~

7. STOCKHOLDERS’ EQUITY ~~FINANCING~~

On(DEFICIT)

In February ~~12,~~ 2021, the Company completed the IPO of 2,250,000 shares of common stock at a public offering price of $8.00 per share. The gross proceeds from the IPO, before deducting underwriting discounts, commissions and other offering expenses payable by the Company, were ~~$18.0 million.~~$18,000. Underwriting discounts and expenses totaled ~~$1.6 million~~$1,600 and the Company incurred approximately ~~$905,000~~$905 of additional expenses related to completing the IPO ~~of which $494,000 were incurred as of December 31, 2020 and included prepaids and other current assets on the Company’s balance sheet; thus~~for aggregate net proceeds were approximately ~~$15.5 million. Immediately prior~~$15,500.

On May 17, 2022, the Company sold 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 (the Offering). The gross proceeds from the Offering were approximately $3,900, before deducting fees payable to the ~~closing of the IPO,~~placement agent and other estimated offering expenses payable by the Company ~~effected a one-for-~~40 ~~reverse stock split~~ of ~~its common stock.~~

approximately $572 of which $85 related to the warrants was expensed.

~~Table of Contents~~

In connection with the IPO, the Company granted the underwriters warrants (the ~~“Underwriters' Warrants”)~~Underwriters' Warrants) to purchase an aggregate of 112,500 shares of common stock at an exercise price of $10.00 per ~~share, which is 125% of the initial public offering price.~~share. The Underwriters’ Warrants have a five-year term and are not exercisable prior to August 12, 2021. All of the Underwriters’ Warrants were outstanding at March 31, 2021. According to ASC 480-10-25-8 and ASC 480-10-25-14, a warrant is classified as a liability if the warrant obligates the issuer to repurchase its shares by transferring an asset. A warrant can also be classified as a liability if it (conditionally or unconditionally) obligates the issuer to settle the warrant by issuing a variable number of shares if the monetary value of the obligation is based on a predetermined fixed amount, variation in something other than the issuers stock price, or variations inversely related to the issuers stock price. Any other warrant would be classified as equity. Given that these warrants do not meet the criteria of debt classification, theseThe warrants were classified as equity and the fair value of ~~$399,000~~$399 is reflected as additional paid-in capital. 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 %	~~85.0~~	%
Expected term in years		2.5	~~2.5~~
Dividend rate	0.0 %		~~0.0~~	%
Risk-free interest rate		0.155 %	~~0.155~~	%

In connection with the Offering, the Company 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 have a five-year term. The warrants were classified as a liability and are revalued at each balance sheet date.

As of September 30, 2022, the Company had the following warrants outstanding to purchase common stock.


Number of Shares	Exercise Price per Share	Expiration Date
112,500	$10.00	February 12, 2026
1,480,000	$0.9382	May 17, 2027

Table of Contents

~~NOTE 6–~~

8. STOCK-BASED COMPENSATION

The Company recorded stock-based compensation related to stock options and restricted stock units (RSUs) issued under the Company’s 2018 Equity Incentive Plan (2018 Plan) in the following expense categories of its accompanying statements of operations for the three and nine months ended September 30, 2022 and 2021:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Research and development	$	(97)	$	22	$	(208)	$	61
General and administrative	(39)		112		168		379
Total	$	(136)	$	134	$	(40)	$	440

Stock Options

The Company has granted stock options to purchase its common stock to employees and consultants under the 2018 ~~Equity Incentive~~ Plan, under which the Company may issue stock options, restricted stock and other equity-based awards. ~~We have~~The Company has also granted certain stock options outside of the 2018 ~~Equity Incentive~~ Plan. AsStock options granted by the Company generally have a contractual life of ~~March 31, 2021, all equity awards granted from the 2018 Equity Incentive Plan were in the form of stock options.~~

up to 10 years.

The Company measures equity-based awards granted to employees, and ~~nonemployees~~non-employees based on their fair value on the date of the grant and ~~recognize~~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 service-based 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~~awards. The Company records ~~the~~ expense for ~~these~~performance-based awards if it concludes that it is probable that the performance condition will be achieved. ~~The fair value of each stock option grant is estimated on~~During the date of grant using the Black-Scholes stock option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the stock option, the risk-free interest rate for a period that approximates the expected term of the stock option,three and the Company’s expected dividend yield. Expected volatility is calculated based on reported volatility data for a representative group of publicly traded companies for which historical information is available. The Company selects companies with comparable characteristics to it with historical share price information that approximates the expected term of the equity-based awards. The Company computes the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period that approximates the calculated expected term of its stock options. The Company will continue to apply this method until a sufficient amount of historical information regarding the volatility of its stock price becomes available. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. The Company uses the simplified method, under which the expected term is presumed to be the midpoint between the vesting date and the end of the contractual term. The Company utilizes this method due to lack of historical exercise data. The expected dividend yield is assumed to be zero asnine month periods ended September 30, 2022, the Company ~~has no current plans~~reversed stock based compensation related to ~~pay any dividends on common stock. The fair value~~performance awards with performance conditions deemed not probable of ~~each restricted common stock award is estimated on the date of grant based on the fair value of our common stock on that same date.~~

~~The Company’s stock-based compensation expense was recognized in operating expense as follows (in thousands):~~

For the Three Months Ended March 31,

2021

2020
Research and development

$
20

$
35
General and administrative

148

—
Total

$
168

$
35

achievement.

~~Table of Contents~~

~~The fair value of the options granted during the three months ended March 31, 2021 and 2020 was estimated by utilizing the following assumptions:~~

For the Three Months Ended March 31,

2021

2020

Volatility

80.0
%

85.0
%
Expected term in years

5.5-5.8

5.8

Dividend rate

0.0
%

0.0
%
Risk-free interest rate

0.63-0.81
%

2.20
%
Fair value of option on grant date

$
4.08-5.31

$
3.24

The table below represents the activity of stock options granted to employees and ~~consultants:~~

non-employees for the nine months ended September 30, 2022:


	Number of options	Weighted average exercise price		Weighted average remaining contractual term (years)
Outstanding at December 31, 2021	708,490	$	3.60	8.64
Granted	204,500	$	5.22
Exercised	—	—
Forfeited	216,406	4.06
Outstanding at September 30, 2022	696,584	$	3.93	8.30
Exercisable at September 30, 2022	315,991	$	3.37	7.77

Period from December 31, 2020 through March 31, 2021

Weighted

average

Aggregate

Weighted

remaining

intrinsic

Number of

average

contractual

value


options

exercise price

terms (years)

($ 000) (1)
Outstanding at December 31, 2020

266,250

$
2.94

4.109

$
474
Granted during the period

22,750

7.39

—

—
Outstanding at March 31, 2021

289,000

$
3.29

4.060

$
460
Exercisable at March 31, 2021

135,794

$
2.28

3.770

$
320

~~(1)~~

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the underlying options and the deemed fair value of the Company’s common stock for those shares that had exercise prices lower than the deemed fair value of the Company’s common stock.

AsTable of ~~March 31, 2021, there~~Contents

The Black-Scholes option-pricing model was ~~approximately $105,000~~used to estimate the grant date fair value of ~~total~~each stock option grant at the time of grant using the following weighted-average assumptions:


	For the Nine Months Ended September 30,
	2022			2021
Volatility	90.39		%	83.50		%
Expected term in years	5.98			5.90
Dividend rate	0.00		%	0.00		%
Risk-free interest rate	2.00		%	0.99		%
Fair value of option on grant date	$	3.86		$	3.87

At September 30, 2022, the unrecognized compensation cost related to ~~non-vested stock-based~~unvested stock options expected to vest was $839. This unrecognized compensation ~~arrangements granted to employees which~~ is expected to be recognized over a weighted-average amortization period of ~~one year.~~2.85 years.

Restricted Stock Units

The Company has issued performance-based and time-based RSUs. Vesting of the performance-based RSUs is subject to the achievement of certain milestones.

The following table summarizes the activity related to RSUs granted to employees for the nine months ended September 30, 2022:


						Shares
Outstanding at December 31, 2021						—
Granted						188,023
Vested and settled						—
Expired/forfeited/canceled						—
Outstanding at September 30, 2022						188,023

During the nine months ended September 30, 2022, the Company granted 188,023 RSUs at a weighted average grant date fair value of $0.5683, of which 150,000 were performance-based RSUs and 38,023 were time-based RSUs. As of ~~March 31, 2021, there~~September 30, 2022, the milestones associated with the performance-based RSUs were not probable of achievement, and accordingly, no stock-based compensation expense has been recognized for these awards. Compensation expense related to time-based RSUs was ~~approximately $118,000 of total~~$6 for the nine months ended September 30, 2022. The unrecognized compensation cost related to ~~non-vested stock-based~~unvested performance-based RSUs was $83, which will be recognized commencing in the period in which the performance condition is deemed probable of achievement. The unrecognized compensation ~~arrangements granted~~cost related to ~~non-employees. That cost is expected to~~unvested time-based RSUs was $18 and will be recognized over ~~a weighted-average period of 0.7 years.~~

~~NOTE 7 – INCOME TAXES~~

~~For~~ the three months ended March 31, 2021 and 2020, respectively, 0 income tax expense or benefit was recognized. The Company’s deferred tax assets are comprised primarily of net operating loss carryforwards. The Company maintains a full valuation allowance on its deferred tax assets since it has not yet achieved sustained profitable operations. As a result, the Company has not recorded any income tax benefit since its inception.

~~NOTE 8 -~~vesting period.

9. RELATED PARTY TRANSACTIONS

In January 6, 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 $100,000 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.

~~Table of Contents~~

~~On January 11,~~ 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 ~~$350,000.~~$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.

~~NOTE 9 - FINANCE LEASE~~

~~The Company entered into a finance lease in October 2019 in relation to equipment utilized in the commercial scale manufacturing~~Table of ~~ADAIR ($ in thousands).~~

Contents

March 31, 2021

December 31, 2020

Initial lease right-of-use asset

$
368

$
368

Accumulated amortization

$
107

$
89

Weighted-average remaining lease term - finance lease (in years)

2.50

2.75

Weighted-average discount rate - finance lease

13.50
%

13.50
%

Three Months Ended March 31,

2021

2020
Operating cash flows from finance lease amortization

$
18

$
18
Financing cash flows from finance lease payments

$
34

$
29

~~The maturities of the finance lease liability as of March 31, 2021 (in thousands):~~

2021

$
95
2022

114
2023

76
Total lease payments

285
Less: Imputed interest

44
Present value of lease liability

$
241

~~NOTE 10 –~~

10. COMMITMENTS AND CONTINGENCIES

~~(A)~~

Employment Agreements

~~On January 15, 2019, the~~

The Company has entered into an employment ~~agreement~~contracts with ~~David Baker, to serve as~~ its ~~President~~officers that provide for severance and ~~Chief Executive Officer, which was subsequently superseded by a new employment agreement, effective as~~continuation of ~~April 20, 2021 (the “Baker Agreement”). The Baker Agreement provides for a base salary of $400,000 per year, effective as of April 20, 2021.~~

~~Under the Baker Agreement,~~benefits in the event of ~~an involuntary~~ termination of employment by the Company without cause or ~~termination~~ by ~~Mr. Baker~~the employee for good ~~reason, Mr. Baker will receive:~~

●

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

●

if he elects to continue receiving group health insurance coverage pursuant to COBRA, subsidized premiums for COBRA continuation coverage for a period of 12 months (or such earlier date that he obtains alternative coverage), such that he will continue to pay the premium cost for active employees who receive the same type of coverage during that period.

~~Table of Contents~~

reason. In addition, in the event of a termination ~~within 12 months after the occurrence~~ of employment following a change in control, ~~transaction,~~ the ~~President and Chief Executive Officer will receive:~~

●

~~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;~~

●

if he elects to continue receiving group health insurance coverage pursuant to COBRA, subsidized premiums for COBRA continuation coverage for a period of 18 months (or such earlier date that he obtains alternative coverage), such that he will continue to pay the premium cost for active employees who receive the same type of coverage during that period; and

●

~~accelerated vesting of all outstanding stock-based~~vesting of certain equity 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.

In exchange for the severance benefits described above, Mr. Baker must comply with certain confidentiality, non-competition and non-solicitation provisions, return all company property, and sign a release of claims in favor of the Company. The description of the terms above are qualified in their entirety by reference to the Baker Agreement, a copy of which is filed by the Company as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

~~(B) Clinical Trial Agreements~~

In January 2020, the Company entered into a service agreement, amended August 2020 and further amended January 2021, with a clinical research organization to provide clinical trial management services to the Company to assist the Company in its pivotal human abuse liability clinical trial of ADAIR, Study VAL-104. The agreement may be terminated by either party upon thirty days prior written notice. The total clinical trial cost is expected to be $3.1 million of which approximately $1.1 million and $49,000 was expensed during the three months ended March 31, 2021 and 2020, respectively. The Company has expensed $1.9 million cumulative from contract inception through the three months ended March 31, 2021 for Study VAL-104 and expects topline results from the study by the end of 2021.

~~(C) Consulting Agreements~~

Effective April 2, 2018, the Company entered into a consulting agreement with a consultant to serve as the Chief Medical Officer for the Company. Pursuant to the consulting agreement, the consultant is paid $10,000 per month for his services. In October 2018 and May 2020, the Company granted the consultant 15,625 and 6,250 options, respectively. For the three months ended March 31, 2021 and 2020, the Company has incurred consulting fees in the amount of approximately $30,000 and $30,000, respectively, under the agreement. The agreement may be terminated by either party with 30 days’ notice.

~~(D) Manufacturing Agreements~~

In August 2019, the Company entered into an agreement with a contract manufacturer for the commercial scale up and registration batches for ADAIR. The total contract is estimated at $1.6 million of which approximately $79,000 and $79,000 was expensed under the agreement during the three months ended March 31, 2021 and 2020, respectively.

In October 2019, the Company entered into an agreement with a formulation development company for the formulation and development for an abuse-deterrent formulation of methylphenidate (Ritalin®). The total contract is estimated at $232,000, of which $6,000 and $83,000 was expensed during the three months ended March 31, 2021 and 2020, respectively.

~~(E) Pre-Clinical Agreement (included in research and development expense)~~

In November 2019, the Company entered into an agreement with a clinical research organization for pre-clinical services. The total contract currently authorized is estimated at $1.5 million of which $245,000 and $175,000 was expensed during the three months ended March 31, 2021 and 2020, respectively.

accelerated.

~~Table of Contents~~

~~(F)~~ COVID-19 Impact

The global COVID-19 pandemic continues to ~~rapidly evolve,~~present uncertainty and unforeseeable new risks to the Company’s operations and business plan. The Company ~~continues to monitor the~~has closely monitored recent COVID-19 ~~situation closely,~~developments, including the ~~worldwide~~lifting of COVID-19 safety measures, the drop in vaccination rates, the implementation of, and reaction to, vaccine ~~rollout~~mandates, the spread of new strains or variants of coronavirus (such as the Delta and ~~the recent outbreaks~~Omicron variants), and supply chain and labor shortages. In light of ~~various strains of the virus.~~these developments, the full impact of the COVID-19 pandemic on the Company’s business, operations and clinical development ~~timelines and~~ plans remains uncertain and will ~~depend~~vary depending on ~~certain developments, including~~ the ~~duration and spread of the outbreak and its~~pandemic’s future impact on the Company’s clinical trial enrollment (including the Company’s ability to recruit and retain patients), clinical trial sites, CROs, third-party manufacturers, and other third parties with whom ~~it does~~we do business, as well as ~~its impact on~~any legal or regulatory ~~authorities and the Company’s key scientific and management personnel.~~consequences resulting therefrom. To the extent possible, the Company is conducting business as usual, with necessary or advisable modifications to employee travel and with ~~many~~most of its employees and consultants working remotely. The Company will continue to actively monitor the ~~rapidly evolving situation related to~~ COVID-19 pandemic and may take further actions that alter its operations, including those that may be required by federal, state or local authorities, or that itthe Company determines are in the best interests of its employees and other third parties with whom the Company does business.

~~NOTE 11: FAIR VALUE MEASUREMENTS~~

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 per share upon closing of the IPO. As such, an expense of $89,000 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 three months ended March 31, 2021 (in thousands):~~


~~Beginning balance at January 1, 2021~~	$	—
~~Additions during the quarter ended March 31, 2021~~		89
~~Transfer out of Level 3~~		89
~~Balance at March 31, 2021~~	$	—

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~~NOTE 12: SUBSEQUENT EVENTS~~

On May 10, 2021, the Company appointed Leanne M. Kelly to serve as its Chief Financial Officer, and principal financial and accounting officer. In connection with Ms. Kelly’s appointment, the Company entered into an employment agreement with Ms. Kelly (the “Kelly Agreement”), which provides for an initial base annual salary of $275,000 and a target bonus opportunity equal to 35% ~~of her base salary.~~

~~The Kelly Agreement also provides that the Company will recommend that the Board approve a stock option grant covering 100,000~~ common shares of the Company (the “Stock Option”). The Stock Option shall have an exercise price per share equal to the fair market value of a share of the Company’s common stock on the date of grant and shall vest in installments and become exercisable as follows: (i) 70% of the shares underlying the Stock Option shall vest as follows: (x) 17,500 option shares on the first anniversary of her start date, and (y) the remaining 52,500 option shares in equal installments on a quarterly basis for the next three years, in each case subject to continued employment, and (ii) 30% of the shares underlying the Stock Option shall vest as follows: (x) 15,000 option shares on the date the Company submits a New Drug Application (“NDA”) filing for ADAIR with the U.S. Food & Drug Administration, and (y) 15,000 option shares on the date when the U.S. Food & Drug Administration approves the NDA, provided that she is employed by the Company at the time the applicable performance objective is achieved.

~~The Kelly Agreement provides that if she is terminated by the Company other than for cause, or she resigns for good reason, in either case not in connection with a change in control, she will receive:~~

●

continued base salary for a period of 9 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

●

if she elects to continue receiving group health insurance coverage pursuant to COBRA, subsidized premiums for COBRA continuation coverage for a period of 9 months (or such earlier date that she obtains alternative coverage), such that she will continue to pay the premium cost for active employees who receive the same type of coverage during that period.

~~If she is terminated by the Company other than for cause, or she resigns for good reason, in either case within the one-year period commencing on a change in control, she will receive:~~

●

~~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;~~

●

if she elects to continue receiving group health insurance coverage pursuant to COBRA, subsidized premiums for COBRA continuation coverage for a period of 12 months (or such earlier date that she obtains alternative coverage), such that she will continue to pay the premium cost for active employees who receive the same type of coverage during that period; 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.

In exchange for the severance benefits described above, Ms. Kelly must comply with certain confidentiality, non-competition and non-solicitation provisions, return all company property, and sign a release of claims in favor of the Company. The description of the terms above are qualified in their entirety by reference to the Kelly Agreement, a copy of which is filed by the Company as Exhibit 10.2 to this Quarterly Report on Form 10-Q.

~~See description of the Baker Agreement under Note 10 – Employment Agreements.~~

~~Table of Contents~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report, and the audited financial statements (and notes thereto), and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, ~~2020,~~2021, included in our Annual Report on Form 10-K that was filed with the SEC on ~~March 29, 2021.~~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.

Overview

We are a clinical-stage biopharmaceutical company ~~primarily~~ focused on the development and commercialization of ~~proprietary biopharmaceutical products.~~novel abuse-deterrent medications for CNS disorders. Our ~~only clinical-stage~~lead investigational product ~~currently under development~~candidate, ADAIR, is ~~ADAIR,~~ a proprietary, abuse-deterrent oral formulation of immediate-release ~~(short-acting)~~ dextroamphetamine (the main active ingredient in Adderall®), which we were developing for the treatment of ~~Attention-deficit/~~attention-deficit/hyperactivity disorder (“~~ADHD~~~~”),~~(ADHD) and ~~Narcolepsy.~~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 ~~future,~~U.S. Food and Drug Administration (the FDA). In addition to ADAIR, we ~~plan to develop other abuse-deterrent products that have potential for abuse in their current forms, beginning with~~completed formulation development work and selected the ~~development~~final formulation of our second product candidate, ADMIR, an abuse deterrent formulation of ~~Ritalin,~~methylphenidate (Ritalin®), for the treatment of ADHD.

Recent Developments

The SEAL study (Study to Evaluate the Abuse Liability, 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 wewas 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 ~~conducting formulation development work.~~

~~The ADAIR assets were acquired by us on June 22, 2018 pursuant~~continuing to assess the terms and conditions of the Amended and Restated Asset Purchase Agreement with Arcturus Therapeutics, Inc. (the successor to Arcturus Therapeutics Ltd.), referred to herein collectively as Arcturus, and Amiservice Development Ltd., dated as of June 22, 2018 (the “~~Asset Purchase Agreement~~~~”). In exchange~~best path forward for the ADAIR ~~assets, we issued 843,750 shares of our common stock to Arcturus (valued at approximately $1.4 million based upon the price at which the common stock was issued~~ and ~~sold in the June 2018 private placement of our common stock) which comprised 30% of our then-outstanding common stock on a fully diluted basis.~~

~~We intend to develop ADAIR for registration through the Section 505(b)(2) approval pathway. We filed our Investigational New Drug (“~~~~IND~~~~”), application for ADAIR in June 2018 and the IND was cleared in July 2018. Subsequently,~~ADMIR development programs. In addition, we have ~~successfully completed a Phase 1 pivotal bioequivalence study~~engaged Ladenburg Thalmann & Co. Inc. (Ladenburg) to evaluate our strategic alternatives with the goal of ~~ADAIR and a Phase 1 food effect study. In 2019, we conducted a Phase 1 proof-of-concept intranasal human abuse potential study designed~~maximizing stockholder value. Ladenburg has been engaged to compare ADAIR when insufflated (snorted) to the reference comparator, crushed immediate release dextroamphetamine sulfate tablets. We began enrollment of subjects in a pivotal intranasal abuse study during the fourth quarter of 2020 and expect to have topline results for the study by the end of 2021. We are also currently conducting a 13-week preclinical toxicology studyadvise us on the final formulation of ADAIR and have begun planning additional non-clinical safety studies during 2021. We also plan to conduct additional preclinical studies of unintended routes of administration such as IV and intranasal administration.

~~We plan to develop other abuse-deterrent products that have~~strategic review process, which could include, without limitation, exploring the potential for ~~abuse~~a possible merger, business combination, investment into the Company, or a purchase, license or other acquisition of assets. In the meantime, and in ~~their current forms, beginning~~conjunction with the ~~development~~exploration of ~~an abuse deterrent formulation of Ritalin (“~~~~ADMIR~~~~”), for which~~strategic alternatives, we are ~~conducting formulation development work.~~

Onstreamlining our operations in order to preserve our capital and cash resources.

License Agreement

In January 6, 2020, we entered into a license agreement with Medice, ~~who is affiliated with one of our principal stockholders, Salmon Pharma, and represented by one member of our board of directors,~~ 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 us a ~~minimal~~$0.1 million 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~~regulatory and sales ~~thresholds. Medice will~~milestones. We are also ~~pay~~entitled to low-double digit 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.

ADAIR.

Table of Contents

Our objective is to develop and commercialize proprietary biopharmaceutical products. To this effect, we intend to develop and seek marketing approvals from the FDA and other worldwide regulatory bodies for ADAIR, and any other products we opt to pursue in the future, such as ADMIR. To achieve these objectives, we plan to:

seek the necessary regulatory approvals to complete the clinical development of ADAIR for the treatment of ADHD and, if successful, file for marketing approval in the United States and other territories;

~~prepare to commercialize ADAIR by establishing independent distribution capabilities or in conjunction with other biopharmaceutical companies in the United States and other key markets;~~

~~commence development of other abuse-deterrent products such as ADMIR; and~~

continue our business development activities and seek partnering, licensing, merger and acquisition opportunities or other transactions to further develop our pipeline and drug-development capabilities and take advantage of our financial resources for the benefit of increasing stockholder value.

Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.” For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation, and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (iv) the end of the fiscal year following the fifth anniversary of the date of the first sale of our Common Stock pursuant to an effective registration statement filed under the Securities Act.

COVID-19

The global COVID-19 pandemic continues to ~~rapidly evolve,~~present uncertainty and ~~we will continue~~unforeseeable new risks to ~~monitor the~~our operations and business plan. We have closely monitored recent COVID-19 ~~situation closely,~~developments, including the ~~worldwide~~lifting of COVID-19 safety measures, the drop in vaccination rates, the implementation of, and reaction to, vaccine ~~rollout and~~mandates, the ~~recent outbreaks~~spread of ~~various~~new strains or variants of the ~~virus. 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 ~~timelines and~~ plans remains uncertain and will ~~depend~~vary depending on ~~certain developments, including~~ the ~~duration and spread of the outbreak and its~~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 ~~its impact on~~any legal or regulatory ~~authorities and our key scientific and management personnel.~~consequences resulting therefrom. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and with most of our employees and consultants working remotely. We will continue to actively monitor the ~~rapidly evolving situation related to~~ COVID-19 pandemic and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business.

~~Reverse Split~~

On February 10, 2021, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, which effected a one-for-40 reverse stock split (the “~~reverse split~~”) of its issued and outstanding shares of common stock at 11:59 PM Eastern Time on that date. As a result of the reverse split, every 40 shares of common stock issued and outstanding were reclassified into one share of common stock. No fractional shares were issued in connection with the reverse split and any fractional shares were rounded up to the nearest whole share.

~~Table of Contents~~

The reverse split did not change the par value of the common stock or the authorized number of shares of common stock. The reverse split affected all stockholders uniformly and did not alter any stockholder’s percentage interest in equity. All outstanding options and other securities entitling their holders to purchase or otherwise receive shares of common stock have been adjusted as a result of the reverse split, as required by the terms of each security. The number of shares available to be awarded under the Company’s 2018 Equity Incentive Plan have also been appropriately adjusted.

~~All share and per share amounts, excluding the number of authorized shares and par value, contained in this Quarterly Report on Form 10-Q give retroactive effect to the reverse split.~~

~~Initial Public Offering (“IPO”); Underwriting Agreement~~

As previously disclosed, on February 12, 2021, we consummated the initial public offering of our common stock through which we sold 2,250,000 shares of our common stock for total gross proceeds of $18.0 million, resulting in net proceeds of approximately $15.5 million after deducting $1.6 million in underwriter’s discounts, expenses and commissions, and $905,000 of other expenses incurred in connection with the offering.

As part of the closing of the IPO, we also issued warrants to purchase an aggregate of 112,500 shares of common stock to certain of the underwriter’s affiliates. Such warrants may be exercised beginning on August 11, 2021 (180 days from the commencement of sales of the IPO) until February 12, 2026 (five years after the commencement of sales in the IPO).

~~2021 Convertible Note Financing~~

On January 11, 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 (20%) 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.

Financial Operations Overview

~~Revenue~~

We have not generated any significant revenue, and we do not expect to generate any revenue from the sale of any products unless or until we obtain regulatory approval of and commercialize ADAIR. The only revenue we have generated was the $100,000 license fee from the Medice license agreement recognized in the three months ended March 31, 2020.

Research and Development Expenses

Since our incorporation, our operations have primarily been limited to building our management and corporate team, acquiring the ADAIR assets from Arcturus and conducting our clinical program for ADAIR. 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.

~~Table of Contents~~

Our research and development expenses have consisted primarily of in-process research and development expenses, ~~which consisted of non-cash~~ costs ~~acquiring the ADAIR assets of $1.7 million, costs incurred in preparing for and conducting~~related to the development program for ADAIR, ~~working on~~ commercial manufacturing of ADAIR and ~~developing formulations~~formulation development for ADMIR. ~~We expect to significantly increase~~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 ~~efforts by~~personnel;

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

•manufacturing and packaging costs in connection with conducting ~~the remaining studies necessary for the development and approval of ADAIR~~clinical trials and for ~~preparing~~stability and other studies required to support an NDA filing as well as manufacturing drug product for commercial ~~supplies of the product. Future~~launch;

•formulation, research and development expenses related to ADMIR; and other products we may ~~include:~~

employee -related expenses, such as salaries, bonuses and benefits, consultant-related expenses such as consultant fees and bonuses, share-based compensation, overhead related expenses and travel related expenseschoose to develop; and

•costs for sponsored research.

We typically use our employee, consultant and infrastructure resources across our research ~~and development personnel;~~

~~expenses incurred under agreements with contract research organizations (~~“~~CROs~~”~~), as well as consultants that support the implementation of the clinical and non-clinical studies described above;~~

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

~~formulation, research and development expenses related to ADMIR; and other products we may choose to develop; and~~

~~costs for sponsored research.~~

~~Research~~ and development ~~activities will continue to be central to our business model. Products in later stages of clinical development generally have higher~~programs. Although we track certain outsourced development costs ~~than those in earlier stages of clinical development, primarily due~~by product candidate, we do not allocate personnel costs or other internal costs to ~~the increased size and duration of later-stage clinical trials.~~ specific product candidates.

We ~~expect~~plan to significantly decrease our research and development expenses ~~to be significant over the next several years~~ as we ~~increase personnel and compensation costs and conduct the studies described above, and prepare to seek regulatory approval for~~consider our future plans regarding ADAIR and ~~any other future product, such~~ADMIR programs as ~~ADMIR.~~

~~The duration, costs and timing of clinical trials of ADAIR and any other future product, such~~well as ~~ADMIR, will depend on a variety of factors that include, but are not limited to:~~

~~the number of trials required for approval;~~

~~the per patient trial costs;~~

~~the number of patients that participate in the trials;~~

~~the number of sites included in the trials;~~

~~the countries in which the trial is conducted;~~

~~the length of time required to enroll eligible patients;~~

~~the number of doses that patients receive;~~

~~the drop-out or discontinuation rates of patients;~~

~~the potential additional safety monitoring or other studies requested by regulatory agencies;~~

~~the duration of patient follow-up;~~

~~the timing and receipt of regulatory approvals; and~~

~~the efficacy and safety profile of our product candidates.~~

strategic alternatives.

~~Table of Contents~~

In addition, the probability of success for ADAIR and any other future products, such as ADMIR, will depend on numerous factors, including competition, manufacturing capability and commercial viability.

General and Administrative Expenses

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

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of personnel, including compensation and employee-related expenses, including stock-based compensation, and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increasedincur costs associated with being a public company, including expenses related to services associated with maintaining compliance with The Nasdaq Capital Market and SEC requirements, directors and officers insurance, ~~increased~~ legal and accounting costs and investor relations costs. ~~In addition, if ADAIR obtains regulatory approval for marketing,~~Our general and administrative expenses may increase due to increases in professional and advisory fees as we ~~expect that we would incur expenses associated with building~~evaluate our strategic alternatives.

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Other Income

Other income consists of income recognized as a ~~commercialization team if we have not sold or licensed~~result of the ~~rights~~extinguishment of the promissory note issued to ~~commercialize ADAIR to a third party in territories not~~us under the ~~license agreement with Medice.~~

~~Interest Expense and~~ 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~~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.

~~Critical Accounting Policies~~

~~The Company’s critical accounting policies are described~~

Warrant Liability, Change in ~~Note B, “Summary of Significant Accounting Policies,”~~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 ~~Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2021. There have been no material changes~~warrants related to the ~~significant accounting policies during~~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 ~~ended March 31, 2021, except for items mentioned in Note 2~~of change. The derivative liabilities will ultimately be converted into the Company’s common stock when the warrants are exercised, or will be extinguished upon expiry of the ~~financial statements~~warrant term. Upon exercise, the intrinsic value of the shares issued is transferred to stockholders’ equity. The difference between the intrinsic value of the stock issued and the fair value of the warrant is recorded as gain or loss on the exchange in ~~this Quarterly Report~~the accompanying Statements of Operations and Comprehensive Loss in the period of exercise.

Interest Income (Expense), net

Interest income (expense), net, consists of interest earned on ~~Form 10-Q.~~

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.

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Results of Operations

Comparison of the ~~three months ended March 31,~~Three Months Ended September 30, 2022 and 2021 ~~and 2020~~

The following table summarizes the results of our operations for the periods ~~indicated:~~

indicated (in thousands):


	Three Months Ended September 30,
	2022		2021

Operating expenses:
Research and development	(18)		215
General and administrative	1,422		1,038
Total operating expenses	1,404		1,253
Loss from operations	(1,404)		(1,253)
Change in fair value of warrant liability	757		—
Loss on warrant conversion	(388)		—
Interest income (expense), net	2		(4)
Net loss	$	(1,033)	$	(1,257)

Three Months Ended

Three Months Ended


March 31, 2021

March 31, 2020

Change $

(in thousands)

License revenue-from related party

$
—

$
100

$
(100)
Operating expenses:






Research and development

1,772

883

889
General and administrative

830

375

455
Total operating expenses

2,602

1,258

1,344
Loss from operations

(2,602)

(1,158)

1,444
Other income

61

—

61
Revaluation of derivative liability

(89)

—

(89)
Interest expense, net

(8)

(2)

(6)
Net loss

$
(2,638)

$
(1,160)

$
1,478

~~License Revenue – From Related Party~~

We determined there is a single performance obligation with respect to our involvement in the joint development committee in regards to the Medice license agreement and thus the entire $100,000 allocable consideration was assigned to that accounting unit and recognized in the first quarterTable of ~~2020.~~

Contents

Research and Development Expenses

Research and development expenses ~~increased by approximately $889,000 to $1.8~~were $(18,000) and $0.2 million ~~from $883,000~~ for the three months ended ~~March 31, 2020 to the three months ended March 31, 2021.~~September 30, 2022 and 2021, respectively. The ~~increase~~$0.2 million decrease in research and development expenses was primarily due to ~~increases of:~~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.

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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,
	2022		2021
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	—		(14)
Net loss	$	(5,441)	$	(6,207)

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, ~~offset by~~ decreases in personnel expense, including non-cash stock compensation, of ~~$77,000 related to the formulation work for ADMIR. In the three months ended March 31, 2020 we had expensed $60,000 for the estimate~~$0.3 million and decreases in consulting expenses of costs to complete the services related to the Medice license agreement and the amortization of that in the first quarter of 2021 was $3,000, thus resulting in a decrease in research and development expense of $57,000 for the three months ended March 31, 2021.

$0.1 million.

General and Administrative Expenses

General and administrative expenses ~~increased by approximately $455,000 to $830,000 from $375,000~~were $4.0 million and $3.0 million for the ~~three~~nine months ended ~~March 31, 2020 to the three months ended March 31, 2021.~~September 30, 2022 and 2021, respectively. The $1.0 million increase was primarily related to increased ~~costs for directors~~expenses and ~~officers insurance~~fees as a result of ~~$200,000, non-cash stock compensation~~our evaluation of ~~$148,000, consultant related expenses of $51,000 and brand development of $25,000.~~

strategic alternatives.

Other Income

In May 2020, the Company issued a promissory note under the PPP totaling $61,000. As of December 31, 2020, the Company had utilized the entire proceeds from such note for payroll costs (greater than 75%), costs related to health care benefits and rent payments and in January 2021, the Company was notified that the note along with accumulated interest had been forgiven. As the PPP note was forgiven, the Company recorded income from the extinguishment of its obligation in accordance with ASC 405-20-40-1.

Revaluation of Derivative Liability

~~For~~

During the ~~three~~nine months ended ~~March 31,~~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.

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

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~~Income Taxes~~

~~For~~On July 25, 2022, we amended the ~~three months ended March 31, 2021 and 2020, respectively, no income tax expense or benefit was recognized. Our deferred tax assets are comprised primarily~~terms of ~~net operating loss carryforwards. We maintain~~the warrants issued in May 2022 to obligate each warrant holder who signed the warrant amendment (Applicable Holder) to effect a ~~full valuation allowance on our deferred tax assets since we~~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 ~~yet achieved sustained profitable operations.~~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.

Liquidity and Capital Resources

Since inception, we have ~~not recorded any income tax benefit since~~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 ~~inception.~~

~~Net Loss~~

~~We recorded $2.6~~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 ~~net loss~~cash and cash equivalents.

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


	Nine Months Ended September 30, 2022
	2022		2021
Net cash provided by (used in):
Operating activities	$	(5,764)	$	(6,729)
Investing activities	3,362		(3,266)
Financing activities	3,432		15,770
Net increase in cash and cash equivalents	$	1,030	$	5,775

Cash Flows from Operating Activities

For the nine months ended ~~March 31,~~September 30, 2022 and 2021, ~~as compared to $1.2~~$5.8 million and $6.7 million were used in ~~net loss during the three months ended March 31, 2020.~~operating activities, respectively. The ~~increase in net loss~~$0.9 million decrease was primarily due to ~~increases of $889,000 in research and development expenses and $445,000 in general and administrative expenses and~~ a $0.8 million decrease in ~~licensing revenue~~our net loss.

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 ~~$100,000.~~

~~Liquidity~~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 ~~Capital Resources~~

~~Overview~~

~~For~~was primarily related to the ~~period~~net proceeds from our IPO and 2021 Convertible Notes financings.

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2021 Convertible Note Financing

In January ~~11, 2018 (inception) through March 31,~~ 2021, we entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including SALMON Pharma GmbH (Salmon Pharma), an affiliate of Medice, and David Baker, our Chief Executive Officer, pursuant to which we issued convertible promissory notes (the 2021 Convertible Notes) for cash proceeds of $350,000. The 2021 Convertible Notes bear an interest rate of 7.0% per annum, non-compounding, and had a maturity date of September 30, 2021. The 2021 Convertible Notes were convertible into shares of our capital stock offered to investors in any subsequent equity financing after the date of their issuance in which we issued any of our equity securities (a Qualified Financing) and were convertible at a twenty percent discount to the price per share offered in such Qualified Financing. Such Qualified Financing included the initial public offering of our common stock, consummated on February 12, 2021; therefore, the 2021 Convertible Notes converted into an aggregate of 54,906 shares of our common stock immediately prior to the closing of the IPO, as agreed upon among the parties thereto.

Future Funding Requirements

To date, we have ~~an accumulated deficit~~not generated any revenue from the sale of ~~$15.2~~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 ~~and we~~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 ~~have positive cash flow from~~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, ~~for the foreseeable future. As~~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 ~~March 31, 2021,~~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 had cash and cash equivalents of $13.0 million which management expects will provide funding for our ongoing business activities into the third quarter of 2022; however, we have based this estimate on assumptions that may provewould prefer to ~~be wrong, and we could use our capital resources sooner than we expect therefore~~retain. Therefore, there is substantial doubt about our ability to continue as a going concern. We expect to continue to incur ~~significant~~expenses and ~~increasing~~ operating losses at least for the foreseeable ~~future. We do not expect to generate product revenue unless~~future as we evaluate future plans for the ADAIR and ~~until we successfully complete development, obtain regulatory approval~~ADMIR programs as well as our strategic alternatives.

See the “Risk Factors” section on this Form 10-Q for and successfully commercialize ADAIR, or any other future products, including ADMIR. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of planned clinical trials andadditional risks associated with our ~~expenditures on other research and development activities. We anticipate that our expenses will increase substantially as we:~~

~~conduct clinical trials and non-clinical studies;~~

~~scale up manufacturing capabilities with third-party contract manufacturer(s);~~

~~conduct ongoing stability studies of ADAIR;~~

~~seek to identify, acquire, develop and commercialize additional products, such as ADMIR;~~

~~integrate acquired technologies into a comprehensive regulatory and product development strategy;~~

~~maintain, expand and protect our intellectual property portfolio;~~

~~hire scientific, clinical, quality control and administrative personnel;~~

~~add operational, financial and management information systems and personnel, including personnel to support our drug development efforts;~~

~~seek regulatory approvals for any products that successfully complete clinical trials;~~

ultimately establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any drug candidates for which we may obtain regulatory approval, including through the license agreement with Medice; and

~~operate as a public company.~~

substantial capital requirements.

~~Table of Contents~~

~~Cash Flows~~

~~The following table summarizes our cash flows for the periods indicated:~~

Three Months Ended

Three Months Ended

March 31, 2021

March 31, 2020

(in thousands)
Net cash provided by (used in):

Operating activities

$
(2,948)

$
(766)
Investing activities

—

(2)
Financing activities

15,819

(29)
Net decrease in cash and cash equivalents

$
12,871

$
(797)

~~Cash Flows from Operating Activities~~

For the three months ended March 31, 2021 and 2020, $2.9 million and $766,000 were used in operating activities, respectively. The $2.2 million increase was primarily due to the $1.5 million increase in our net loss offset by a $793,000 increase in prepaid expenses and increased accounts payable and accrued expenses of $259,000. The net loss for the three months ended March 31, 2021 included non-cash expenses of $168,000 in non-cash stock compensation, $89,000 in revaluation of derivative liability and $18,000 amortization of finance lease right-of-use asset offset by $61,000 of other income from the forgiveness of the PPP note.

~~Cash Flows from Investing Activities~~

~~Net cash used in investing activities was $0 for the three months ended March 31, 2021 and $2,000 for the three months ended March 31, 2020.~~

~~Cash Flows from Financing Activities~~

Net cash provided by financing activities was $15.8 million during the three months ended March 31, 2021 related to the net proceeds from our IPO and 2021 Convertible Notes financings compared to $29,000 used in financing activities during the three months ended March 31, 2020 related to our finance lease.

~~Contractual Obligations and Other Commitments~~

As of March 31, 2021, there have been no changes to our contractual obligations and commitments since December 31, 2020. For a discussion of our contractual obligations, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10K.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies 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. 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.

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Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

~~reduced disclosure about our executive compensation arrangements;~~

~~no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and~~

•reduced disclosure about our executive compensation arrangements;

•no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and

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

~~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. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable to a smaller reporting company.

Item 4. Controls and Procedures.

Management’s Evaluation of our Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of ~~March 31, 2021.~~September 30, 2022. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls 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 cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Based on the evaluation of our disclosure controls and procedures as of ~~March 31, 2021,~~September 30, 2022, our Chief Executive Officer ~~has~~and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures, as defined above, are effective.

Changes in Internal Control over Financial Reporting

We are taking actions to remediate the material weaknesses relating to our internal controls over financial reporting as described in our Annual Report on Form 10-K. Except as otherwise disclosed herein, there have been

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ~~ended March 31, 2021~~covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently a party to any material legal proceedings. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Regardless of the outcome, litigation can have a material adverse effect on us because of defense and settlement costs, diversion of management resources, and other factors.

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Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020,~~2021, except as set forth below.

~~Public health crises~~Our ability to execute on our business strategy is subject to a number of risks, which are discussed more fully below in this section. You should carefully consider these risks before making an investment in our common stock. These risks include, among others, the following:

•Our activities to evaluate and pursue strategic alternatives may not be successful.

•If we do not successfully consummate a strategic transaction, our board of directors may decide to pursue a dissolution and liquidation of the company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as ~~pandemics~~well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

•We are substantially dependent on our remaining employees to facilitate the consummation of a strategic transaction. We could lose such key employees, in particular, as a result of the ADAIR data.

•Our prospects were highly dependent on a single product candidate, ADAIR. As the SEAL study of ADAIR did not meet its predefined clinical endpoint, we are currently assessing the best path forward for ADAIR and have been evaluating other strategic alternatives to maximize stockholder value, which may not be successful.

•We have no approved products and a limited operating history, which may make it difficult to evaluate our technology and product development capabilities and predict our future performance.

•We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the future.

•We are currently assessing the best path forward for ADAIR, and any further development of ADAIR or ~~similar outbreaks~~the development of any new product will require additional capital to fund our operations, which we may not be able to obtain.

•Negative perception of any product candidate that we develop could ~~materially and~~ adversely affect our ~~preclinical~~ability to conduct our business or obtain regulatory approvals for such product candidate.

•The market price of our common stock is expected to be volatile. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies.

Risks related to Our Evaluation of Strategic Alternatives

Our activities to evaluate and pursue strategic alternatives may not be successful.

In March 2022, we announced that topline data from our SEAL study of ADAIR for the treatment of ADHD did not meet statistical significance for the primary endpoint of Emax Drug Liking. We are continuing to assess the best path forward for the ADAIR and ADMIR programs and we have commenced a process to evaluate strategic alternatives to maximize stockholder value. We have engaged a financial advisory firm to help explore our available strategic alternatives, including a possible merger, business combination, asset acquisitions or sales, and collaboration and licensing arrangements. We have significantly reduced our research and development activities to reduce operating expenses while we evaluate these opportunities. We expect to devote significant time and

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resources to identifying and evaluating strategic transactions; however, there can be no assurance that such activities will result in any agreements or transactions that will enhance stockholder value. In addition, potential strategic transactions that require stockholder approval may not be approved by our stockholders or a counterparty’s stockholders. Further, any strategic transaction that is completed ultimately may not deliver the anticipated benefits or enhance stockholder value.

We also may acquire additional businesses, products or product candidates. Integrating any newly acquired business, product or product candidate could be expensive and time-consuming. We may not be able to integrate any acquired business, product or product candidate successfully. If we do acquire any additional business, products, or product candidates, our future financial performance will depend, in part, on our ability to manage any future growth effectively and our ability to integrate any such acquired businesses, products or product candidates.

Any strategic transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:

•exposure to unknown liabilities;

•incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;

•higher than anticipated acquisition and/or integration costs;

•write downs of assets or goodwill or impairment charges;

•increased amortization expenses;

•difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

•impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

•the inability to retain our key employees or our other service providers or those of any acquired businesses.

Accordingly, there can be no assurance that we will undertake or successfully complete any strategic transactions of the nature described above and any transactions that we do complete may be subject to the foregoing or other risks and could have a material adverse effect on our business, financial condition and prospects.

If we do not successfully consummate a strategic transaction, our board of directors may decide to pursue a dissolution and liquidation of the Company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that the process to identify a strategic transaction will result in a successfully consummated transaction. If no transaction is completed, our board of directors may decide to pursue a dissolution and liquidation of the Company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution will continue to decrease as we fund our operations while we evaluate our strategic alternatives. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of the Company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provisions for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include (i) regulatory and clinical ~~trials,~~obligations; (ii) obligations under our employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control; and (iii) potential litigation against us, and other various claims and legal actions arising in the ordinary course of business. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of the Company. If a dissolution and liquidation were pursued, our board of directors, in consultation with our advisors, would need to evaluate these matters and make a determination about a

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reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of the Company.

Our prospects were highly dependent on a single product candidate, ADAIR, and while we are assessing the best path forward for ADAIR, we may not complete the development or commercialization of ADAIR

Our long-term prospects were highly dependent on future acceptance and revenues from our lead product candidate, ADAIR. In March 2022, we announced that topline data from our SEAL study of ADAIR for the treatment of ADHD did not meet statistical significance for the primary endpoint of Emax Drug Liking and that, given that result, we are currently assessing the best path forward for ADAIR. Any further development of ADAIR would require substantial capital and time to complete, and there is no guarantee that any future clinical trial, if pursued, would be timely or successful, or that ADAIR would be approved or, if approved, that commercialization would be successful. Concurrently, we have been evaluating strategic alternatives to maximize stockholder value, which could involve, without limitation, exploring the potential for a possible merger, business combination, investment into the Company, or a purchase, license or other acquisition of assets. However, there is no assurance that we will be successful in our pursuit of a strategic alternative, failure of which may have a material adverse impact on our business, financial condition, and results of operations.

We are substantially dependent on our remaining employees to facilitate the consummation of a strategic transaction. We could lose such key employees, in particular, as a result of the ADAIR data.

Our cash conservation activities may yield unintended consequences, such as attrition and reduced employee morale, which may cause remaining employees to seek alternative employment. Our ability to successfully complete a strategic transaction depends in large part on our ability to retain certain personnel, particularly David Baker, our Chief Executive Officer, and Leanne Kelly, our Chief Financial Officer. Despite our efforts to retain these employees, one or more may terminate their employment on short notice. The loss of the services of any of these employees could potentially harm our ability to evaluate and pursue strategic alternatives, as well as fulfill our reporting obligations as a public company.

Competition among biotechnology companies for qualified employees is intense, and our ability to retain our key employees is critical to our ability to effectively manage our resources and consummate a strategic transaction. If we develop new product candidates, such development would require expertise from a number of different disciplines, some of which are not widely available. The results of the SEAL study of ADAIR will likely make it more challenging to retain qualified personnel and more difficult to recruit personnel in the future, if necessary. If we fail to attract new personnel or fails to retain and motivate our current personnel, our business and future growth prospects and our ability to consummate a strategic transaction would be harmed.

Risks related to Our Business, Technology and Industry

We have no approved products and have a limited operating history, which may make it difficult to evaluate our technology and product development capabilities and predict our future performance.

We have no products approved for commercial sale and have not generated any revenue from product sales. Our ability to generate product revenue or profits was dependent on the successful development and eventual commercialization of ADAIR. Given that the topline data from our SEAL study of ADAIR for the treatment of ADHD failed to meet statistical significance for the primary endpoint of Emax Drug Liking and we are assessing the best path forward for the ADAIR program, we may never be able to develop or commercialize a marketable product.

Our current and future programs and product candidates will require additional discovery research, preclinical development, clinical development, regulatory approval to commercialize the product, manufacturing validation, obtaining manufacturing supply, capacity and expertise, building of a commercial and distribution organization, substantial investment and significant marketing efforts before we generate any revenue from product sales. In ~~March 2020,~~addition, any drug product candidate must be approved for marketing by the World Health Organization declared COVID-19 a global pandemic and the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic continues affect the U.S. and global economies and may affect our operations andFDA or certain other ~~third parties on~~health regulatory agencies before we may commercialize any product in the respective jurisdictions.

Our limited operating history may make it difficult to evaluate our, or any new, technology and industry and predict its future performance. Our short history as an operating company makes any assessment of our future success or viability subject to significant

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uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in evolving fields. If we do not address these risks successfully, our business will suffer. Similarly, we expect that our financial condition and operating results will fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. As a result, our stockholders should not rely upon the results of any quarterly or annual period as an indicator of future operating performance.

We have incurred net losses in every year since our inception and we anticipate that we will continue to incur net losses in the future.

We are a biopharmaceutical company with a limited operating history. Investment in product development in the healthcare industry, including of biopharmaceutical products, is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date. As a result, we are not profitable and have incurred losses in each period since our inception. For the nine months ended September 30, 2022, we reported a net loss of $5.4 million. As of September 30, 2022, we had an accumulated deficit of $27.3 million.

To become and remain profitable, we or any potential future collaborator must develop and eventually commercialize products with significant market potential at an adequate profit margin after cost of goods sold and other expenses. This will require us to be successful in a range of challenging activities, including completing clinical trials, manufacturing, marketing and selling products for which we ~~rely, including by causing disruptions~~may obtain marketing approval and satisfying any post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the ~~supply~~value of the Company and could impair our ~~product candidates~~ability to raise capital, maintain our research and ~~the conduct of future clinical trials. Moreover, the COVID-19 pandemic~~development efforts, expand our business or continue our operations.

We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

Additional capital will be required to fund our operations, ADAIR product development activities or the development of any new product. If we fail to obtain necessary financing, we will not be able to complete the development and commercialization of product candidates.

Our operations have consumed substantial amounts of cash since inception. While we plan to significantly decrease our research and development expenses as we assess the best path forward for ADAIR, we expect to continue to spend a considerable amount of resources on pursuing strategic opportunities. Furthermore, to move forward with the development of ADAIR or any other product candidates, we would be required to spend substantial amounts to conduct clinical trials of such programs, to validate the manufacturing process and specifications for any such product candidate, to seek regulatory approvals for such product candidate and to launch and commercialize any products for which we receive regulatory approval, including potentially building our own commercial organization. As of September 30, 2022, we had $5.2 million of cash, cash equivalents and marketable securities on hand. Our future capital requirements and the period for which our existing resources will support our operations may vary significantly from what we currently expect and may change if our business plan changes from our current expected operating plan. Our monthly spending levels will vary based on development and corporate activities. Because of the uncertainty regarding our future development pathway, we are unable to estimate the actual funds we will require for development of any potential product candidate and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

•the timing and structure of any strategic options that we pursue;

•the terms of any collaboration agreements we may choose to initiate or conclude;

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•the outcome, timing and cost of meeting regulatory requirements established by the FDA, and other ~~health authorities, resulting~~comparable foreign regulatory authorities;

•delay or failure in obtaining the necessary approvals from regulators or institutional review boards (IRBs) in order to commence a clinical trial at a prospective trial site, or their suspension or termination of a clinical trial once commenced;

•failure of third-party contractors, such as contract research organizations (CROs), or investigators to comply with regulatory requirements, including Good Clinical Practices (GCPs);

•governmental or regulatory delays and changes in regulation or policy relating to the development and commercialization of ~~reviews~~a product candidate by the FDA or other comparable foreign regulatory authorities;

•undertaking and ~~approvals~~completing additional pre-clinical studies to generate data required to support the clinical development of a product candidate;

•inability to enroll sufficient patients to complete clinical trials;

•difficulty in having patients complete a trial or return for post-treatment follow-up;

•clinical sites deviating from trial protocol or dropping out of a trial;

•problems with ~~respect~~biopharmaceutical product candidate storage, stability and distribution;

•our inability to add new or additional clinical trial sites;

•varying interpretations of the data generated from our preclinical or clinical trials;

•inability to manufacture, or obtain from third parties, adequate supply of biopharmaceutical product candidate sufficient to complete our preclinical studies and clinical trials;

•the costs of establishing, maintaining, and overseeing a quality system compliant with current good manufacturing practice requirements (cGMPs) and a supply chain for the development and manufacture of our product ~~candidates. While~~ candidate;

•the ~~potential economic impact~~cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;

•the effect of competing technological and market developments;

•the ~~duration~~cost and timing of establishing, expanding and scaling manufacturing capabilities;

•the cost of establishing sales, marketing and distribution capabilities for any product candidate for which we may receive regulatory approval in regions where we choose to commercialize its products on our own; and

•potential unforeseen business disruptions or market fluctuations that delay our product development or clinical trials and increase our costs or expenses, such as business or operational disruptions, delays, or system failures due to malware, unauthorized access, terrorism, war, natural disasters, strikes, geopolitical conflicts, restrictions on trade, import or export restrictions, or public health crises, such as the current COVID-19 ~~pandemic is difficult~~outbreak.

We do not have any committed external source of funds or other support for our development efforts, and we cannot be certain that additional funding will be available on acceptable terms, or at all. Until we can generate sufficient product or royalty revenue to ~~assess~~finance our cash requirements, which we may never do, we expect to finance its future cash needs through a combination of public or ~~predict,~~private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If we raise additional funds through public or private equity offerings, the ~~impact~~terms of ~~the COVID-19 pandemic on the global financial markets~~these securities may ~~reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. In addition, the loss of any of our employees as a result of COVID-19,~~include liquidation or ~~another pandemic, may~~other preferences that adversely affect our ~~operations. The ultimate impact~~stockholders’ rights. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible into or exchangeable for common stock, each existing investors’ ownership interest will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends or acquiring or licensing intellectual property rights. If we raise additional capital through marketing

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and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to its product candidate, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. We also could be required to seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or relinquish our rights to product candidates or technologies that we otherwise would seek to develop or commercialize ourself. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our other research and development initiatives. Any of the ~~COVID-19 pandemic is highly uncertain, and we do not yet know the full extent of potential delays or impacts that COVID-19 may have on~~above events could significantly harm our business, ~~financing or clinical trial activities.~~

~~Some examples of potential disruptions that may result from the COVID-19 pandemic, include, but are not limited to:~~

~~delays or difficulties in enrolling patients in our clinical trials;~~

~~delays or difficulties in initiating or expanding clinical trials, including delays or difficulties with clinical site initiation and recruiting clinical site investigators and clinical site staff;~~

~~increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting COVID-19 or other health conditions or being forced to quarantine;~~

interruption of key clinical trial activities, such as clinical trial site data monitoring and efficacy, safety and translational data collection, processing and analyses, due to limitations on travel imposed or recommended by federal, state or local governments, employers and others or interruption of clinical trial subject visits, which may impact the collection and integrity of subject data and clinical study endpoints;

delays or disruptions in preclinical experiments and IND-enabling studies due to restrictions of on-site staff and unforeseen circumstances at CROs and vendors, including any delays caused by the COVID-19 outbreak;

~~interruption or delays in the operations of the FDA and comparable foreign regulatory agencies;~~

interruption of, or delays in receiving, supplies of our product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;

~~delays in receiving approval from local regulatory authorities to initiate our planned clinical trials;~~

limitations on employee or other resources that would otherwise be focused on the conduct of our clinical trials and pre-clinical work, including because of sickness of employees or their families, the desire of employees to avoid travel or contact with large groups of people, an increased reliance on working from home, school closures or mass transit disruptions;

changes in regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;

delays in necessary interactions with regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government or contractor personnel; and

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~~refusal of the FDA to accept data from clinical trials in affected geographies outside the United States.~~

~~The COVID-19 global pandemic continues to rapidly evolve. The extent to which the outbreak may affect our clinical trials, business,~~prospects, financial condition and results of operations ~~will depend on future developments, which are highly uncertain~~ and ~~cannot be predicted at this time, such as~~cause the ~~ultimate geographic spread~~price of ~~the disease, the duration of the outbreak, travel restrictions, actions~~our common stock to contain the outbreak or treat its impact, such as social distancing and quarantines or lock-downs in the United States, and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease, and the ongoing worldwide vaccine rollout. Future developments in these and other areas present material uncertainty and risk with respect to our clinical trials, business, financial condition and results of operations.

decline.

Item 2. Unregistered Sales of ~~Equity Securities and Use of Proceeds.~~

Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

~~None.~~

None.

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Item 6. Exhibits.


Exhibit Number	Description

3.1		Amended and Restated Certificate of Incorporation of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021).
Exhibit Number	~~Description~~
3.2	Amended and Restated Bylaws of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021).
~~10.1#~~
3.3	Certificate of Amendment to Amended and Restated Certificate of Incorporation of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021).

~~Employment~~3.4	Amendment No. 1 to the Amended and Restated Bylaws of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on May 18 2022).

10.1	Amendment No. 1 to Securities Purchase Agreement, dated ~~as of April 20, 2021,~~July 25, 2022, (incorporated by ~~and between~~reference to Exhibit 10.1 to the ~~Company and David Baker~~Current Report on Form 8-K, filed with the SEC on July 26, 2022).

~~10.2#~~ 10.2	~~Employment Agreement, dated as~~Form of ~~May 10, 2021,~~Amendment No.1 to Common Stock Purchase Warrant (incorporated by ~~and between~~reference to Exhibit 10.2 to the ~~Company and Leanne M. Kelly~~Current Report on Form 8-K, filed with the SEC on July 26, 2022).

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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~~iXBRL Instance Document

101.SCH	~~XBRL~~iXBRL Taxonomy Extension Schema Document

101.CAL	~~XBRL~~iXBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	~~XBRL~~iXBRL Taxonomy Extension Definition Linkbase Document

101.LAB	~~XBRL~~iXBRL Taxonomy Extension Label Linkbase Document

101.PRE	~~XBRL~~iXBRL Taxonomy Extension Presentation Linkbase Document

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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Unless otherwise indicated, exhibits are filed herewith.

#	~~Indicates a management contract or any compensatory plan, contract or arrangement.~~

This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing.

*This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, except to the extent specifically incorporated by reference into such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	VALLON PHARMACEUTICALS, INC.


Date: ~~May 13, 2021~~ November 3, 2022	By:	/s/ ~~David Baker~~ Leanne M. Kelly
		Name: ~~David Baker~~ Leanne M. Kelly
		Title: ~~President~~Chief Financial Officer
		(Principal Financial and ~~Chief Executive Officer~~ Accounting Officer)

~~Delaware~~		~~82-4369909~~
~~(State or other jurisdiction of~~ ~~incorporation or organization)~~		~~(I.R.S. Employer~~ ~~Identification No.)~~

~~100 N. 18~~^th ~~Street~~, ~~Suite 300~~, ~~Philadelphia~~, PA		~~19103~~
~~(Address of principal executive offices)~~		~~(Zip Code)~~


Delaware						82-4369909
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

100 N. 18th Street, Suite 300, Philadelphia, PA 19103
(Address of principal executive offices, including zip code)

	~~Page~~
			Page
~~PART I.~~		~~FINANCIAL INFORMATION~~
~~Item 1.~~PART I.		~~Financial Statements (Unaudited)~~FINANCIAL INFORMATION	3
Item 1.		Financial Statements	3
		Balance Sheets ~~at March~~as of September 30, 2022 (unaudited) and December 31, 2021 ~~(unaudited) and December 31, 2020~~	3
		Statements of Operations and Comprehensive Loss (unaudited) for the three and nine months ended ~~March 31, 2021~~ September 30, 2022 and ~~2020~~2021	4
		Statements of Changes in Stockholders’ Equity (Deficit) (unaudited) for the three and ninemonths ended ~~March 31, 2021~~September 30, 2022 and ~~2020~~2021	5
		Statements of Cash Flows (unaudited) for the ~~three~~nine months ended ~~March 31, 2021~~September 30, 2022 and ~~2020~~2021	6
		Notes to Unaudited Interim Financial Statements	7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	25 24
Item 4.		Controls and Procedures	25 24
PART II.		OTHER INFORMATION	25
Item 1.		Legal Proceedings	25
Item 1A.		Risk Factors	26 25
~~Item 2.~~		~~Unregistered Sales of Equity Securities and Use of Proceeds~~	27
~~Item 3.~~		~~Defaults Upon Senior Securities~~	27
~~Item 4.~~		~~Mine Safety Disclosures~~	27
~~Item 5.~~		~~Other Information~~	27
Item 6.		Exhibits	28 31
~~Signatures~~		29 Signatures	33


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	March 31, 2021		December 31, 2020
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	12,980	$	109
Prepaid expenses and other current assets		1,358		565
Total current assets		14,338		674

Finance lease right-of-use asset, net		261		279
Property and equipment, net		1		2
Total assets	$	14,600	$	955

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable	$	1,347	$	1,226
Accrued expenses		985		847
Note payable, current		—		47
Finance lease liability, current		95		105
Total current liabilities		2,427		2,225
Note payable, non-current		—		14
Finance lease liabilities, non-current		146		170
Total liabilities		2,573		2,409

Commitments and contingencies (Note 10)

Stockholders' equity (deficit):
Common stock, $0.0001 par value; 250,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 6,812,836 and 4,506,216 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively, which gives retroactive effect to the one-for-40 reverse stock split. See Note 1 to these financial statements.		—		—
Additional paid-in-capital		27,264		11,145
Accumulated deficit		(15,237)		(12,599)
Total stockholders’ equity (deficit)		12,027		(1,454)
Total liabilities and stockholders' equity (deficit)	$	14,600	$	955


	September 30, 2022		December 31, 2021
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	4,732	$	3,702
Marketable securities, available-for-sale	419		3,808
Prepaid expenses and other current assets	418		619
Total current assets	5,569		8,129
Other assets	—		206

Total assets	$	5,569	$	8,335

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,185	$	918
Accrued expenses	700		1,430
Warrant liability	225		—

Other current liabilities	—		97
Total current liabilities	2,110		2,445

Other liabilities	—		72
Total liabilities	2,110		2,517

Commitments and contingencies (Note 10)

Stockholders' equity:
Common stock, $0.0001 par value; 250,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 12,732,836 and 6,812,836 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	1		—
Additional paid-in-capital	30,802		27,722
Accumulated other comprehensive loss	(1)		(2)
Accumulated deficit	(27,343)		(21,902)
Total stockholders’ equity	3,459		5,818
Total liabilities and stockholders' equity	$	5,569	$	8,335


	For the Three		For the Three
	Months Ended		Months Ended
	March 31,		March 31,
	2021		2020
License revenue-related party	$	—	$	100
Operating expenses:
Research and development		1,772		883
General and administrative		830		375
Total operating expenses		2,602		1,258
Loss from operations		(2,602)		(1,158)
Other income		61		—
Revaluation of derivative liability		(89)		—
Interest expense, net		(8)		(2)
Net loss attributable to common stockholders	$	(2,638)	$	(1,160)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.46)	$	(0.26)
Weighted-average common shares outstanding basic and diluted		5,710,270		4,506,216


	Common Stock			Additional Paid-In		Accumulated		Stockholders’
	Shares (1)	Amount		Capital		Deficit		Equity (Deficit)
Balance, December 31, 2019	4,506,216	$	—	$	10,991	$	(7,777)	$	(3,214)
Stock-based compensation expense	—		—		35		0		35
Net loss	—		—		0		(1,160)		(1,160)
Balance, March 31, 2020	4,506,216	$	—	$	11,026	$	(8,937)	$	(2,089)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Stockholders’ Equity (Deficit)
	Shares	Amount
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	—	—		168		—		—		168
Net loss	—	—		—		—		(2,638)		(2,638)
Balance, March 31, 2021	6,812,836	—		27,264		—		(15,237)		12,027
Stock-based compensation	—	—		138		—		—		138
Net loss	—	—		—		—		(2,312)		(2,312)
Balance, June 30, 2021	6,812,836	—		27,402		—		(17,549)		9,853
Stock-based compensation	—	—		134		—		—		134
Unrealized loss on investments	—	—		—		(1)		—		(1)
Net loss	—	—		—		—		(1,257)		(1,257)
Balance September 30, 2021	6,812,836	$	—	$	27,536	$	(1)	$	(18,806)	$	8,729


	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2021		2020
Cash flows from operating activities:
Net loss	$	(2,638)	$	(1,160)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization of finance lease right-of-use asset		18		18
Stock-based compensation expense		168		35
Revaluation of derivative liability		89		—
Forgiveness of PPP note		(61)		—
Non-cash interest, depreciation and other expense		10		—
Change in operating assets and liabilities:
Prepaid expenses and other current assets		(793)		(87)
Accounts payable		121		200
Accrued expenses		138		226
Net cash used in operating activities		(2,948)		(766)

Cash flows from investing activities:
Purchase of property and equipment		—		(2)
Net cash used in investing activities		—		(2)

Cash flows from financing activities:
Proceeds from common stock, net of offering expenses		15,503		—
Proceeds from convertible notes		350		—
Payment of finance lease liability		(34)		(29)
Net cash provided by (used in) financing activities		15,819		(29)

Net increase (decrease) increase in cash and cash equivalents		12,871		(797)
Cash and cash equivalents, at beginning of period		109		3,821
Cash and cash equivalents, at end of period	$	12,980	$	3,024
Supplemental disclosure of cash flows information:
Interest paid	$	—	$	—
Noncash financing activities:
Conversion of convertible notes to common stock	$	350	$	—


	March 31,		December 31,
	2021		2020
Payroll and related	$	176	$	342
Clinical and preclinical trial and regulatory related		490		137
Chemistry and manufacturing		154		117
Financing related		—		97
Licensing related		76		81
Other		89		73
Total accrued expenses	$	985	$	847


	Period from December 31, 2020 through March 31, 2021
					Weighted
					average		Aggregate
			Weighted		remaining		intrinsic
	Number of		average		contractual		value
	options		exercise price		terms (years)		($ 000) (1)
Outstanding at December 31, 2020		266,250	$	2.94		4.109	$	474
Granted during the period		22,750		7.39		—		—
Outstanding at March 31, 2021		289,000	$	3.29		4.060	$	460
Exercisable at March 31, 2021		135,794	$	2.28		3.770	$	320


	March 31, 2021			December 31, 2020
Initial lease right-of-use asset	$	368		$	368
Accumulated amortization	$	107		$	89
Weighted-average remaining lease term - finance lease (in years)		2.50			2.75
Weighted-average discount rate - finance lease		13.50	%		13.50	%


2021	$	95
2022		114
2023		76
Total lease payments		285
Less: Imputed interest		44
Present value of lease liability	$	241


	Three Months Ended		Three Months Ended
	March 31, 2021		March 31, 2020		Change $
			(in thousands)
License revenue-from related party	$	—	$	100	$	(100)
Operating expenses:
Research and development		1,772		883		889
General and administrative		830		375		455
Total operating expenses		2,602		1,258		1,344
Loss from operations		(2,602)		(1,158)		1,444
Other income		61		—		61
Revaluation of derivative liability		(89)		—		(89)
Interest expense, net		(8)		(2)		(6)
Net loss	$	(2,638)	$	(1,160)	$	1,478

Three Months Ended March 31,

Operating cash flows from finance lease amortization

Financing cash flows from finance lease payments