Form 8-K/A - Current report: [Amend]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 FORM 8-K/A

(Amendment No. 2)

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): April 21, 2023

GRI BIO, INC.

(Exact name of registrant as specified in its charter)

Delaware

001-40034

82-4369909

(State or other jurisdiction

(Commission File Number)

(IRS Employer Identification No.)

of incorporation)

2223 Avenida de la Playa, Suite 208

La Jolla, CA 92037

(Address of principal executive offices and zip code)

(619) 400-1170

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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	GRI	The Nasdaq Capital Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.

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. ☐

Explanatory Note

This Amendment No. 2 (this “Amendment”) to the Current Report on Form 8-K originally filed with the U.S. Securities and Exchange Commission by GRI Bio, Inc. (formerly known as Vallon Pharmaceuticals, Inc. or the “Company” or “Vallon”) on April 21, 2023 (the “Original Report”), in which the Company reported, among other events, the closing of the Merger (as defined below) on April 21, 2023 (the “Closing Date”), pursuant to which, among other matters, Vallon Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Vallon, merged with and into GRI Operations, Inc., formerly known as GRI Bio, Inc., a Delaware corporation (“GRI”), with GRI continuing as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the “Merger”).

This Amendment does not amend any other items of the Original Report or purport to provide an update or a discussion of any developments at the Company or its subsidiaries subsequent to the filing date of the Original Report and is being filed solely to provide the disclosures required by Item 9.01 of Form 8-K that were not previously filed with the Original Report. The information previously reported in or filed with the Original Report is incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits.

(a) Financial statements of businesses or funds acquired.

The unaudited interim financial statements of GRI as of and for the three months ended March 31, 2023 and 2022 and the audited financial statements of GRI for the years ended December 31, 2022 and 2021 and the related notes thereto are filed herewith as Exhibits 99.1 and 99.2, respectively, and are incorporated herein by reference. Also filed herewith as Exhibit 99.3 and incorporated herein by reference is GRI’s Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2023 and 2022.

(b) Pro forma financial information.

The unaudited pro forma condensed combined financial information of Vallon and GRI as of and for the three months ended March 31, 2023 and for the year ended December 31, 2022 and the related notes thereto are filed herewith as Exhibit 99.4 and are incorporated herein by reference.

(d) Exhibits


Exhibit No.						Description
23.1						Consent of Sadler, Gibb and Associates, LLC.
99.1						Unaudited interim financial statements of GRI as of and for the three months ended March 31, 2023 and 2022.
99.2						Audited financial statements of GRI for the years ended December 31, 2022 and 2021.
99.3						GRI's Management Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2023 and 2022.
99.4						Unaudited pro forma condensed combined financial information of Vallon and GRI as of and for the three months ended March 31, 2023 and the year ended December 31, 2022.
104						Cover Page Interactive Data File (embedded within the Inline XBRL document).

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 hereunto duly authorized.


Date: July 6, 2023						GRI Bio, Inc.
						By: /s/ Leanne Kelly
						Leanne Kelly
						Chief Financial Officer

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the inclusion in the Registration Statements on Form S-4 (No. 333‑268977), Form S-3 (No. 333-272276) and Form S-8 (No. 333-255972) of GRI Bio Operations, Inc. (formerly known as GRI Bio, Inc.), (the “Company”) of our report dated February 23, 2023, related to the financial statements of the Company, which appears in this Amendment No. 2 to the Current Report on Form 8-K. Our report contains an explanatory paragraph about the existence of substantial doubt concerning the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty.

/s/ Sadler, Gibb & Associates

Draper, Utah

July 6, 2023

Exhibit 99.1

GRI Bio, Inc.

Balance Sheets

(in thousands, except share and per share amounts)


	March 31, 2023		December 31, 2022
	(unaudited)
Assets
Current assets:
Cash	460		$	9
Prepaid expenses and other assets	271		299
Total current assets	731		308
Property and equipment, net	11		4
Operating lease right-of-use assets	55		67
Deposits	4		4
Total assets	$	801	$	383
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable	$	1,585	$	1,294
Accrued expenses	—		36
Advances from employees	—		5
Bridge promissory note, net	2,391		602
Operating lease liabilities, current	55		57
Total current liabilities	4,031		1,994
Operating lease liabilities, noncurrent	—		14
Total liabilities	4,031		2,008

Commitments and contingencies (Note 10)

Stockholders' deficit:
Common stock, $0.01 par value; 40,000,000 shares authorized; 31,130,077 shares issued as of March 31, 2023 and December 31, 2022; 26,743,934 and 26,731,434 shares outstanding as of March 31, 2023 and December 31, 2022, respectively	267		267
Additional paid-in capital	17,149		16,604
Accumulated deficit	(20,646)		(18,496)
Total stockholders' deficit	(3,230)		(1,625)
Total liabilities and stockholders' deficit	$	801	$	383

See accompanying notes to unaudited interim financial statements.

GRI Bio, Inc.

Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended
	March 31,
	2023		2022
Operating expenses:
Research and development	$	116	$	59
General and administrative	872		139
Total operating expenses	988		198
Loss from operations	(988)		(198)




Interest expense	(1,162)		(103)

Net loss	$	(2,150)	$	(301)
Net loss per common share, basic and diluted	$	(0.08)	$	(0.01)
Weighted-average common shares outstanding, basic and diluted	27,930,659		23,902,159

See accompanying notes to unaudited interim financial statements.

GRI Bio, Inc.

Statements of Changes in Redeemable Common Stock and Stockholders’ Deficit

(in thousands, except shares)

(Unaudited)


	Redeemable Common Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount
Balance, December 31, 2021	209,000	$	124	22,765,434	$	228	$	10,203	$	(15,279)	$	(4,848)
Net loss	—	—		—	—		—		(301)		(301)
Balance March 31, 2022	209,000	$	124	22,765,434	$	228	$	10,203	$	(15,580)	$	(5,149)


	Redeemable Common Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount
Balance, December 31, 2022	—	$	—	26,731,434	$	267	$	16,604	$	(18,496)	$	(1,625)
Warrant issuance	—	—		—	—		532		—		532
Restricted stock vesting	—	—		12,500	—		—		—		—
Stock based compensation	—	—		—	—		13		—		13
Net loss	—	—		—	—		—		(2,150)		(2,150)
Balance March 31, 2023	—	$	—	26,743,934	$	267	$	17,149	$	(20,646)	$	(3,230)

See accompanying notes to unaudited interim financial statements.

GRI Bio, Inc.

Statements of Cash Flows

(in thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2023		2022
Operating activities:
Net loss	$	(2,150)	$	(301)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment	1		1
Amortization of debt discounts	1,161		—


Amortization of right-of-use assets	12		11
Stock-based compensation expense	13		—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	28		(2)
Accounts payable	408		10
Accrued expenses	(36)		212
Operating lease liabilities	(16)		(11)
Cash used in operating activities	(579)		(80)



Financing activities:
Advances from employees	190		10
Repayment of advances from employees	(195)		—




Proceeds from issuance of bridge promissory note	1,250		—
Payments of debt issuance costs	(105)		—
Payments of deferred stock issuance costs	(110)		—


Cash provided by financing activities	1,030		10
Net increase (decrease) in cash	451		(70)
Cash at beginning of period	9		90
Cash at end of period	$	460	$	20


Non-cash investing and financing activities:
Property and equipment purchases included in accounts payable	$	8	$	—



Recognition of debt discount and additional paid-in-capital for issuance of warrants in connection with the issuance of promissory notes	$	532	$	—


Debt issuance costs included in accounts payable	$	45	$	—

See accompanying notes to unaudited interim financial statements.

GRI Bio, Inc.

Notes to Unaudited Interim Financial Statements

(in thousands, except share and per share data)

Note 1. ORGANIZATION AND DESCRIPTION OF BUSINESS

GRI Bio, Inc. (GRI or the Company), based in La Jolla, CA, was incorporated in Delaware in May 2009, which is the date of inception.

GRI is a clinical-stage biopharmaceutical company focused on discovering, developing, and commercializing innovative therapies that target serious diseases associated with dysregulated immune responses leading to inflammatory, fibrotic, and autoimmune disorders. The Company’s goal is to be an industry leader in developing therapies to treat these diseases and to improve the lives of patients suffering from such diseases. The Company’s lead product candidate, GRI-0621, is an oral inhibitor of type 1 Natural Killer T (iNKT I) cells and is being developed for the treatment of severe fibrotic lung diseases such as idiopathic pulmonary fibrosis (IPF). The Company’s product candidate portfolio also includes GRI-0803 and a proprietary library of 500+ compounds. GRI-0803, the lead molecule selected from the library, is a novel oral agonist of type 2 Natural Killer T (NKT II) cells and is being developed for the treatment of autoimmune disorders, with much of its preclinical work in Systemic Lupus Erythematosus Disease (SLE) or lupus and multiple sclerosis (MS).

Note 2. LIQUIDITY

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 $20,646 in accumulated deficit through March 31, 2023. The Company has financed its working capital requirements to date through the issuance of equity and debt securities. As of March 31, 2023, the Company had cash of approximately $460.

Based on our current operating plan, we believe that our existing cash will be sufficient to fund our operating expenses and capital expenditure requirements for at least the twelve months following the Merger (Note 9) and financing contemplated by the Securities Purchase Agreement, dated as of December 13, 2022, by and between GRI, Vallon and Altium Growth Fund, LP (the Equity Financing), not including the exercise of the Series T Warrants (the Series T Warrant Exercises). For the foreseeable future, the Company’s ability to continue its operations is dependent upon its ability to obtain additional capital.

Note 3. BASIS OF PRESENTATION

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial periods and pursuant to the rules of the Securities and Exchange Commission (the SEC). Any reference in the accompanying unaudited interim financial statements to “authoritative guidance” is meant to refer to GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). The December 31, 2022 balance sheet was derived from the Company’s audited financial statements.

In the opinion of management, the unaudited interim financial statements furnished herein include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of March 31, 2023, and the results of operations and stockholders’ deficit for the three months ended March 31, 2023 and 2022 and cash flows for the three months ended March 31, 2023 and 2022. Results of operations for the three months ended March 31, 2023, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2023. The 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 and related notes as of and for the year ended December 31, 2022, which is included as Exhibit 99.2 of Amendment No. 2 to the Current Report on Form 8-K filed with the SEC on July 6, 2023.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of share options, the embedded derivative of convertible notes, warrant issuance and subsequent 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

GRI Bio, Inc.

Notes to Unaudited Interim Financial Statements

(in thousands, except share and per share data)

in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.

Cash

The Company maintains its cash balances at domestic financial institutions. Bank deposits with US banks are insured up to $250 by the Federal Deposits Insurance Corporation. The Company had an uninsured cash balances of $210 at March 31, 2023. The Company’s cash balance as of December 31, 2022 was fully insured.

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: Unadjusted quoted prices in active markets that are accessible at the measurement date for 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 full term of the asset or liabilities.

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

As of March 31, 2023, the Company’s financial instruments included cash, prepaid expenses and other current assets, accounts payable and the bridge promissory note. The carrying amounts reported in the balance sheets for cash, prepaid expenses and other current assets and accounts payable 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 carrying amounts reported for cash, accounts payable, accrued expenses, and advances from employees approximate their fair values due to their short-term nature.

Deferred Stock Issuance Costs

Deferred stock issuance costs represent incremental legal costs incurred that are directly attributable to proposed offerings of securities. The costs are charged against the gross proceeds of the respective offering upon closing.

Debt Discounts

The relative fair values of warrants and common shares issued and call option rights assigned in connection with principal advances under promissory notes, the increases in fair values of embedded conversion options in connection with convertible promissory note modifications, and the intrinsic values of non-contingent beneficial conversion features were recorded as debt discounts that are amortized as additional interest expense over the estimated terms of the notes using the effective interest method.

Debt Issuance Costs

Debt issuance costs represent incremental legal costs and other costs incurred that are directly attributable to issuing debt. The costs are included as a direct reduction of the carrying amount of the respective liability and are amortized as additional interest expense over the estimated term of the debt using the effective interest method.

Stock-Based Compensation

GRI Bio, Inc.

Notes to Unaudited Interim Financial Statements

(in thousands, except share and per share data)

with performance-based vesting conditions is recognized ratably over the requisite service periods if achievement of the performance conditions is probable. The effect of forfeitures is recognized as a reduction of stock-based compensation expense in the period in which the forfeitures occur. The Company issues new shares of common stock upon a stock option exercise.

Net Income (Loss) Per Common Share

Basic and diluted net loss per common share are calculated by dividing the net loss by the applicable weighted-average number of common shares outstanding during the period. As the Company had a net loss in each of the three-month periods ended March 31, 2023 and 2022, diluted net loss per common share is the same as basic net loss per common share for the period because the effects of potentially dilutive securities are antidilutive.

Potentially dilutive securities not included in the diluted net loss per common share calculations because their (i) effects were antidilutive or (ii) contingent conditions have not been satisfied are as follows for the periods presented:


	March 31,
	2023	2022
Stock options	2,392,375	2,392,375
Warrants	2,774,212	269,232
Restricted stock subject to contingent conditions	4,386,143	3,956,643
Stock subject to put right	—	209,000
Convertible promissory note(1)	—	3,307,692
	9,552,730	10,134,942

__________________

(1) The conversion price for the $500 second additional advance from May 2021 was assumed to be $1.00 per share. The conversion price for all other convertible amounts was assumed to be $1.30 per share.

Recently Issued Accounting Pronouncements Not Yet Adopted

The Company considered the applicability and impact of all ASUs issued during the quarter ended March 31, 2023 and each was determined to be either not applicable or expected to have minimal impact on these financial statements.

Note 4. PROPERTY AND EQUIPMENT


	March 31,
	2023		2022
Computer equipment (useful life – 5 years)	$	21	$	13
Furniture and fixtures (useful life – 5 years)	13		13
	34		26
Accumulated depreciation	(23)		(22)
	$	11	$	4

Depreciation expense related to property and equipment was $1 for each of the three-month periods ended March 31, 2023 and 2022.

Note 5. ACCRUED EXPENSES


	March 31,
	2023		2022
Accrued compensation	$	—	$	33

Other	—		3
	$	—	$	36

GRI Bio, Inc.

Notes to Unaudited Interim Financial Statements

(in thousands, except share and per share data)

Note 6. CONVERTIBLE PROMISSORY NOTE

In November 2018, the Company and TEP Biotech, LLC (TEP) entered into a convertible note and warrant purchase agreement pursuant to which TEP agreed to fund up to $5,000 to the Company in exchange for a convertible promissory note (the TEP Note) and a warrant to purchase up to 675,000 shares of the Company’s common stock at an exercise price of $0.01 per share. The TEP Note was secured by the Company’s assets and accrued simple interest on the outstanding principal balance at a rate of 12% per annum. The total outstanding principal and accrued interest balance was initially due on the earlier of the Company’s next financing, as defined, and May 2, 2020. The initial $2,500 tranche under the TEP Note was funded upon execution of the agreement in November 2018.

In July 2020, the TEP Note maturity date was extended to August 31, 2020, and in March 2021, TEP agreed to forbear on its available right to exercise remedies on account of the Company’s failure to pay the past due principal and accrued interest balance until October 31, 2021.

In July 2022, the Company and TEP further amended the TEP Note, and TEP agreed to make a third additional advance of $125 to the Company in exchange for a convertible promissory note and a warrant to purchase up to 31,250 shares of the Company’s common stock at an exercise price of $0.01 per share.

In October 2022, the Company and TEP entered into a conversion agreement pursuant to which, effective upon the full execution of the Merger Agreement (Note 9), $3,500 of outstanding principal under the TEP Note together with $650 of related accrued interest was to automatically convert into 4,150,000 shares of the Company’s common stock at a conversion price of $1.00 per share. Further, upon the closing of the first tranche of the Bridge Financing (Note 9), the Company was to repay, in cash, the $125 third additional advance under the TEP Note along with the $15 of related accrued interest. Upon issuance of the 4,150,000 conversion shares and payment of the $140 principal and accrued interest balance, the Company would fully satisfy all of its obligations under the TEP Note.

In December 2022, upon the full execution of the Merger Agreement and the closing of the first tranche of the Bridge Financing, the Company issued the 4,150,000 conversion shares and paid the $140 principal and accrued interest balance as per the terms of the conversion agreement.

As part of the conversion, the $4,150 of converted principal and accrued interest, along with $863 of related forfeited accrued interest through the conversion date, were credited to stockholders’ deficit. Interest expense recognized on the TEP Note was $103 for the three months ended March 31, 2022.

Note 7. STOCKHOLDERS’ DEFICIT

Redeemable Common Stock

In November 2018, the Company entered into an agreement with a stockholder pursuant to which the stockholder had the right to require the Company to purchase all or a portion of 209,000 shares of the Company’s common stock held by the stockholder for $0.594 per share (the Put Right). The Put Right was exercisable (i) for a period commencing thirty days prior to the day the Company completed an equity or debt financing and ending fifteen business days thereafter, or (ii) at any time following a breach of the agreement by the Company.

Management assessed the Put Right and determined that (i) it was not freestanding and, therefore, was not required to be classified as a liability and (ii) it could be exercised by the stockholder at any time, which was not within the Company’s control. Therefore, the common shares subject to the Put Right were classified in mezzanine equity. In December 2022, the stockholder exercised the Put Right and the Company redeemed the 209,000 shares of common stock for $124 ($0.594 per share). The redeemed shares were retired by the Company.

GRI Bio, Inc.

Notes to Unaudited Interim Financial Statements

(in thousands, except share and per share data)

Warrants

As of March 31, 2023 the Company had the following warrants outstanding to purchase common stock:


Number of Shares	Exercise Price per Share	Expiration Date
675,000	$0.01	November 2023
461,725	$0.01	December 2024
230,770	$1.30	November 2023
38,462	$1.30	December 2023
62,500	$0.01	July 2027
1,252,490	$1.33	April 2028
1,252,490	$1.33	April 2028

The warrants include cashless exercise features, are subject to standard antidilution adjustments, and were issued in connection with debt and equity financings.

Note 8. STOCK-BASED COMPENSATION

The Company recorded stock-based compensation related to restricted stock awards issued under the 2015 Equity Incentive Plan, as amended, (the 2015 Plan) in the following expense categories of its accompanying statements of operations for the three months ended March 31, 2023:


	For the Three Months Ended March 31, 2023
Research and development	$	—
General and administrative	13
Total	$	13

No stock based compensation expense was recorded during the three months ended March 31, 2022.

The Company has granted stock options to purchase its common stock and restricted stock awards to employees and consultants under the 2015 Plan, under which the Company may issue stock options, restricted stock and other equity-based awards. Stock options granted by the Company generally have a contractual life of up to 10 years. As of March 31, 2023, 4,689,900 shares of the Company's common stock were authorized to be issued under the 2015 Plan, and 2,297,525 shares were reserved for future awards under the 2015 Plan.

The Company measures equity-based awards granted to employees, and non-employees based on their fair value on the date of the grant and recognizes compensation expense for those awards over the requisite service period or performance-based period, which is generally the vesting period of the respective award. The measurement date for 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 for certain performance-based awards. The Company records expense for performance-based awards if it concludes that it is probable that the performance condition will be achieved.

Restricted Stock Awards

The Company has issued performance-based and time-based restricted stock awards. Vesting of the performance-based restricted stock awards is based on the consummation of a liquidity event, or, if earlier, upon the death, disability, or termination without cause of the grantee.

The following table summarizes the activity related to restricted stock awards granted for the three-month period ended March 31, 2023:

GRI Bio, Inc.

Notes to Unaudited Interim Financial Statements

(in thousands, except share and per share data)


						Shares
Outstanding at December 31, 2022						4,398,643
Granted						—
Vested and settled						12,500
Expired/forfeited/canceled						—
Outstanding at March 31, 2023						4,411,143

As of March 31, 2023, the occurrence of events associated with the vesting of the performance-based restricted stock awards was deemed not probable and accordingly, no stock-based compensation was recorded. Compensation expense related to time-based restricted stock awards was $13 for three months ended March 31, 2023. The unrecognized compensation cost related to unvested performance-based restricted stock awards was $5,367, which will be recognized commencing in the period in which the performance condition is deemed probable of achievement. The unrecognized compensation cost related to unvested time-based restricted stock awards was $13 and will be recognized over the vesting period.

Stock Options

The table below represents the activity of stock options granted to employees and non-employees for the three months ended March 31, 2023:


	Number of options	Weighted average exercise price		Weighted average remaining contractual term (years)
Outstanding at December 31, 2022	2,392,375	$	0.73	3.59
Granted	—
Exercised	—
Forfeited	—
Outstanding at March 31, 2023	2,392,375	$	0.73	3.59
Exercisable at March 31, 2023	1,845,547	$	0.73	3.59

As of March 31, 2023, the aggregate intrinsic value of vested and exercisable stock options outstanding was $1,107 and the remaining contractual term was 3.59 years. At March 31, 2023, the unrecognized compensation cost related to non-vested stock options expected to vest was $279 and the remaining contractual term was 3.59 years.

Note 9. PROPOSED MERGER AND RELATED FINANCINGS

Merger Agreement and Transaction

The Company entered into an Agreement and Plan of Merger, dated December 13, 2022 and amended on February 17, 2023 (the Merger Agreement), with Vallon Pharmaceuticals, Inc. (Vallon) and Vallon Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Vallon (Merger Sub). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Vallon. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes. The Merger was not consummated as of March 31, 2023.

Securities Purchase Agreement (Bridge Financing)

In connection with signing the Merger Agreement, the Company entered into a Securities Purchase Agreement, dated as of December 13, 2022 (Bridge SPA), with Altium Growth Fund, LP (Investor), pursuant to which the Company issued senior secured promissory notes (Bridge Notes) in the aggregate principal amount of $3,333, in exchange for an aggregate purchase price of $2,500.

The Bridge Notes were issued in two closings: (i) the first closing for $1,667 in aggregate principal amount (in exchange for an aggregate purchase price of $1,250) closed on December 14, 2022; and (ii) the second closing for $1,667 in aggregate principal amount (in exchange for an aggregate purchase price of $1,250) closed on March 9, 2023. The Bridge Notes are secured by a lien on all of the Company’s assets.

GRI Bio, Inc.

Notes to Unaudited Interim Financial Statements

(in thousands, except share and per share data)

In addition, upon the funding of each tranche, the Investor received warrants to purchase an aggregate of 1,252,490 shares of Company’s common stock (Bridge Warrants). The Bridge Warrants have an exercise price of $1.33 per share, are exercisable at any time on or after the applicable issuance date and have a term of 60 months from the date all shares underlying the Bridge Warrants are freely tradable.

The $1,250 of proceeds from the first closing were allocated to the Bridge Notes and Bridge Warrants based on their relative fair values as of the commitment date, resulting in an allocation of $679 and $571, respectively. The $1,250 of proceeds from the second closing were allocated to the Bridge Notes and Bridge Warrants based on their relative fair values as of the commitment date, resulting in an allocation of $718 and $532, respectively. The Bridge Notes are being accounted for as share-settled debt under the accounting guidance in ASC 835-30 and, accordingly, the initial net carrying amounts are being accreted to the redemption amounts using the effective interest method. The Company incurred debt issuance costs of $205 during the year ended December 31, 2022 and $89 during the three months ended March 31, 2023 related to its issuance of debt under the Bridge SPA. Unamortized debt discounts and debt issuance costs totaled $942 and $1,065 as of March 31, 2023 and December 31, 2022, respectively. Interest expense stemming from amortization of the debt discounts and debt issuance costs was $1,161 for the three months ended March 31, 2023.

Securities Purchase Agreement (Equity Financing)

In connection with signing the Merger Agreement and the Bridge SPA, the Company, Vallon, and the Investor entered into a Securities Purchase Agreement on December 13, 2022 (the Equity SPA), pursuant to which, among other things, the Investor agreed to invest $12,250 in cash and cancel any outstanding principal and accrued interest on the Bridge Notes immediately prior to the consummation of the Merger (the Closing) to fund the combined company following the Merger. In return, the Company will issue shares (the Initial Shares) of the Company’s common stock to the Investor equal to approximately 10.19% of the estimated Parent Fully Diluted Number, as defined in the Equity SPA. The Company will also deposit a number of shares of the Company’s common stock equal to 400% of the number of Initial Shares (the Additional Shares) into escrow for potential additional issuances to the Investor. The Equity Financing will close on the same date as the Closing.

As a result of the Merger, at the Effective Time, each Initial Share will automatically be converted into the right to receive a number of shares of Vallon common stock equal to the number of Initial Shares multiplied by the Exchange Ratio.

Further, at the Effective Time, each Additional Share placed into escrow will automatically be converted into the right to receive a number of shares of Vallon common stock equal to the number of Additional Shares multiplied by the Exchange Ratio. The converted Additional Shares in escrow shall be issued to the Investor upon certain specified reset dates under the Equity SPA in the event that Vallon’s share price is less than 90% of the arithmetic average of the five lowest weighted-average prices of Vallon’s common stock over the applicable periods set forth in the Equity SPA.

In addition, Vallon will issue to the Investor (i) Series A-1 Warrants to purchase that number of shares of Vallon common stock equal to 500% of the Initial Shares, (ii) Series A-2 Warrants to purchase that number of shares of Vallon common stock equal to 450% of the Initial Shares, and (iii) Series T Warrants to purchase (x) that number of shares of Vallon common stock equal to 320.856% of the Initial Shares and (y) upon exercise of the Series T Warrants, an additional amount of Series A-1 Warrants and Series A-2 Warrants, each to purchase up to that number of shares of Vallon common stock equal to 320.856% of the Initial Shares (collectively, the Equity Warrants). The Equity Warrants will be issued on the 11th trading day following the Closing and will have an exercise price per share equal to 20% of the Closing Per Share Price, as defined in the Equity SPA, for the Series T Warrants, 22% of the Closing Per Share Price for the Series A-1 Warrants and Series A-1 Warrants issued upon exercise of the Series T Warrants, and 24% of the Closing Per Share Price for the Series A-2 Warrants and Series A-2 Warrants issued upon exercise of the Series T Warrants. The Equity Warrants will be exercisable at any time on or after the applicable issuance date.

The Series A-1 Warrants will have a term of 60 months from the date all shares underlying the Series A-1 Warrants are freely tradable, and the Series A-2 Warrants and Series T Warrants will have a term of 24 months from the date all shares underlying the Series A-2 Warrants and Series T Warrants, respectively, are freely tradable. Vallon may force the exercise of the Series T Warrants subject to the satisfaction of certain equity conditions. The Equity Warrants will also include certain contingent cashless exercise features and will contain certain other rights with regard to asset distributions and fundamental transactions. The exercise price of the Series A-1 Warrants will be subject to adjustment for certain dilutive issuances, and all of the Equity Warrants will be subject to standard antidilution adjustments.

The Company capitalized stock issuance costs of $259 as part of its proposed offering of securities under the Equity SPA. The deferred costs will be charged to stockholders’ deficit upon the Closing.

GRI Bio, Inc.

Notes to Unaudited Interim Financial Statements

(in thousands, except share and per share data)

Note 10. COMMITMENTS AND CONTINGENCIES

Contingent Transaction Bonuses

In March 2021, the Company agreed to pay cash bonuses of $500 in the aggregate to two Company executives upon the closing of a reverse merger. Compensation cost for these contingent transaction bonuses will be recognized if and when a reverse merger is consummated based on the amount of cash paid by the Company.

Note 11. SUBSEQUENT EVENTS

Merger with Vallon Pharmaceuticals, Inc.

On April 21, 2023, the Company completed the Merger with Vallon in accordance with the terms of the Merger Agreement, by and among the Company, Merger Sub and Vallon, pursuant to which Merger Sub merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Vallon. In connection with the Merger, and prior to the effective time of the Merger (the Effective Time), Vallon effected a reverse stock split of the its common stock at a ratio of 1 for 30 (the Reverse Stock Split). Substantially concurrent with the closing of the Merger (the Closing), Vallon was renamed “GRI Bio, Inc.” and the Company was renamed “GRI Operations, Inc.”. Unless otherwise noted, all share and per share amounts in this Note 11 reflect the Reverse Stock Split.

At the Effective Time:

(a)Each share of the Company’s common stock (Company Common Stock) outstanding immediately prior to the Effective Time, including any shares of the Company Common Stock issued pursuant to the Equity SPA, automatically converted solely into the right to receive a number of shares of Vallon’s common stock equal to 0.0374 (the Exchange Ratio).

(b)Each option to purchase shares of the Company Common Stock (each, a GRI Option) outstanding and unexercised immediately prior to the Effective Time under the the 2015 Plan, whether or not vested, converted into and became an option to purchase shares of Vallon’s common stock, and Vallon assumed the 2015 Plan and each such GRI Option in accordance with the terms of the 2015 Plan (each, an Assumed Option). The number of shares of Vallon Common Stock subject to each Assumed Option was determined by multiplying (i) the number of shares of the Company Common Stock that were subject to such GRI Option, as in effect immediately prior to the Effective Time, by (ii) the Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Vallon Common Stock. The per share exercise price for the Vallon Common Stock issuable upon exercise of each Assumed Option was determined by dividing (A) the per share exercise price of such Assumed Option, as in effect immediately prior to the Effective Time, by (B) the Exchange Ratio and rounding the resulting per share exercise price up to the nearest whole cent. Any restriction on the exercise of any Assumed Option continued in full force and effect and the term, exercisability, vesting schedule, and any other provisions of such Assumed Option otherwise remained unchanged.

(c)Each warrant to purchase shares of the Company Common Stock outstanding immediately prior to the Effective Time other than the Bridge Warrants (the GRI Warrants), was assumed by Vallon and converted into a warrant to purchase shares of Vallon’s common stock (each, an Assumed Warrant) and thereafter (i) each Assumed Warrant became exercisable solely for shares of Vallon’s common stock; (ii) the number of shares of Vallon’s common stock subject to each Assumed Warrant was determined by multiplying (A) the number of shares of the Company Common Stock that were subject to such GRI Warrant, as in effect immediately prior to the Effective Time, by (B) the Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Vallon Common Stock; (iii) the per share exercise price for shares of the Vallon’s common stock issuable upon exercise of each Assumed Warrant was determined by dividing (A) the exercise price per share of the Company Common Stock subject to such GRI Warrant, as in effect immediately prior to the Effective Time, by (B) the Exchange Ratio, and rounding the resulting exercise price up to the nearest whole cent.

(d)The Bridge Warrants were exchanged for warrants (the Exchange Warrants) to purchase an aggregate of 421,589 shares of Vallon’s common stock. The Exchange Warrants contain substantively similar terms to the Bridge Warrants, and had an initial exercise price equal to $14.73 per share subject to adjustments for splits and recapitalization events.

(e)All rights with respect to the Company’s restricted stock awards were assumed by Vallon and converted into Vallon restricted stock awards with the number of shares subject to each restricted stock award multiplied by the Exchange Ratio and rounding the resulting number down to the nearest whole number of shares of Vallon’s common stock. The term, exercisability, vesting schedule and other provisions of the the Company’s restricted stock awards otherwise remained unchanged.

In connection with the signing of the Merger Agreement, the Company entered into the Bridge SPA with the Investor pursuant to which the Company issued the Bridge Notes in the aggregate principal amount of $3,333 in exchange for an aggregate purchase price of $2,500. In addition, the Company issued the Bridge Warrants to the Investor. As a result of the Merger, at the Effective Time, the Bridge Warrants were exchanged for the Exchange Warrants.

In addition to the Bridge SPA and in connection with signing the Merger Agreement, on December 13, 2022, Vallon, the Company and the Investor entered into the Equity SPA pursuant to which the Investor agreed to invest $12,250 in cash. Pursuant to the Equity SPA, immediately prior to the Closing, the Company issued the Initial Shares to the Investor and the Additional Shares into escrow with an escrow agent. At the closing, pursuant to the Merger, the Initial Shares converted into an aggregate of 253,842 shares of Vallon Common Stock and the Additional Shares converted into an aggregate of 1,015,368 shares of Vallon Common Stock. On May 8, 2023, in accordance with the terms of the Equity SPA, Vallon and the Investor authorized the escrow agent to, subject to beneficial ownership limitations, disburse to the Investor all of the shares of Vallon Common Stock issued in exchange for the Additional Shares.

Pursuant to the Equity SPA, on May 8, 2023, Vallon issued the Equity Warrants.

Immediately following the Effective Time, there were approximately 2,918,954 shares of Vallon Common Stock outstanding, of which 1,201,077 shares were held by the former stockholders of the Company (excluding the Investor).

Exhibit 99.2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of GRI Bio, Inc.:

Opinion on the Financial Statements

We have audited the accompanying balance sheets of GRI Bio, Inc. (“the Company”) as of December 31, 2022 and 2021, the related statements of operations, changes in stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph Regarding Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.

/s/ Sadler, Gibb & Associates, LLC

We have served as the Company’s auditor since 2022.

Draper, UT

February 23, 2023

GRI Bio, Inc.

Balance Sheets

(in thousands, except share and per share amounts)


	December 31, 2022		December 31, 2021

Assets
Current assets:
Cash	$	9	$	90
Prepaid expenses and other assets	299		6
Total current assets	308		96
Property and equipment, net	4		3
Operating lease right-of-use assets	67		114
Deposits	4		5
Total assets	$	383	$	218
Liabilities, mezzanine equity and stockholders' deficit
Current liabilities:
Accounts payable	$	1,294	$	57
Accrued expenses	36		1,271
Advances from employees	5		—
Convertible promissory notes	—		3,500
Bridge promissory note, net	602		—
Operating lease liabilities, current	57		47
Total current liabilities	1,994		4,875
Operating lease liabilities, noncurrent	14		67
Total liabilities	2,008		4,942

Commitments and contingencies (Note 10)

Redeemable common stock	—		124

Stockholders' deficit:
Common stock, $0.01 par value; 40,000,000 shares authorized; 31,130,077 and 26,722,077 shares issued as of December 31, 2022 and 2021, respectively; 26,731,434 and 22,765,434 shares outstanding as of December 31, 2022 and 2021, respectively	267		228
Additional paid-in capital	16,604		10,203
Accumulated deficit	(18,496)		(15,279)
Total stockholders' deficit	(1,625)		(4,848)
Total liabilities, mezzanine equity, and stockholders' deficit	$	383	$	218

See accompanying notes to financial statements.

GRI Bio, Inc.

Statements of Operations

(In thousands, except share and per share amounts)


	Year Ended
	December 31,
	2022		2021
Operating expenses:
Research and development	$	242	$	249
General and administrative	1,997		813
Total operating expenses	2,239		1,062
Loss from operations	(2,239)		(1,062)


Gain on extinguishment of Paycheck Protection Program (PPP) loan	—		50
Loss on extinguishment of convertible promissory notes	(325)		—
Interest expense	(653)		(547)

Net loss	$	(3,217)	$	(1,559)
Net loss per common share, basic and diluted	$	(0.13)	$	(0.07)
Weighted-average common shares outstanding, basic and diluted	24,135,215		23,885,088

See accompanying notes to financial statements.

GRI Bio, Inc.

Statements of Changes in Stockholders’ Deficit

(In thousands, except shares)


	Redeemable Common Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount
Balance, December 31, 2020	209,000	$	124	22,688,511	$	227	$	8,548	$	(13,720)	$	(4,945)
Issuance of common stock	—	—		76,923	1		99		—		100
Non-contingent beneficial conversion feature	—	—		—	—		150		—		150
Extinguishment of accrued compensation	—	—		—	—		1,406		—		1,406
Net loss	—	—		—	—		—		(1,559)		(1,559)
Balance, December 31, 2021	209,000	$	124	22,765,434	$	228	$	10,203	$	(15,279)	$	(4,848)
Issuance of warrants and non-contingent beneficial conversion feature in connection with convertible promissory note	—	—		—	—		60		—		60
Issuance of warrants in connection with non-convertible promissory note	—	—		—	—		30		—		30

Conversion of convertible promissory note	—	—		4,150,000	41		5,296		—		5,337
Restricted stock awards issued in satisfaction of accrued compensation	—	—		—	—		417		—		417
Issuance of warrants in connection with the issuance of a bridge promissory note	—	—		—	—		571		—		571
Redemption of redeemable common stock	(209,000)	(124)		(209,000)	(2)		2		—		—
Vesting of restricted stock	—	—		25,000	—		—		—		—
Stock-based compensation expense	—	—		—	—		25		—		25
Net loss	—	—		—	—		—		(3,217)		(3,217)
Balance December 31, 2022	—	$	—	26,731,434	$	267	$	16,604	$	(18,496)	$	(1,625)

See accompanying notes to financial statements.

GRI Bio, Inc.

Statements of Cash Flows

(In thousands)


	Year Ended
	December 31,
	2022		2021
Operating activities:
Net loss	$	(3,217)	$	(1,559)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment	3		3
Amortization of debt discounts	217		150
Gain on extinguishment of PPP loan	—		(50)
Loss on extinguishment of debt	325		—
Amortization of right-of-use assets	47		46
Stock-based compensation expense	25		—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(35)		(1)
Accounts payable	897		54
Accrued expenses	696		551
Operating lease liabilities	(43)		(41)
Cash used in operating activities	(1,085)		(847)
Investing activities:
Purchases of property and equipment	(3)		—
Cash used in investing activities	(3)		—
Financing activities:
Advances from employees	35		—
Repayment of advances from employees	(30)		—
Proceeds from advances under a convertible promissory note	125		500
Repayment of advances under convertible promissory note	(125)		—
Proceeds from issuance of non-convertible promissory note	125		—
Repayment of non-convertible promissory note	(125)		—
Proceeds from issuance of bridge promissory note	1,250		—
Payments of debt issuance costs	(111)		—
Payments of deferred stock issuance costs	(13)		—
Redemption of redeemable common stock	(124)		—
Proceeds from issuance of common stock	—		100
Cash provided by financing activities	1,007		600
Net decrease in cash	(81)		(247)
Cash at beginning of year	90		337
Cash at end of year	$	9	$	90
Supplemental disclosure of cash flow information:
Cash paid for interest	$	33	$	—
Non-cash investing and financing activities:
Recognition of operating lease right-of-use asset and liability	$	—	$	145
Non-contingent beneficial conversion feature on an advance under a convertible promissory note.	$	60	$	150
De-recognition of PPP loan balance	$	—	$	50
Restricted stock awards issued in satisfaction of accrued compensation.	$	417	$	1,406
Recognition of debt discount and additional paid-in-capital for issuance of warrants in connection with the issuance of promissory notes	$	601	$	—

Conversion of promissory note	$	5,337	$	—
Debt and deferred stock issuance costs included in accounts payable	$	340	$	—

See accompanying notes to financial statements.

Note 1. THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES

The Company and Nature of Operations

GRI Bio, Inc. (the Company), incorporated in Delaware in May 2009, is a clinical stage biotechnology company located in La Jolla, California. With a focus on on discovering, developing, and commercializing innovative therapies that target serious diseases associated with dysregulated immune responses leading to inflammatory, fibrotic, and autoimmune disorders, the Company’s goal is to be an industry leader in developing therapies to treat these diseases and to improve the lives of patients suffering from such diseases. Since its inception, the Company has devoted substantially all of its resources to research and development efforts relating to drug candidates and to general and administrative support for these operations. Management views its operations and manages its business as one operating segment.

The Company is subject to a number of risks and uncertainties, similar to those faced by other clinical stage biotechnology companies, involving the successful discovery and development of drug candidates, the protection of proprietary information, obtaining regulatory approvals and market acceptance, and the ability to raise additional capital, among others.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of gains and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

Cash

The Company maintains its cash in checking and savings accounts with reputable banks that may, at times, exceed federally insured limits. The Company has not experienced any losses in its cash accounts and does not believe they are subject to significant credit risk.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.The authoritative guidance establishes a hierarchy that prioritizes the inputs used to measure fair value, which consists of three broad levels:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2: Inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly. Such inputs include (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in inactive markets, (iii) inputs other than quoted prices that are observable for the asset or liability, or (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amounts reported for cash, refunds receivable, accounts payable, accrued expenses, and advances from employees approximate their fair values due to their short-term nature. The fair value of the outstanding bridge promissory note was estimated to be approximately $1,398 as of December 31, 2022 based on its stated principal amount, estimated remaining term, and discount rate (Level 3 inputs). The fair value of the convertible promissory note was estimated to be approximately $3,650 as of December 31, 2021 based on the interest rate on the note and the holder’s options to convert the note into shares of the Company’s common stock (Level 2 inputs).

Deferred Stock Issuance Costs

Property and Equipment

Property and equipment are stated at cost. Maintenance and repairs that do not improve or extend the useful lives of the respective assets are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized, using the straight-line method, over the shorter of the estimated economic life of the improvements or the remaining lease term.

Long-Lived Assets

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the projected future undiscounted cash flows is less than the carrying amount of the assets, the assets will be written down to their estimated fair value in the period in which the determination is made. Management determined there was no impairment of long-lived assets during the years ended December 31, 2022 and 2021.

Leases

The Company accounts for its leases in accordance with Accounting Standards Codification (ASC) 842, Leases, and assesses at contract inception whether a contract is, or contains, a lease. Generally, a lease exists if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company determines that it has the right to control the use of an identified asset when (i) it has the right to substantially all of the economic benefits from use of the identified asset and (ii) it has the right to direct the use of the identified asset. As permitted, the Company has made the accounting policy election to not separate lease components from non-lease components when allocating contract consideration, and instead accounts for each lease component and associated non-lease components as a single lease component.

The Company classifies a lease as a finance lease when one or more of the following criteria are met: (i) the lease transfers ownership of the underlying asset to the Company by the end of the lease term, (ii) the lease grants an option to purchase the underlying asset that the Company is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining useful life of the underlying asset, (iv) the present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. The Company did not have any finance leases as of December 31, 2022 and 2021. A lease that does not meet any of these criteria is classified as an operating lease.

At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability for its operating leases, except its short-term operating leases with original lease terms of twelve months or less. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability plus any lease prepayments. The lease liability is initially measured at the present value of the lease payments not yet paid, discounted using an estimate of the Company’s incremental borrowing rate for a collateralized loan with a similar amount and terms as the underlying lease in a similar economic environment. That discount rate is used because the interest rate implicit in the Company’s lease contracts is typically not readily determinable.

Lease modifications that grant the right to use an existing leased asset for an additional period of time (i.e., a period of time not included in the original lease agreement) are not accounted for as separate contracts; however, the lease term, classification, discount rate, and measurement of the remaining consideration due under the contract are reassessed upon execution of such modifications.

Lease expense for operating leases is recognized on a straight-line basis over the term of the lease and is included in operating expenses.

Paycheck Protection Program Loan

In April 2020, the Company was granted a $50 loan from a bank under the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The interest rate on the loan was 1.00% per annum and it was scheduled to mature in April 2022. Up to 100% of the loan amount qualified for forgiveness if, during the covered period following loan disbursement, (i) employee and compensation levels were maintained, (ii) the loan proceeds were spent on payroll costs and other eligible expenses, and (iii) at least 60% of the proceeds were spent on payroll costs. The application for these funds required the Company to, in good-faith, certify that the then-current economic uncertainty made the loan request necessary to support the operations of the Company. This certification further required the Company to take into account business activity and ability to access other sources of liquidity sufficient to support operations in a manner that would not significantly detriment the business. The certification made by the Company did not contain any objective criteria and is subject to interpretation. If, despite the good-faith belief that given the Company’s circumstances all eligibility requirements for the PPP loan were satisfied, it is later determined that

the Company had violated any applicable laws or regulations or it is otherwise determined the Company was ineligible to receive the PPP loan, it may be required to repay the PPP loan in its entirety and/or be subject to additional penalties.

In May 2021, the Company received notification from the Small Business Administration (SBA) that all of the principal and interest outstanding under its PPP loan had been forgiven. Accordingly, the Company de-recognized the related liability in 2021 and recognized a corresponding gain on extinguishment. No payments of principal or interest were made prior to forgiveness.

Beneficial Conversion Features

Conversion options embedded in convertible promissory notes are accounted for as beneficial conversion features if the effective conversion price is less than the fair value of the Company’s common stock on the commitment date. The intrinsic value of a non-contingent beneficial conversion feature is recognized as a debt discount, with a corresponding increase to additional paid-in capital, on the commitment date. The intrinsic value of a contingent beneficial conversion feature is not recognized until the uncertain future event or circumstance occurs.

Debt Discounts

Debt Issuance Costs

Stock-Based Compensation

Stock-based compensation recognized for stock option awards is based on the fair value of the awards on the grant date. The Company estimates the grant-date fair value of the awards using the Black-Scholes option pricing model, which requires the input of subjective assumptions including (i) the estimated fair value of the common stock, (ii) the expected stock price volatility, (iii) the risk-free interest rate, (iv) the expected term of the award, and (v) the expected dividend yield. Compensation cost for stock option awards with service-based vesting conditions is recognized ratably over the requisite service periods. Compensation cost for stock option awards with performance-based vesting conditions is recognized ratably over the requisite service periods if achievement of the performance conditions is probable. The effect of forfeitures is recognized as a reduction of stock-based compensation expense in the period in which the forfeitures occur. The Company issues new shares of common stock upon a stock option exercise.

Common Shares Issued and Outstanding

The number of shares of common stock issued as reported in the balance sheets includes legally issued shares of unvested restricted common stock for which the holders have the right to vote the shares and the right to receive dividends in such amount and at such times as all other common stockholders.

Internally Developed Patents

Costs associated with the application and award of internally developed patents are expensed as incurred due to uncertainties regarding their recoverability.

Research and Development

Research and development costs are expensed as incurred.

Income Taxes

The provision for income taxes is based on the sum of the taxes currently payable or refundable plus the changes in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for net operating loss carryforwards and temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities for net operating loss carryforwards and temporary differences are measured using enacted tax rates in effect for the years in which the net operating losses

are expected to be utilized and the temporary differences are expected to reverse. A valuation allowance is recorded against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

The provision for income taxes is based on tax positions taken or expected to be taken in the Company’s income tax returns. The tax benefits of an uncertain tax position are recognized only if it is more likely than not that the tax position would be sustained upon examination by the relevant taxing authority. Tax benefits related to uncertain tax positions that do not meet this criterion are not recognized in the financial statements. There were no unrecognized tax benefits related to uncertain tax positions as of December 31, 2022 and 2021. Due to the existence of net operating loss carryforwards, the Company’s federal and state income tax returns are open to examination by the taxing authorities for all years since inception. Interest and penalties related to income taxes are recognized as a component of the provision for income taxes.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which reduces the number of accounting models available for convertible instruments, amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives, and modifies the diluted earnings per share calculations by requiring the use of the if-converted method and eliminating the treasury stock method, among other changes. The amendments in this update are effective for the Company’s fiscal years beginning after December 15, 2023, with early adoption permitted in fiscal years beginning after December 15, 2020. The guidance may be adopted through either a modified retrospective or fully retrospective transition method. Management is currently evaluating the impact of this update on the Company’s financial statements.

Note 2. LIQUIDITY AND GOING CONCERN

Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. The mitigating effect of management’s plans to alleviate the substantial doubt is considered only to the extent that it is probable that (i) management’s plans will be effectively implemented and (ii) when implemented, will mitigate the relevant conditions or events that raise the substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued.

As of December 31, 2022, the Company had cash of $9, negative working capital of $1,686 and an accumulated deficit of $18,438. In 2022, the Company incurred a net loss of $3,159 and used $1,085 of cash in operations. The Company has incurred losses since inception and, to date, has financed its operations by issuing equity and debt securities. Management anticipates that the Company will continue to incur losses and generate negative operating cash flows in the foreseeable future as it continues to develop its drug candidates and that the Company will require additional funding to support its planned operating activities. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.

As discussed in Note 9, the Company closed the first tranche of the Bridge Financing and entered into the Merger Agreement and the Equity SPA in December 2022. The Company will require additional funding in order to complete the development and commercialization of its product candidates. Until such time, if ever, in which the Company can generate substantial product revenue, it expects it may continue to fund its operations and capital funding needs through equity offerings, debt financings, or other capital sources, including strategic licensing, collaboration, or other similar agreements. If the Company is unable to secure adequate additional funding, it will need to reevaluate its operating plans and may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, delay, scale back, or eliminate some or all of its development programs, or relinquish rights to its technology on less favorable terms than it would otherwise choose. These actions could materially impact its business, results of operations, and future prospects.

Failure to obtain adequate financing when needed could adversely affect the Company’s ability to operate as a going concern. The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business.

They do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.

Note 3. NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share are calculated by dividing the net loss by the applicable weighted-average number of common shares outstanding during the period. As the Company had a net loss in each of the years ended December 31, 2022 and 2021 , diluted net loss per common share is the same as basic net loss per common share for the period because the effects of potentially dilutive securities are antidilutive.


	December 31,
	2022	2021
Stock options	2,392,375	2,392,375
Warrants	1,521,722	269,232
Restricted stock subject to contingent conditions	4,398,643	3,956,643
Stock subject to put right	—	209,000
Convertible promissory note(1)	—	3,307,692
	8,312,740	10,134,942

__________________

(1)The conversion price for the $500 second additional advance from May 2021 is assumed to be $1.00 per share. The conversion price for all other convertible amounts is assumed to be $1.30 per share.

Note 4. PROPERTY AND EQUIPMENT


	December 31,
	2022		2021
Computer equipment (useful life – 5 years)	$	13	$	10
Furniture and fixtures (useful life – 5 years)	13		13
	26		23
Accumulated depreciation	(22)		(20)
	$	4	$	3

Depreciation expense related to property and equipment was $3 for each of the years ended December 31, 2022 and 2021.

Note 5. ACCRUED EXPENSES


	December 31,
	2022		2021
Accrued compensation	$	33	$	142
Accrued interest	—		1,111
Other	3		18
	$	36	$	1,271

In March 2021 and December 2022, two Company executives agreed to forego $1,406 and $417, respectively, of accrued compensation in exchange for restricted stock awards and legally released the Company from the obligations to pay such amounts. Accordingly, the Company de-recognized the respective liabilities and recognized corresponding increases to additional paid-in capital in each year.

Note 6. CONVERTIBLE PROMISSORY NOTE

was secured by the Company’s assets and, on a pro-rata basis, was jointly senior with a non-convertible promissory note issued to a separate lender (Note 7).

The TEP Note accrued simple interest on the outstanding principal balance at a rate of 12% per annum. The total outstanding principal and accrued interest balance was initially due on the earlier of the Company’s next financing, as defined, and May 2, 2020.

The initial $2,500 tranche under the TEP Note was funded upon execution of the agreement in November 2018. Upon receipt of the initial tranche, the Company used a portion of the proceeds to repurchase 252,349 shares of the Company’s common stock held by another stockholder for $150, then issued 83,999 of the repurchased shares to TEP as additional consideration for the TEP Note. The proceeds from the $2,500 initial tranche were allocated to the convertible debt instrument, warrants, and common stock based on their relative fair values as of the commitment date. Since the effective conversion price of the convertible debt instrument was less than the commitment date fair value of the Company’s common stock, this also gave rise to a beneficial conversion feature. The Company recognized a total debt discount of $1,408 for the beneficial conversion feature, warrants, and common stock, which was amortized as additional interest expense over the initial eighteen-month term of the note.

In December 2019, the Company and TEP amended the TEP Note. In lieu of TEP funding the second $2,500 tranche, TEP made a first additional advance of $500 to the Company in exchange for a convertible promissory note, a warrant to purchase up to 461,725 shares of the Company’s common stock at an exercise price of $0.01 per share, and the assignment of the Company’s rights under a certain call option agreement. The call option agreement, which was entered into in 2015, provided the Company with the right to repurchase up to 1,050,000 shares of the Company’s common stock held by the counterparty for $1.00 per share at any time before April 1, 2025. Management assessed the call option agreement and determined that it was indexed to the Company’s own equity and that all other conditions for equity classification were met. Accordingly, the call option agreement was classified as equity, was initially measured at fair value, and was not adjusted for subsequent changes in fair value.

The proceeds from the $500 first additional advance were allocated to the convertible debt instrument, warrants, and call option rights based on their relative fair values as of the commitment date. Since the effective conversion price of the convertible debt instrument was less than the commitment date fair value of the Company’s common stock, this also gave rise to a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was greater than the proceeds allocated to the convertible debt instrument and, accordingly, the amount recorded for the beneficial conversion feature was limited to that amount. The Company recognized a total debt discount of $500 for the beneficial conversion feature, warrants, and call option rights, which was amortized as additional interest expense over the remaining five-month term of the note.

Until repayment of the TEP Note, TEP originally had the option to convert the initial tranche, the first additional advance, and, effective May 2021, accrued interest in the amount of $650, into shares of the Company’s common stock: (i) at any time at a conversion price equal to $1.30 per share; (ii) upon the closing of the Company’s next financing at a conversion price equal to the lesser of (a) $1.30 per share, (b) the lowest per share purchase price of the equity securities issued in the next financing, and (c) the quotient resulting from dividing the valuation cap ($40,000) by the Company’s fully diluted capitalization, as defined, immediately prior to the closing of the next financing; and (iii) upon the closing of a corporate transaction, as defined, at a conversion price equal to the lesser of (a) $1.30 per share and (b) the quotient resulting from dividing the valuation cap by the Company’s fully diluted capitalization immediately prior to the closing of the corporate transaction. The conversion price described in (ii)(c) and (iii)(b) did not apply if the then-current valuation exceeded the valuation cap. The conversion price was subject to standard antidilution adjustments.

In May 2021, the Company and TEP amended the TEP Note, and TEP agreed to make a second additional advance of $500 to the Company in exchange for a convertible promissory note with separate, modified conversion options. The conversion options and terms for the second additional advance were the same as those for the initial tranche, except that $1.00 was the modified conversion price in sections (i), (ii)(a), and (iii)(a), and $27,000 was the modified valuation cap. Since the conversion price of the convertible debt instrument was less than the commitment date fair value of the Company’s common stock, this gave rise to a beneficial conversion feature. The Company recognized a debt discount of $150 for the beneficial conversion feature, which was amortized as additional interest expense over the remaining five-month term of the note.

As of December 31, 2021, the aggregate principal balance outstanding on the TEP Note was $3,500 and the related accrued interest balance was $1,111.

The conversion options and terms for the third additional advance were the same as those for the initial tranche, except that the third additional advance called for fixed interest in the amount of $15 with total principal and interest due on the earlier of (i) the Company’s next financing of $3,000, or more and (ii) December 31, 2022.

The proceeds from the $125 third additional advance were allocated to the convertible debt instrument and warrants based on their relative fair values as of the commitment date. Since the effective conversion price of the convertible debt instrument was less than the commitment date fair value of the Company’s common stock, this also gave rise to a beneficial conversion feature. The Company recognized a total debt discount of $60 for the beneficial conversion feature and warrants, which was amortized as additional interest expense over the estimated six-month term of the note.

In contemplation of entering into the Bridge Notes (Note 9), the Company amended the conversion price for certain tranches of the TEP notes from $1.30 per share to $1.00 per share. The amendment was accounted for as extinguishment to which the excess fair value of the amended debt over the carrying value of the original debt resulted in a loss on extinguishment of $325 for the year ended December 31, 2022.

As part of the conversion, the $4,150 of converted principal and accrued interest, along with $863 of related forfeited accrued interest through the conversion date, were credited to stockholders’ deficit. Interest expense recognized on the TEP Note, including amortization of the debt discounts, was $477 and $546 for the years ended December 31, 2022 and 2021, respectively.

Note 7. NON-CONVERTIBLE PROMISSORY NOTE

In July 2022, the Company issued a $125 non-convertible promissory note to a lender which called for fixed interest in the amount of $15 with total principal and interest due on the earlier of the Company’s next financing of $3,000 or more and December 31, 2022. The promissory note was secured by the Company’s assets and, on a pro-rata basis, was jointly senior with the TEP Note (Note 6). As part of the financing, the Company also issued a warrant to the lender to purchase up to 31,250 shares of the Company’s common stock at an exercise price of $0.01 per share. The proceeds from the financing were allocated to the promissory note and warrants based on their relative fair values as of the commitment date, resulting in a debt discount of $30 which was amortized as additional interest expense over the estimated six-month term of the note.

In December 2022, the $140 principal and accrued interest balance was paid in-full. Interest expense recognized on the promissory note, including amortization of the debt discount, was $45 for the year ended December 31, 2022.

Note 8. STOCKHOLDERS’ DEFICIT

Issuance of Common Stock to Investors

In March 2021, the Company issued 76,923 shares of common stock to one investor in exchange for $100 in cash.

Redeemable Common Stock

Management assessed the Put Right and determined that (i) it was not freestanding and, therefore, was not required to be classified as a liability and (ii) it could be exercised by the stockholder at any time, which was not within the Company’s control. Therefore, the common shares subject to the Put Right were classified in mezzanine equity as of December 31, 2021. In December 2022, the stockholder exercised the Put Right and the Company redeemed the 209,000 shares of common stock for $124 ($0.594 per share). The redeemed shares were retired by the Company.

Warrants

As of December 31, 2022 and 2021, the Company had 2,720,947 and 1,405,957 warrants outstanding, respectively, the details of which are as follows:


Issuance	Number of Common Shares	Exercise Price	Expiration
November 2018	675,000	$0.01	November 2023
December 2019	461,725	$0.01	December 2024
November 2020	230,770	$1.30	November 2023
December 2020	38,462	$1.30	December 2023
July 2022	62,500	$0.01	July 2027
December 2022	1,252,490	$1.33	March 2028 (Estimate)

The warrants include cashless exercise features, are subject to standard antidilution adjustments, and were issued in connection with debt and equity financings.

Restricted Stock Awards

In April 2015, the Company awarded an aggregate of 3,312,000 shares of restricted common stock to its three co-founders. The awards vest upon the completion of a liquidity event to be defined as a change in control of the Company or the expiration of a lock-up period following the Company’s initial public offering, or, if earlier, upon death or disability of the grantee or the termination by the Company or the Company’s shareholders, as applicable, of the grantee’s service relationship with the Company, whether as an employee, member of the board of directors, or consultant, other than for cause or performance reasons, provided that the grantee is continuously an employee of, director of, or consultant to the Company throughout the period from the grant date to the vesting date.

Compensation cost for these restricted stock awards will be recognized if and when the awards vest based on the consummation of a liquidity event, or, if earlier, upon the death, disability, or termination without cause of the grantee. The compensation cost for the restricted stock award issued to the co-founder who is a Company employee will be based on the grant date fair value of the award which was $1.00 per share. The compensation cost for the restricted stock awards issued to the two co-founders who are nonemployees will be based on the fair value of the awards on the adoption date of ASU No. 2018-07 (January 1, 2018) which was $1.30 per share. The total unrecognized compensation cost for these restricted stock awards was $3,974 as of December 31, 2022.

In March 2021, the Company awarded an aggregate of 644,643 shares of restricted common stock to two employees. The awards vest upon the completion of a liquidity event to be defined as a change in control of the Company or the expiration of a lock-up period following the Company’s initial public offering, or, if earlier, upon death or disability of the grantee or the termination by the Company or the Company’s shareholders, as applicable, of the grantee’s service relationship with the Company, whether as an employee, member of the board of directors, or consultant, other than for cause or performance reasons, provided that the grantee is continuously an employee of, director of, or consultant to the Company throughout the period from the grant date to the vesting date.

In October 2022, the Company awarded 50,000 shares of restricted common stock under the 2015 Plan, as defined below, to a nonemployee consultant in exchange for investor relations services. The award vests as follows: (i) 12,500 shares vest on the grant date, (ii) 12,500 shares vest on December 31, 2022, (iii) 12,500 shares vest on March 31, 2023, and (iv) 12,500 shares vest on June 30, 2023. As of December 31, 2022, 25,000 shares were vested and 25,000 shares were unvested.

Compensation cost for this restricted stock award is being recognized in the same period and in the same manner as if the Company had paid cash for the services based on the grant date fair value of the award which was $1.00 per share.

Stock-based compensation expense for this restricted stock award was $25 for the year ended December 31, 2022. The unrecognized compensation cost for this award was $25 as of December 31, 2022.

In December 2022, the Company awarded an aggregate of 417,000 shares of restricted common stock to two employees. The awards vest upon the completion of a liquidity event to be defined as a change in control of the Company or the expiration of a lock-up period following the Company’s initial public offering, or, if earlier, upon death or disability of the grantee or the termination by the Company or the Company’s shareholders, as applicable, of the grantee’s service relationship with the Company, whether as an employee, member of the board of directors, or consultant, other than for cause or performance reasons, provided that the grantee is continuously an employee of, director of, or consultant to the Company throughout the period from the grant date to the vesting date.

Stock Options

The Board of Directors authorized the 2015 Equity Incentive Plan, as amended, (the 2015 Plan) pursuant to which the Company is authorized to grant incentive stock options, non-qualified stock options, and other stock-based awards to employees, directors, and consultants. The Company is authorized to grant up to 4,689,900 shares of common stock under the 2015 Plan, of which 2,247,525 and 2,297,525 shares remained available for future issuance as of December 31, 2022 and 2021, respectively. The maximum term of a stock option granted under the 2015 Plan cannot exceed 10 years. No stock options were granted, exercised, or forfeited during the years ended December 31, 2022 and 2021.

There were 2,392,375 stock options outstanding as of December 31, 2022 and 2021, all of which were granted in November 2016, have an exercise price of $0.73 per share, and contractually expire in November 2026 or upon termination of service, if earlier. The 1,298,718 options granted with service-based vesting conditions vested ratably over periods of two to three years.

Of the 1,093,657 options granted with performance-based vesting conditions related to future receipts of funding by the Company, 546,829 of these options vested, and the related stock-based compensation was recognized, during a prior year. Achievement of the related performance conditions for the remaining 546,828 options has not been deemed probable and, accordingly, the Company has not recognized any compensation cost for these awards as of December 31, 2022. No stock-based compensation expense for stock options was recognized for the years ended December 31, 2022 and 2021.

There were 1,845,547 vested and exercisable stock options outstanding as of December 31, 2022 and 2021. The aggregate intrinsic value of vested and exercisable stock options outstanding was $1,107 and the remaining contractual term was 3.85 years, as of December 31, 2022. There were 546,828 non-vested stock options outstanding as of December 31, 2022 and 2021. The total unrecognized compensation cost for non-vested stock options outstanding was $279, and the remaining contractual term was 3.85 years, as of December 31, 2022. The non-vested stock options are subject to performance-based vesting conditions related to future receipts of funding by the Company. The unrecognized compensation cost will be recognized if and when it becomes probable that the performance conditions will be achieved.

Note 9. PROPOSED MERGER AND RELATED FINANCINGS

Merger Agreement and Transaction

On December 13, 2022, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Vallon Pharmaceuticals, Inc. (Vallon) and Vallon Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Vallon (Merger Sub). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Vallon. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes. The Merger was not consummated as of December 31, 2022.

At the effective time of the Merger (the Effective Time) and pursuant to the terms of the Merger Agreement, each share of the Company’s common stock outstanding immediately prior to the Effective Time, excluding any dissenting shares but including any

shares of Company’s common stock issued pursuant to the Equity Financing will be automatically converted solely into the right to receive a number of shares of Vallon’s common stock (Vallon Common Stock) equal to the exchange ratio described below. Each option to purchase shares of Company’s common stock (each, a Company Option) that is outstanding and unexercised immediately prior to the Effective Time under the 2015 Plan, whether or not vested, will be converted into and become an option to purchase shares of Vallon Common Stock, and Vallon will assume the 2015 Plan and each such Company Option in accordance with the terms of the 2015 Plan (Assumed Options). The number of shares of Vallon Common Stock subject to each Assumed Option will be determined by multiplying (i) the number of shares of Company’s common stock that were subject to such Company Option, as in effect immediately prior to the Effective Time, by (ii) the exchange ratio, and rounding the resulting number down to the nearest whole number of shares of Vallon Common Stock. The per share exercise price for Vallon Common Stock issuable upon exercise of each Assumed Option will be determined by dividing (A) the per share exercise price of such Assumed Option, as in effect immediately prior to the Effective Time, by (B) the exchange ratio and rounding the resulting per share exercise price up to the nearest whole cent. Any restriction on the exercise of any Assumed Option will continue in full force and effect and the term, exercisability, vesting schedule, and any other provisions of such Assumed Option will otherwise remain unchanged. Each warrant to purchase shares of Company’s common stock (the Company Warrants) outstanding immediately prior to the Effective Time will be assumed by Vallon and converted into warrants to purchase Vallon Common Stock (Assumed Warrants) and thereafter (i) each Assumed Warrant may be exercised solely for shares of Vallon Common Stock; (ii) the number of shares of Vallon Common Stock subject to each Assumed Warrant will be determined by multiplying (A) the number of shares of Company’s common stock that were subject to such Company Warrant, as in effect immediately prior to the Effective Time, by (B) the exchange ratio, and rounding the resulting number down to the nearest whole number of shares of Vallon Common Stock; (iii) the per share exercise price for Vallon Common Stock issuable upon exercise of each Assumed Warrant will be determined by dividing (A) the exercise price per share of the Company’s common stock subject to such Company Warrant, as in effect immediately prior to the Effective Time, by (B) the exchange ratio, and rounding the resulting exercise price up to the nearest whole cent. All rights with respect to Company restricted stock awards will be assumed by Vallon and converted into Vallon restricted stock awards with the number of shares subject to each warrant multiplied by the exchange ratio and rounding the resulting number down to the nearest whole number of shares of Vallon Common Stock. The term, exercisability, vesting schedule and other provisions of the Company restricted stock awards shall otherwise remain unchanged.

Securities Purchase Agreement (Bridge Financing)

In connection with signing the Merger Agreement, the Company entered into a Securities Purchase Agreement, dated as of December 13, 2022 (Bridge SPA) with Altium Growth Fund, LP (Investor), pursuant to which, among other things, the Investor agreed to purchase, and the Company agreed to issue, senior secured notes (Bridge Notes) in the aggregate principal amount of up to approximately $3,333, in exchange for an aggregate purchase price of up to approximately $2,500. Pursuant to the terms of the Bridge SPA, the Investor agreed to purchase the Bridge Notes in two closings: (i) the first closing for approximately $1,667, in aggregate principal amount (in exchange for an aggregate purchase price of approximately $1,250), which closed on December 14, 2022; and (ii) the second closing for approximately $1,667 in aggregate principal amount (in exchange for an aggregate purchase price of approximately $1,250), which is scheduled to close on the first business day following the date of effectiveness of the Registration Statement. The Bridge Notes are secured by a lien on all of the Company’s assets, as described in the Bridge SPA and its exhibits. In addition, upon the funding of each tranche as described above, the Investor will also receive warrants to purchase an aggregate of 1,252,490 shares of Company’s common stock (Bridge Warrants). The Bridge Warrants have an exercise price of $1.33 per share, are exercisable at any time on or after the applicable issuance date and have a term of 60 months from the date all shares underlying the Bridge Warrants are freely tradable. The Bridge Warrants also contain certain rights with regard to asset distributions and fundamental transactions. The exercise price of the Bridge Warrants will be subject to adjustment for splits and similar recapitalization events. As a result of the Merger, at the Effective Time, each Bridge Warrant will automatically be exchanged for warrants (Exchange Warrants) to purchase that number of shares of Vallon Common Stock equal to 11,272,408 multiplied by the exchange ratio. The Exchange Warrants will be on substantively similar terms to the Bridge Warrants, and have an initial exercise price equal to 24% of the Closing Per Share Price (as defined in the Equity SPA, defined below). The exercise price of the Exchange Warrants will be subject to adjustment for splits and similar recapitalization events.

The $1,250 of proceeds from the first closing were allocated to the bridge promissory note and warrants based on their relative fair values as of the commitment date, resulting in an allocation of $679 and $571, respectively. The Company also incurred debt issuance costs of $205 as part of its issuance of debt under the Bridge SPA. The bridge promissory note is being accounted for as share-settled debt under the accounting guidance in ASC 835-30 and, accordingly, the initial net carrying amount of $474 is being accreted to the $1,667 redemption amount on the expected redemption date in March 2023 using the effective interest method. Unamortized debt discounts and debt issuance costs totaled $1,065 as of December 31, 2022. Interest expense stemming from amortization of the debt discounts and debt issuance costs was $127 for the year ended December 31, 2022.

Securities Purchase Agreement (Equity Financing)

In connection with signing the Merger Agreement, Vallon, the Company and the Investor entered into a Securities Purchase Agreement, dated as of December 13, 2022 (Equity SPA), pursuant to which, among other things, the Investor agreed to invest approximately $12,250 in cash and cancel any outstanding principal and interest on the Bridge Notes immediately prior to the Closing (the aggregate amount of such cash investment and the cancellation of the outstanding principal and interest on the Bridge Notes) to fund the combined company following the Merger. In return, the Company will issue shares (Initial Shares) of Company’s common stock to the Investor equal to approximately 10.19% of the estimated Parent Fully Diluted Number (as defined in the Equity SPA). The Equity Financing will close on the same date as the Closing. In addition, Company will deposit a number of shares of Company’s common stock equal to 400% of the number of Initial Shares (Additional Shares) into escrow with an escrow agent, to be exchanged for Vallon Common Stock in the Merger, and to be delivered, in whole or in part, based on the exchange ratio. As a result of the Merger, at the Effective Time, each Initial Share will automatically be converted into the right to receive a number of shares of Vallon Common Stock equal to the number of Initial Shares multiplied by the exchange ratio. Further, at the Effective Time, each Additional Share placed into escrow with the escrow agent will automatically be converted into the right to receive a number of shares of Vallon Common Stock equal to the number of Additional Shares multiplied by the exchange ratio. Additional Shares shall be issued to the Investor upon certain specified reset dates under the Equity SPA in the event that Vallon’s share price is less than 90% of the arithmetic average of the five lowest weighted average prices of the Vallon Common Stock over the applicable periods set forth in the Equity SPA.

In addition, Vallon will issue to the Investor (i) Series A-1 Warrants to purchase that number of shares of Vallon Common Stock equal to 500% of the Initial Shares, (ii) Series A-2 Warrants to purchase that number of shares of Vallon Common Stock equal to 450% of the Initial Shares, and (iii) Series T Warrants to purchase (x) that number of shares of Vallon Common Stock equal to approximately 320.9% of the Initial Shares and (y) upon exercise of the Series T Warrants, an additional amount of Series A-1 Warrants and Series A-2 Warrants, each to purchase that number of shares of Vallon Common Stock equal to approximately 320.9% of the Initial Shares (collectively, the Equity Warrants). The Equity Warrants will be issued on the 11th trading day following the Closing and will have an initial exercise price per share equal to 20% of the Closing Per Share Price for the Series T Warrants, 22% of the Closing Per Share Price for the Series A-1 Warrants and Series A-1 Warrants issued upon exercise of the Series T Warrants and 24% of the Closing Per Share Price for the Series A-2 Warrants and Series A-2 Warrants issued upon exercise of the Series T Warrants. The Equity Warrants are exercisable at any time on or after the applicable issuance date. The Series A-1 Warrants have a term of 60 months from the date all shares underlying the Series A-1 Warrants are freely tradable and the Series A-2 Warrants and Series T Warrants have a term of 24 months from the date all shares underlying the Series A-2 Warrants and Series T Warrants, respectively, are freely tradable. Vallon may force the exercise of the Series T Warrants subject to the satisfaction of certain equity conditions. The Equity Warrants have a cashless exercise provision providing that if on any trading day following the earlier of (i) 240 days following the Closing or (ii) the deadline under the Registration Rights Agreement for having a registration statement registering the underlying Series A-2 warrant shares for resale declared effective (such earlier date, the Trigger Date), a registration statement covering the resale of the warrant shares that are the subject of an exercise notice is unavailable, such Equity Warrant may be exercised on a cashless basis and receive shares of common stock pursuant to the formula therein. The Series A-2 Warrants also have an alternate cashless exercise provision providing that if on any trading day following the Trigger Date, the weighted average price of the post-merger combined company’s common stock is less than 90% of the exercise price of the Series A-2 Warrants, then the holder of the Series A-2 Warrant may exercise the Series A-2 Warrants on a cashless basis and receive one share of common stock for each underlying Series A-2 Warrant share. The exercise price of the Series A-1 Warrants is subject to adjustment for certain dilutive issuances, and the exercise prices and number of shares issuable upon exercise of the Equity Warrants are subject to adjustment for reverse stock splits and similar recapitalization events. The Equity Warrants also contain certain rights with regard to asset distributions and fundamental transactions

Note 10. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases office facilities under an operating lease agreement that was originally set to expire on March 31, 2021. In February 2021, the operating lease agreement was modified to extend the lease term to March 31, 2024. The lease agreement requires fixed monthly rental payments as well as payments for variable monthly utilities and operating costs throughout the lease term. As of December 31, 2022 and 2021, the discount rate applied on this operating lease was 12% and the remaining lease term was fifteen months and twenty seven months, respectively. Lease expense for operating leases was $59 and $58 for the years ended December 31,

2022 and 2021, respectively. Cash paid for operating leases was $54 and $58 for the years ended December 31, 2022 and 2021, respectively.

Future minimum lease payments are due as follows:


	December 31, 2022
2023	$	63
2024	14
Total	77
Less: Imputed interest	6
Present value of operating lease liabilities	$	71

Contingent Transaction Bonuses

Note 11. INCOME TAXES

The difference between the provision for income taxes and the amount expected by applying the federal statutory rate of 21% to pre-tax loss is due to the following:


	Year Ended
	December 31,
	2022		2021
Expected tax benefit based on federal statutory rate	$	(676)	$	(328)
State tax benefit	(242)		(144)
Permanent differences	288		567
Increase (decrease) in valuation allowance	630		(95)
Provision for income taxes	$	—	$	—

Significant components of deferred tax assets and liabilities, and the related valuation allowance, are as follows as of:


	December 31,
	2022		2021
Net operating loss (NOL) carryforwards	$	3,505	$	2,879
Stock-based compensation	188		188
Accrued compensation	10		42
Operating lease liabilities	21		34
Operating lease right-of-use assets	(20)		(34)
Capitalized research and experimental expenditures	68		—
Depreciation and amortization	7		(2)
State income taxes	(235)		(193)
Valuation allowance	(3,544)		(2,914)
Net deferred tax asset	$	—	$	—

A valuation allowance has been recorded for the full amount of the net deferred tax asset due to uncertainties regarding its realizability.

As of December 31, 2022, federal NOL carryforwards totaled $11,652, of which $6,124 expires from 2029 to 2037 and $5,528 does not expire. As of December 31, 2022, California NOL carryforwards totaled $11,966 and expire from 2029 to 2042. The future annual

utilization of NOL carryforwards may become limited due to changes in ownership. The annual limitation may result in the carryforwards not being fully utilized prior to expiration.

Note 12. SUBSEQUENT EVENTS

Management has evaluated subsequent events through the date that the accompanying financial statements were issued.

Exhibit 99.3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of GRI’s financial condition and results of operations should be read in conjunction with GRI’s financial statements and the related notes which are filed as Exhibit 99.1 of Amendment No. 2 to the Current Report on Form 8-K filed with the SEC on July 6, 2023. Some of the information contained in this discussion and analysis, including information with respect to GRI’s plans and strategy for its business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set out under the section entitled “Risk Factors” which is included in the Quarterly Report on Form 10-Q filed by the Combined Company, GRI’s actual results could differ materially from the results described in or implied by these forward-looking statements.

Overview

On April 21, 2023, GRI Bio, Inc., formerly known as Vallon Pharmaceuticals, Inc, (Vallon or the Combined Company) completed its previously announced merger transaction with GRI Bio Operations, Inc., formerly known as GRI Bio, Inc. (GRI) in accordance with the terms of the Agreement and Plan of Merger, dated December 13, 2022 and amended on February 17, 2023 (the Merger Agreement), by and among the Company, Vallon Merger Sub, Inc., a wholly-owned subsidiary of Vallon (Merger Sub) and GRI, pursuant to which Merger Sub merged with and into GRI, with GRI surviving as a wholly-owned subsidiary of the Combined Company (the Merger). Substantially concurrent with the closing of the Merger (the Closing), Vallon was renamed “GRI Bio, Inc.” All references in this section to “GRI,” the “Company,” “we,” “us,” or “our” mean GRI Bio Operations, Inc. (formerly known as GRI Bio, Inc.) prior to completion of the Merger, unless stated otherwise or the context otherwise indicates. In addition, references to “Vallon” refers to GRI Bio, Inc. (formerly known as Vallon Pharmaceuticals, Inc.) prior to the completion of the Merger. References to the Combined Company refer to Vallon after the completion of the Merger.

Our lead product candidate, GRI-0621, is an oral inhibitor of type 1 Natural Killer T (iNKT) cells. GRI-0621 is also an oral formulation of tazarotene, a synthetic retinoid acid receptor (RAR)-beta and gamma selective agonist, that is approved in the United States for topical treatment of psoriasis and acne. As of March 31, 2023, it has been evaluated in over 1,700 patients as an oral product for up to 52-weeks. We are developing GRI-0621 for the treatment of severe fibrotic lung diseases such as idiopathic pulmonary fibrosis (IPF), a life-threatening progressive fibrotic disease of the lung that affects approximately 140,000 people in the United States, with up to 40,000 new cases per year in the United States and some estimate that IPF affects 3 million globally. While there are currently two approved therapies for the treatment of lung fibrosis, neither has been associated with improvements in overall survival, and both therapies have been associated with significant side effects leading to poor therapeutic adherence. In preliminary data from our trials to date with GRI-0621, and earlier trials with oral tazarotene, we have observed GRI-0621 to be well-tolerated and to inhibit iNKT cell activity in subjects. We and others have shown that activated iNKT are upregulated in IPF, primary sclerosing cholangitis (PSC), non-alcoholic steatohepatitis (NASH), alcoholic liver disease (ALD), Systemic Lupus Erythematosus Disease (SLE), multiple sclerosis (MS), ulcerative colitis (UC) patients as well as other indications. In these patients activated iNKT cells are correlated with more severe disease. We are initiating a Phase 2a trial in 36 IPF patients in the second half of 2023 and expects topline results from this trial to be available in the second half of 2024.

Our product candidate portfolio also includes GRI-0803 and a proprietary library of 500+ compounds. GRI-0803, the lead molecule selected from the library, is a novel oral agonist of type 2 Natural Killer T (type 2 NKT) cells. We are developing GRI-0803 for the treatment of autoimmune disorders, with much of our preclinical work in SLE or lupus and MS. In lupus, the immune system mistakenly attacks its own healthy tissues, especially joints and skin, but can affect almost every organ and tissue of the body. The condition can be fatal, and often causes debilitating bouts of fatigue and pain that prevent nearly half of adult patients from working. Lupus affects between 160,000 - 200,000 patients in the United States, with around 80,000 – 100,000 patients in the United States suffering from kidney nephritis, one of the most serious manifestations of SLE, typically within five years of diagnosis. There is no cure for lupus, but medical interventions and lifestyle changes can help control it. SLE treatment consists primarily of immunosuppressive drugs that inhibit the activity of the immune system. Only two drugs have been approved for lupus in the past 50 years, and new treatment options are sorely needed. Subject to IND clearance, we intend to evaluate GRI-0803 in a Phase 1a and 1b trial initially targeting SLE. We expect to file an IND with respect to this Phase 1a and 1b trial in the first half of 2024. We will continue to evaluate indications to select the best fit for further development of the program, but our initial focus is on lupus.

COVID-19

The global COVID-19 pandemic continues to present uncertainty and unforeseeable new risks to our operations and business plan. We have closely monitored recent COVID-19 developments, including the lifting of COVID-19 safety measures, the drop in vaccination rates, the implementation of, and reaction to, vaccine mandates, the spread of various coronavirus strains such as the Delta variant, and supply chain and labor shortages. In light of these developments, the full impact of the COVID-19 pandemic on our business, operations and clinical development plans remains uncertain and will vary depending on the pandemic’s future impact on our clinical trial enrollment, clinical trial sites, contract research organizations (CROs), third-party manufacturers, and other third parties with whom we do business, as well as any legal or regulatory consequences resulting therefrom. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and with most of our employees and consultants working remotely. We will continue to actively monitor the 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.

Financial Operations Overview

Research and Development Expenses

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

Our research and development expenses have consisted primarily of costs related to our development program for our lead product candidate GRI-0621. These expenses include:

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

•expenses incurred under agreements with CROs, CMOs and research laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities as well as consultants that support the implementation of our clinical and non-clinical studies.

Although our direct research and development expenses are tracked by product candidate, we do not allocate employee costs and costs associated with our discovery efforts, laboratory supplies and facilities, including other indirect costs, to specific product candidates as these costs are deployed across multiple programs. We expect our research and development expenses to increase over the next several years as we conduct our planned clinical and preclinical activities for our product candidates.

General and Administrative Expenses

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

We expect our general and administrative expenses will increase substantially as we incur costs associated with being a public company, including expenses related to services associated with maintaining compliance with The Nasdaq Capital Market and SEC requirements, directors and officers insurance, legal and accounting costs and investor relations costs, as well as and increase in personnel expenses as we hire additional personnel.

Interest Expense

Interest expense consists of amortization of debt discounts, debt issuance costs and interest expense related to the TEP Notes and promissory notes held by Altium Growth Fund, LP.

Results of Operations

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

The following table sets forth GRI’s statements of operations data for the periods shown below (in thousands):


	Three Months Ended March 31,
	2023		2022
Operating expenses:
Research and development	$	116	$	59
General and administrative	872		139
Total operating expenses	988		198
Loss from operations	(988)		(198)
Interest expense	(1,162)		(103)
Net loss	$	(2,150)	$	(301)

Research and Development Expenses

Research and development expenses were $0.1 million for each of the three-month periods ended March 31, 2023 and 2022. These expenses primarily related to personnel costs.

General and Administrative Expenses

General and administrative expenses were $0.9 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively. The $0.7 million increase was primarily due to an increase in professional fees, including legal, accounting and audit fees as a result of the proposed Merger.

Interest Expense

Interest expense was $1.2 million and $0.1 million for for the three months ended March 31, 2023 and 2022, respectively, and related to the outstanding promissory notes.

Liquidity and Capital Resources

Since inception, we have incurred losses and expect to continue to incur losses for the foreseeable future. We incurred net losses of $2.2 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had an accumulated deficit of $20.6 million.

We have financed our working capital requirements to date through the issuance of common stock, warrants, convertible notes and promissory notes. As of March 31, 2023, we had $0.5 million in cash.

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


	Three Months Ended March 31,
	2023		2022
Net cash provided by (used in):
Operating activities	$	(579)	$	(80)
Financing activities	1,030		10
Net increase (decrease) in cash	$	451	$	(70)

Cash Flows from Operating Activities

For the three months ended March 31, 2023 and 2022, net cash used in operating activities was $0.6 million and $0.1 million, respectively. The $0.5 million increase was primarily due to a $2.2 million increase in net loss offset by a $1.5 million increase in net noncash adjustments and a $0.2 million increase in changes in operating assets and liabilities. The $0.2 million net change in operating assets and liabilities was primarily due to a $0.4 million increase in account payable offset by a $0.2 million decrease in accrued liabilities.

Cash flows from Financing Activities

Net cash provided by financing activities was $1.0 million for the three months ended March 31, 2023, which primarily consisted of proceeds from promissory notes.

Future Funding Requirements

Our net losses were $2.2 million and $0.3 million for the quarters ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had $0.5 million in cash and an accumulated deficit of $20.6 million. We expect to devote substantial financial resources to our planned activities, particularly as we prepare for, initiate, and conduct our planned clinical trials of GRI-0621 and GRI-0803, advance our discovery programs and continue our product development efforts. In addition, we expect to incur additional costs associated with operating as a public company. Based on our current operating plan, we believe that our existing cash will be sufficient to fund our operating expenses and capital expenditure requirements for at least the twelve months following the Merger and financing contemplated by the Securities Purchase Agreement, dated as of December 13, 2022, by and between GRI, Vallon and Altium Growth Fund, LP (the Equity Financing), not including the exercise of the Series T Warrants (the Series T Warrant Exercises).

Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to secure adequate additional funding, we will need to reevaluate our operating plans and may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, delay, scale back or eliminate some or all of our development programs, or relinquish rights to our technology on less favorable terms than we would otherwise choose. These actions could materially impact our business, results of operations and future prospects. In addition, attempting to secure additional financing may divert the time and attention of management from day-to-day activities and distract from our discovery and product development efforts.

Off-Balance Sheet Arrangements

We are not party to any off-balance sheet transactions. We have no guarantees or obligations other than those which arise out of normal business operations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of its financial condition and results of operations is based on its unaudited interim financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management evaluates these estimates and judgments on an ongoing basis. Management bases its estimates on historical experience and on various other factors that it believes are reasonable under the circumstances. Actual results could differ from those estimates.

Our significant accounting policies are described in more detail in Note 1, “The Company and a Summary of its Significant Accounting Policies”, in the notes to its financial statements as of and for the years ended December 31, 2022 and 2021, which is Exhibit 99.2 of Amendment No. 2 to the Current Report on Form 8-K filed with the SEC on July 6, 2023.

Qualitative and Quantitative Disclosures About Market Risk

We are not exposed to market risks in the ordinary course of its business. These risks primarily include interest rate sensitivities. Our cash is our only interest-earning asset. Interest income earned was de minimis for the three months ended March 31, 2023 and 2022.

Exhibit 99.4

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On April 21, 2023, pursuant to that Agreement and Plan of Merger, dated as of December 13, 2022, as amended on February 17, 2023 (the “Merger Agreement”), by and among GRI Bio, Inc., formerly known as Vallon Pharmaceuticals, Inc. (the “Company” or “Vallon”), GRI Operations, Inc., formerly known as GRI Bio, Inc., a Delaware corporation (“GRI”), and Vallon Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub”), Merger Sub was merged with and into GRI (the “Merger”), with GRI surviving the Merger as a wholly owned subsidiary of the Company. In connection with the Merger, and prior to the effective time of the Merger (the “Effective Time”), the Company effected a reverse stock split of the Company’s common stock at a ratio of 1-for-30 (the “Reverse Split”). Unless otherwise noted, all references to share and per share amounts herein reflect the Reverse Split. Also, in connection with the closing of the Merger (the “Closing”), the Company amended its certificate of incorporation and bylaws to change its name from “Vallon Pharmaceuticals, Inc.” to “GRI Bio, Inc.”

At the Effective Time, each share of GRI’s common stock (“GRI Common Stock”) outstanding immediately prior to the Effective Time, including any shares of GRI Common Stock issued pursuant to the Pre-Merger Financing (as defined below) automatically converted solely into the right to receive a number of shares of the Company’s common stock (“Company Common Stock”) equal to 0.0374 (the “Exchange Ratio”).

Each option to purchase shares of GRI Common Stock (each, a “GRI Option”) outstanding and unexercised immediately prior to the Effective Time under the GRI Bio, Inc. 2015 Equity Incentive Plan (the “GRI Plan”), whether or not vested, converted into and became an option to purchase shares of Company Common Stock, and the Company assumed the GRI Plan and each such GRI Option in accordance with the terms of the GRI Plan (each, an “Assumed Option”). The number of shares of Company Common Stock subject to each Assumed Option was determined by multiplying (i) the number of shares of GRI Common Stock that were subject to such GRI Option, as in effect immediately prior to the Effective Time, by (ii) the Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Company Common Stock. The per share exercise price for the Company Common Stock issuable upon exercise of each Assumed Option was determined by dividing (A) the per share exercise price of such Assumed Option, as in effect immediately prior to the Effective Time, by (B) the Exchange Ratio and rounding the resulting per share exercise price up to the nearest whole cent. Any restriction on the exercise of any Assumed Option continued in full force and effect and the term, exercisability, vesting schedule, and any other provisions of such Assumed Option otherwise remained unchanged.

Each warrant to purchase shares of GRI Common Stock outstanding immediately prior to the Effective Time other than the Bridge Warrants (as defined below) (the “GRI Warrants”), was assumed by the Company and converted into a warrant to purchase Company Common Stock (each, an “Assumed Warrant”) and thereafter (i) each Assumed Warrant became exercisable solely for shares of Company Common Stock; (ii) the number of shares of Company Common Stock subject to each Assumed Warrant was determined by multiplying (A) the number of shares of GRI Common Stock that were subject to such GRI Warrant, as in effect immediately prior to the Effective Time, by (B) the Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Company Common Stock; (iii) the per share exercise price for the Company Common Stock issuable upon exercise of each Assumed Warrant was determined by dividing (A) the exercise price per share of the GRI Common Stock subject to such GRI Warrant, as in effect immediately prior to the Effective Time, by (B) the Exchange Ratio, and rounding the resulting exercise price up to the nearest whole cent.

The Bridge Warrants were exchanged for warrants (the “Exchange Warrants”) to purchase an aggregate of 421,589 shares of Company Common Stock.

All rights with respect to GRI restricted stock awards were assumed by the Company and converted into Company restricted stock awards with the number of shares subject to each restricted stock award multiplied by the Exchange Ratio and rounding the resulting number down to the nearest whole number of shares of Company Common Stock. The term, exercisability, vesting schedule and other provisions of the GRI restricted stock awards otherwise remained unchanged.

The Merger is accounted for as a reverse recapitalization under U.S. GAAP because the primary assets of Vallon are cash, cash equivalents, and short-term marketable securities. For accounting purposes, GRI has been determined to be the accounting acquirer based upon the terms of the Merger and other factors including: (i) the equity holders of GRI immediately prior to the Merger owned, or held rights to acquire, in the aggregate approximately 85% of the outstanding Company Common Stock and the Company’s stockholders immediately prior to the Merger owned approximately 15% of the outstanding Company Common Stock (ii) GRI holds the majority (4 out of 5) of board seats of the combined company, and (iii) GRI’s management holds the majority of key positions in the management of the combined company.

The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X. The Vallon and GRI unaudited pro forma condensed combined balance sheet data assume that the Merger took place on March 31, 2023 and combines the Vallon and GRI historical balance sheets at March 31, 2023. The Vallon and GRI unaudited pro forma condensed combined statements of operations data assume that the Merger took place as of January 1, 2022 and combines the historical results of Vallon and GRI for the three months ended March 31, 2023 and for the year ended December 31, 2022. The historical financial statements of Vallon and GRI, which are filed as Exhibit 99.4 of Amendment No. 2 to the Current Report on Form 8-K filed with the SEC on July 6, 2023, have been adjusted to give pro forma effect to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results.

The unaudited pro forma condensed combined financial statements are based on the assumptions and adjustments that are described in the accompanying notes. The unaudited pro forma condensed combined financial statements and pro forma adjustments have been prepared based on preliminary estimates of fair value of assets acquired and liabilities assumed. The unaudited pro forma condensed combined financial statements do not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the Merger. The unaudited pro forma condensed combined financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Vallon and GRI been a combined company during the specified period. The unaudited pro forma condensed combined financial statements, including the notes thereto, should be read in conjunction with the separate historical (i) unaudited interim financial statements of Vallon for the three months ended March 31, 2023, which is filled in Vallon’s Form 10-Q (ii) audited financial statements of Vallon for the year ended December 31, 2022, which is filed in Vallon’s Form 10-K, (iii) unaudited interim financial statements of GRI for the three months ended March 31, 2023, which is filed as Exhibit 99.1 to the Current Report on this Form 8-K/A and (iv) audited financial statements of GRI for the year ended December 31, 2022 which is filed as Exhibit 99.2 of Amendment No. 2 to the Current Report on Form 8-K filed with the SEC on July 6, 2023.

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2023

(in thousands)


	GRI Bio, Inc.		Vallon Pharmaceuticals, Inc.		Transaction Adjustments		Notes	Pro Forma Combined
Assets
Current assets:
Cash and cash equivalents	$	460	$	1,665	$	4,042	A	$	6,167
Prepaid expenses and other current assets	271		432		(259)		B	444
Total current assets	731		2,097		3,783			6,611
Deposits	4		—		—			4
Property and equipment, net	11		—		—			11
Right of use assets – operating leases	55		—		—			55
Total assets	$	801	$	2,097	$	3,783		$	6,681

Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	1,585		528		(1,582)		C	531
Accrued expenses	—		1,353		(52)		C	1,301
Operating lease liabilities	55		—		—			55
Warrant liability	—		185		—			185
Non-convertible promissory notes	2,391		—		(2,391)		D	—


Total liabilities	4,031		2,066		(2,169)			2,072

Stockholders’ equity (deficit):
Common stock	267		—		(13)		E	254
Additional paid-in capital	17,149		31,353		(16,927)		E	31,575
Accumulated deficit	(20,646)		(31,322)		24,748		E	(27,220)
Total stockholders’ equity (deficit)	(3,230)		31		7,808			4,609
Total liabilities and stockholders’ equity (deficit)	$	801	$	2,097	$	5,639		$	6,681

See accompanying notes to the unaudited pro forma condensed combined financial statements.

Unaudited Pro Forma Condensed Combined Statements of Operations

For the Three Months Ended March 31, 2023

(in thousands, except share and per share amounts)


	GRI Bio, Inc.		Vallon Pharmaceuticals, Inc.		Transaction Adjustments		Notes	Pro Forma Combined
Operating expenses:
Research and development	$	116	$	(124)	$	—		$	(8)
General administrative	872		2,473		—			3,345
Total operating expenses	988		2,349		—			3,337
Loss from operations	(988)		(2,349)		—			(3,337)
Interest income (expense), net	(1,162)		16		1,162		F	16
Change in fair value of warrant liability	—		(63)		—			(63)
Net loss	$	(2,150)	$	(2,396)	$	1,162		$	(3,384)
Net loss per share, basic and diluted.	$	(1.78)	$	(5.33)				$	(1.14)
Weighted average common shares outstanding, basic and diluted	1,207,935		449,408		1,299,752		G	2,957,095

See accompanying notes to the unaudited pro forma condensed combined financial statements.

Unaudited Pro Forma Condensed Combined Statements of Operations

For the Year Ended December 31, 2022

(in thousands, except share and per share amounts)


	GRI Bio, Inc.		Vallon Pharmaceuticals, Inc.		Transaction Adjustments		Notes	Pro Forma Combined
Operating expenses:
Research and development	$	242	$	1,170	$	—		$	1,412
General and administrative	1,997		5,758		—			7,755
Total operating expenses	2,239		6,928		—			9,167
Loss from operations	(2,239)		(6,928)		—			(9,167)
Interest income (expense), net	(653)		26		653		F	26
Loss on extinguishment of debt	(325)		—		—			(325)
Loss on warrant conversion	—		(506)		—			(506)
Change in fair value of warrant liability	—		384		—			384
Net loss	$	(3,217)	$	(7,024)	$	653		$	(9,588)
Net loss per share, basic and diluted	$	(0.13)	$	(0.69)				$	(3.45)
Weighted average common shares outstanding, basic and diluted	24,135,215		10,143,205		(31,497,252)		G	2,781,168

See accompanying notes to the unaudited pro forma condensed combined financial statements.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

1.Description of Transactions

The Merger

On April 21, 2023, pursuant to that Agreement and Plan of Merger, dated as of December 13, 2022, as amended on February 17, 2023 (the “Merger Agreement”), by and among GRI Bio, Inc., formerly known as Vallon Pharmaceuticals, Inc. (the “Company”), GRI Operations, Inc., formerly known as GRI Bio, Inc., a Delaware corporation (“GRI”), and Vallon Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub”), Merger Sub was merged with and into GRI (the “Merger”), with GRI surviving the Merger as a wholly owned subsidiary of the Company. In connection with the Merger, and prior to the effective time of the Merger (the “Effective Time”), the Company effected a reverse stock split of the Company’s common stock at a ratio of 1-for-30 (the “Reverse Split”). Unless otherwise noted, all references to share and per share amounts herein reflect the Reverse Split. Also, in connection with the closing of the Merger (the “Closing”), the Company amended its certificate of incorporation and bylaws to change its name from “Vallon Pharmaceuticals, Inc.” to “GRI Bio, Inc.” and is trading under the symbol “GRI” on the Nasdaq Global Market.

The Bridge Warrants were exchanged for warrants (the “Exchange Warrants”) to purchase an aggregate of 421,589 shares of Company Common Stock. The Exchange Warrants contain substantively similar terms to the Bridge Warrants, and have an initial exercise price equal to $14.73 per share.

Immediately following the Effective Time, there were approximately 2,918,954 shares of Company Common Stock outstanding, the former stockholders of GRI (including the Investor (as defined below)) owned, or held rights to acquire, in the aggregate approximately 85% of the outstanding Company Common Stock and the Company’s stockholders immediately prior to the Merger owned approximately 15% of the outstanding Company Common Stock.

As previously disclosed, in connection with signing the Merger Agreement, GRI entered into a Securities Purchase Agreement, dated as of December 13, 2022 (the “Bridge SPA”) with Altium Growth Fund, LP (the “Investor”), pursuant to which, among other things, the Investor purchased, and GRI issued, senior secured notes (the “Bridge Notes”) in the aggregate principal amount of up to approximately $3.3 million, in exchange for an aggregate purchase price of up to approximately $2.5 million. In addition, GRI issued the Investor warrants to purchase an aggregate of 2,504,980 shares of GRI Common Stock (the “Bridge Warrants”). As a result of the Merger, at the Effective Time, the Bridge Warrants were exchanged for the Exchange Warrants to purchase an aggregate of 421,589 shares of Company Common Stock. The Exchange Warrants contain substantively similar terms to the Bridge Warrants, and have an initial exercise price equal to $14.73 per share. The exercise price of the Exchange Warrants is subject to adjustment for splits and similar recapitalization events.

In addition to the Bridge SPA, in connection with signing the Merger Agreement, the Company, GRI and the Investor entered into a Securities Purchase Agreement, dated as of December 13, 2022 (the “Equity SPA”). Pursuant to the Equity SPA, immediately prior to the Closing, GRI issued 6,787,219 shares of GRI Common Stock (the “Initial Shares”) to the Investor and 27,148,877 shares of GRI Common Stock (the “Additional Shares”) into escrow with an escrow agent. At the closing, pursuant to the Merger, the Initial Shares converted into an aggregate of 253,842 shares of Company Common Stock and the Additional Shares converted into an aggregate of 1,015,368 shares of Company Common Stock. Subject to beneficial ownership limitations, some or all of the shares of Company Common Stock issued in exchange for the Additional Shares were held in escrow and to be released to the Investor upon certain specified reset dates described in the Equity SPA. On May 8, 2023, in accordance with the terms of the Equity SPA, the Company and the Investor authorized the escrow agent to, subject to beneficial ownership limitations, disburse to the Investor all of the shares of Company Common Stock issued in exchange for the Additional Shares.

Also on May 8, 2023, pursuant to the Equity SPA, the Company issued to the Investor (i) Series A-1 Warrants to purchase 1,269,210 shares of Company Common Stock with an initial exercise price of $13.50 per share, (ii) Series A-2 Warrants to purchase 1,142,289 shares of Company Common Stock with an initial exercise price of $14.73 per share, and (iii) Series T Warrants to purchase at an exercise price of $12.28 per share (x) 814,467 shares of Company Common Stock and (y) upon exercise of the Series T Warrants, an additional amount of Series A-1 Warrants and Series A-2 Warrants, each to purchase 814,467 shares of Company Common Stock (collectively, the “Equity Warrants”).

2. Basis of Presentation

The unaudited pro forma condensed combined financial statements were prepared in accordance with the regulations of the SEC. The unaudited pro forma condensed combined balance sheet as of March 31, 2023 is presented as if the Merger had been completed on March 31, 2023. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2023 and for the year ended December 31, 2022 assumes that the merger occurred on January 1, 2022, and combines the historical results of GRI and Vallon.

For accounting purposes, GRI is considered to be the acquiring company and Merger will be accounted for as a reverse recapitalization of Vallon by GRI because at the closing of the Merger, the primary pre‑combination assets of Vallon were cash and cash equivalents.

Under reverse recapitalization accounting, the assets and liabilities of Vallon were recorded, as of the completion of the Merger, at their fair values which are expected to approximate their book values because of the short‑term nature of the instruments. No goodwill or intangible assets were recognized and the excess consideration transferred over the fair value of the net assets of Vallon was reflected as a reduction to equity. Consequently, the consolidated financial statements of GRI reflect the operations of the acquirer for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders of the legal acquirer and a recapitalization of the equity of the accounting acquirer. The historical financial statements of Vallon and GRI have been adjusted to give pro forma effect to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results.

Pro forma adjustments related to the Equity Financing for aggregate cash proceeds of $12.25 million reflect additional issuance of GRI Common Stock that was completed prior to the closing of the Merger as a condition to the Merger Agreement. The shares of GRI Common Stock in the Equity Financing (including those issued upon cancellation of the Bridge Notes) are converted into shares of Company Common Stock effective as of immediately after the Effective Time.

The unaudited pro forma condensed combined financial statements also give effect to the other transactions that are not directly attributable to the Merger but are deemed relevant to the pro forma financial position and operations of the combined companies.

To the extent there are significant changes to the business following completion of the Merger, the assumptions and estimates set forth in the unaudited pro forma condensed combined financial statements could change significantly. Accordingly, the pro forma adjustments are subject to further adjustments as additional information becomes available and as additional analyses are conducted following the completion of the Merger. There can be no assurances that these additional analyses will not result in material changes to the estimates of fair value.

3. Pro Forma Adjustments

The pro forma adjustments were based on the preliminary information available at the time of the preparation of the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the separate historical (i) audited financial statements for the years ended December 31, 2022 and (ii) unaudited interim financial statements for the three months ended March 31, 2023 and 2022 of Vallon and GRI of which GRI’s are filed as Exhibit 99.1 of Amendment No. 2 to the Current Report on Form 8-K filed with the SEC on July 6, 2023.

Merger Transaction Adjustments

A.Reflects (i) approximately $12.25 million in proceeds from the Equity Financing (not including any proceeds from the potential exercise of Equity Warrants) and, (ii) payment of total estimated unpaid transaction costs upon consummation of the Merger.


(amounts in thousands)	GRI Bio, Inc.		Vallon Pharmaceuticals, Inc.		Total
Proceeds from Equity Financing, net of issuance costs	$	12,250	$	—	$	12,250
Payment of transaction costs	(3,908)		(4,300)		(8,208)
Pro forma adjustment	$	8,342	$	(4,300)	$	4,042

B.Reflects the reclassification of deferred stock issuance costs upon completion of the Equity Financing.

C.Reflects the settlement of transaction costs included in accounts payable and accrued liabilities pursuant to the Equity SPA:


(amounts in thousands)	GRI Bio, Inc.		Vallon Pharmaceuticals, Inc.		Total
Unpaid transaction costs in accounts payable as of March 31, 2023	$	(1,395)	$	(187)	$	(1,582)
Unpaid transaction costs in accrued liabilities as of March 31, 2023	—		(52)		(52)
Pro forma adjustment	$	(1,395)	$	(239)	$	(1,634)

D.Issuance of common stock to settle the Bridge Notes upon completion of the Equity Financing.

E.To record the (i) exchange ratio adjustment to GRI Common Stock outstanding, (ii) sale of GRI Common Stock and GRI Warrants, net of issuance costs, in connection with Equity Financing, (iii) elimination of Vallon’s historical equity carrying value, (iv) post-combination stock-based compensation expense for Vallon options and warrants and (viii) payment of transaction and severance costs:

For purposes of these unaudited pro forma condensed combined financial statements, the Equity Warrants have been classified as equity as they are not redeemable and the potential adjustments to exercise prices and settlement scenarios, as defined in the warrant agreements, are deemed to be indexed to the Company Common Stock.


	Common stock			Additional paid-in capital		Accumulated deficit		Total
(Dollar amounts in thousands)	Shares	Amount
Adjustment to GRI Common Stock outstanding in connection with the exchange ratio	—	$	(14)	$	14	$	—	$	—
Issuance of common stock and warrants upon completion of Equity Financing	1,299,752	1		14,381		—		14,382


Elimination of Vallon’s historical carrying values	—	—		(31,322)		31,322		—
Issuance of common stock to Vallon shareholders	449,408	—		—		—		—
Payment of transaction costs	—	—		—		(6,574)		(6,574)
Pro forma adjustment	1,749,160	$	(13)	$	(16,927)	$	24,748	$	7,808

F. Elimination of interest expense associated with the Bridge Notes that were settled upon completion of the Equity Financing.

G. The pro forma combined basic and diluted loss per share have been adjusted to reflect the pro forma net loss for the three months ended March 31, 2023 and for the year ended December 31, 2022. In addition, the number of shares used in calculating the pro forma combined basic and diluted loss per share has been adjusted to reflect the estimated total number of shares of common stock of the combined company that would be outstanding as of the closing of the Merger. The following table sets forth the calculation of the pro forma weighted-average number of common shares outstanding—basic and diluted.


	Three Months Ended March 31, 2023	Year Ended December 31, 2022
Elimination of historical Vallon weighted average shares	(449,408)	(10,143,205)
Effect of applying estimated exchange ratio to GRI Common Stock	—	(23,103,207)
Issuance of common stock in connection with Equity Financing	1,299,752	1,299,752
Issuance of shares of common stock of the combined company to Vallon stockholders	449,408	449,408
	1,299,752	(31,497,252)

Cover	Apr. 21, 2023
Cover [Abstract]
Document Type	8-K/A
Document Period End Date	Apr. 21, 2023
Entity Registrant Name	GRI BIO, INC.
Entity Incorporation, State or Country Code	DE
Entity File Number	001-40034
Entity Tax Identification Number	82-4369909
Entity Address, Address Line One	2223 Avenida de la Playa
Entity Address, Address Line Two	Suite 208
Entity Address, City or Town	La Jolla
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	92037
City Area Code	619
Local Phone Number	400-1170
Written Communications	false
Soliciting Material	false
Pre-commencement Tender Offer	false
Pre-commencement Issuer Tender Offer	false
Title of 12(b) Security	Common Stock, par value $0.0001 per share
Trading Symbol	GRI
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Central Index Key	0001824293
Amendment Flag	false

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