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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________
FORM 10-Q
____________________________________
(Mark One)

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

For the quarterly period ended
September 30, 2022

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

For the transition period from_________to_________
Commission File Number: 001-40034
____________________________________
VALLON PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)
____________________________________

Delaware |  | 82-4369909
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
100 N. 18th Street, Suite 300, Philadelphia, PA 19103
(Address of principal executive offices, including zip code)

(267)-607-8255
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, par value $0.0001 per share |  | VLON |  | The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | o | Accelerated filer | o
Non-accelerated filer | x | Smaller reporting company | x
Emerging growth company | x |  |

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of November 2, 2022, 12,742,342 shares of the Registrant’s Common Stock were outstanding.

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|  | Page
PART I. | FINANCIAL INFORMATION | 3
Item 1. | Financial Statements | 3
| Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 | 3
| Statements of Operations and Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2022 and 2021 | 4
| Statements of Changes in Stockholders’ Equity (Deficit) (unaudited) for the three and nine months ended September 30, 2022 and 2021 | 5
| Statements of Cash Flows (unaudited) for the nine months ended September 30, 2022 and 2021 | 6
| Notes to Unaudited Interim Financial Statements | 7
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 24
Item 4. | Controls and Procedures | 24
PART II. | OTHER INFORMATION | 25
Item 1. | Legal Proceedings | 25
Item 1A. | Risk Factors | 25
Item 6. | Exhibits | 31
| Signatures | 33

i

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements in the sections captioned “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Quarterly Report contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about:
•our ability to identify, evaluate and complete any strategic alternative that yields value for our stockholders;
•the likelihood of our clinical trials and non-clinical studies demonstrating safety and efficacy of our product candidates, and other positive results;
•the timing of initiation of our future clinical trials, and the reporting of data from our completed, current and future preclinical and clinical trials;
•the size of the market opportunity for our product candidates;
•our plans relating to commercializing our product candidates, if approved, including the geographic areas of focus and sales strategy;
•the success of competing therapies that are or may become available;
•our estimates of the number of patients in the United States who suffer from ADHD or narcolepsy and the number of patients that will enroll in our clinical trials;
•the beneficial characteristics, safety and efficacy of our product candidates;
•the timing or likelihood of regulatory filings and approval for our product candidates;
•our ability to obtain and maintain regulatory approval of our product candidates;
•our plans relating to the further development and manufacturing of our product candidates, including ADMIR;
•the expected potential benefits of strategic collaborations with third parties, including MEDICE Arzneimittel Putter GmbH & Co. KG (Medice), which is affiliated with one of our principal stockholders, SALMON Pharma GMbH (Salmon Pharma), and represented by one member of our board of directors, and our ability to attract collaborators with development, regulatory and commercialization expertise;
•existing regulations and regulatory developments in the United States, the European Union, and other geographic territories;
•our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;
•our continued reliance on third parties to conduct additional clinical trials of our product candidates, and for the manufacture of our product candidates for preclinical studies and clinical trials;
•the need to hire additional personnel, and our ability to attract and retain such personnel;
•the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
•our financial performance;
•the sufficiency of our existing capital resources to fund our future operating expenses and capital expenditure requirements;
•the impacts of the COVID-19 pandemic on our operations;
•our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act or a smaller reporting company under the Exchange Act; and
•our ability to maintain the listing of our common stock on The Nasdaq Capital Market.
ii

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Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations and prospects, and these forward-looking statements are not guarantees of future performance or development. You should refer to the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 and this Quarterly Report for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. If the forward-looking statements prove to be inaccurate; the inaccuracy may be material. In light of the significant uncertainties in these forward- looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represents our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change, however, except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after we distribute this Quarterly Report, whether as a result of any new information, future events or otherwise. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.
This Quarterly Report includes trademarks and registered trademarks of Vallon Pharmaceuticals, Inc. Products or service names of other companies mentioned in this Quarterly Report may be trademarks or registered trademarks of their respective owners.
As used in this Quarterly Report, unless the context requires otherwise, the “Company,” “we,” “us” and “our” refer to Vallon Pharmaceuticals, Inc.
iii

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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Vallon Pharmaceuticals, Inc.
Balance Sheets
(in thousands, except share and per share amounts)

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

See accompanying notes to unaudited interim financial statements.
3

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Vallon Pharmaceuticals, Inc.
Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
(Unaudited)

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

See accompanying notes to unaudited interim financial statements.
4

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Vallon Pharmaceuticals, Inc.
Statements of Changes in Stockholders’ Equity (Deficit)
(in thousands, except shares)
(Unaudited)

| Common Stock | Additional Paid-in Capital |  | Accumulated Other Comprehensive Loss |  | Accumulated Deficit |  | Stockholders’ Equity (Deficit)
| Shares |  | Amount |  |  |  |
Balance, December 31, 2020 | 4,506,216 |  | $ | — |  | $ | 11,145 |  | $ | — |  | $ | (12,599) |  |  | $ | (1,454) |
Issuance of common stock for convertible notes | 54,906 |  | — |  | 439 |  | — |  | — |  | 439
Issuance of common stock for IPO, net of issuance expenses | 2,250,000 |  | — |  | 15,104 |  | — |  | — |  | 15,104
Issuance of common stock for services | 1,714 |  | — |  | 9 |  | — |  | — |  | 9
Issuance of Underwriters Warrants | — |  | — |  | 399 |  | — |  | — |  | 399
Stock-based compensation | — |  | — |  | 168 |  | — |  | — |  | 168
Net loss | — |  | — |  | — |  | — |  | (2,638) |  |  | (2,638) |
Balance, March 31, 2021 | 6,812,836 |  | — |  | 27,264 |  | — |  | (15,237) |  |  | 12,027
Stock-based compensation | — |  | — |  | 138 |  | — |  | — |  |  | 138
Net loss | — |  | — |  | — |  | — |  | (2,312) |  |  | (2,312)
Balance, June 30, 2021 | 6,812,836 |  | — |  | 27,402 |  | — |  | (17,549) |  |  | 9,853
Stock-based compensation | — |  |  | — |  |  | 134 |  | — |  | — |  |  | 134
Unrealized loss on investments | — |  |  | — |  |  | — |  | (1) |  | — |  |  | (1)
Net loss | — |  |  | — |  |  | — |  | — |  | (1,257) |  |  | (1,257)
Balance September 30, 2021 | 6,812,836 |  |  | $ | — |  |  | $ | 27,536 |  |  | $ | (1) |  |  | $ | (18,806) |  |  | $ | 8,729 |

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

See accompanying notes to unaudited interim financial statements.
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Vallon Pharmaceuticals, Inc.
Statements of Cash Flows
(in thousands)
(Unaudited)

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

See accompanying notes to unaudited interim financial statements.
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Vallon Pharmaceuticals, Inc.
Notes to Unaudited Interim Financial Statements
(in thousands, except share and per share data)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Vallon Pharmaceuticals, Inc. (Vallon or the Company), based in Philadelphia, PA was incorporated in Delaware on January 11, 2018, which is the date of inception.
The Company is a biopharmaceutical company focused on the development and commercialization of novel abuse-deterrent medications for CNS disorders. The Company’s lead investigational product candidate, ADAIR, is a proprietary, abuse-deterrent oral formulation of immediate-release dextroamphetamine (the main active ingredient in Adderall®) for the treatment of attention-deficit/hyperactivity disorder (ADHD) and narcolepsy. In March 2022, the Company announced that its SEAL study for ADAIR did not reach its primary endpoint, and there is no assurance that ADAIR will receive approval by the U.S. Food and Drug Administration (the FDA). In addition to ADAIR, the Company completed formulation development work and selected the final formulation of its second product candidate, ADMIR, an abuse deterrent formulation of methylphenidate (Ritalin®), for the treatment of ADHD.
Recent Developments
The SEAL study (S tudy to E valuate the A buse L iability, Pharmacokinetics, Safety and Tolerability of an Abuse-Deterrent d-Amphetamine Sulfate Immediate Release Formulation), was the Company’s pivotal intranasal human abuse liability study assessing the pharmacodynamics (PD), pharmacokinetics (PK), safety and tolerability of snorting professional laboratory-manipulated ADAIR 30 mg when compared to crushed d-amphetamine sulfate and placebo in recreational drug users. ADAIR was prepared for snorting by a pharmacist using a multi-step technique that had been developed by a professional laboratory and agreed upon by the FDA. The SEAL study enrolled 55 subjects, of whom 53 completed the study and 52 were included in the final analysis. The study involved a four-way crossover design to evaluate professionally manipulated, intranasal ADAIR 30 mg, crushed intranasal dextroamphetamine, ADAIR 30 mg taken orally, and placebo. All subjects were non-dependent recreational stimulant users with an additional history of recreational intranasal drug use.
The SEAL study did not meet its primary endpoint, which was E max Drug Liking. ADAIR scored similarly to what was observed in an earlier proof-of-concept study, however, reference dextroamphetamine did not score as high as expected and as seen in the previous study, thus driving the lack of statistical significance. The SEAL study did meet all pharmacodynamic secondary endpoints including Overall Drug Liking and willingness to Take Drug Again at 12 and 24 hours post-dosing, demonstrating statistical significance.
The Company is continuing to assess the best path forward for the ADAIR and ADMIR development programs. In addition, the Company has engaged Ladenburg Thalmann & Co. Inc. (Ladenburg) to evaluate its strategic alternatives with the goal of maximizing stockholder value. Ladenburg has been engaged to advise the Company on the strategic review process, which could include, without limitation, exploring the potential for a possible merger, business combination, investment into the Company, or a purchase, license or other acquisition of assets. In the meantime, and in conjunction with the exploration of strategic alternatives, the Company is streamlining its operations in order to preserve its capital and cash resources.
2. LIQUIDITY
These financial statements have been prepared on the basis that the Company is a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not generated any significant revenues from operations since inception and does not expect to do so in the foreseeable future. The Company has incurred operating losses since its inception and has incurred and accumulated deficit of $27,343 through September 30, 2022. The Company has financed its working capital requirements to date through the issuance of common stock, warrants, convertible notes, short-term promissory notes, and a Paycheck Protection Program (PPP) promissory note.
In January 2021, the Company completed a $350 convertible note financing and in February 2021, the Company completed the initial public offering (IPO), raising net proceeds of $15,500.
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On May 17, 2022, the Company entered into a Securities Purchase Agreement with certain investors (the Securities Purchase Agreement) for the sale of up to 3,700,000 shares of the Company’s common stock, par value $0.0001 per share (the Shares), at a purchase price of $1.0632 per Share in a registered direct offering (the Offering). In a concurrent private placement also pursuant to the Securities Purchase Agreement (the Private Placement), for each Share of common stock purchased by an investor, such investor was entitled receive from the Company an unregistered warrant (the Warrant and, together with the Shares, the Securities) to purchase one Share of common stock. The gross proceeds from the Offering and Private Placement were approximately $3,900, before deducting fees payable to the placement agent and other estimated offering expenses payable by the Company of approximately $572, of which $85 related to the warrants was expensed.
As of September 30, 2022, the Company had cash, cash equivalents and marketable securities of approximately $5,151.
The Company expects to incur ongoing expenses as it evaluates its plans for the ADAIR and ADMIR programs and strategic alternatives after it announced in March 2022 that the SEAL study of ADAIR for the treatment of ADHD failed to meet statistical significance for its primary endpoint. The Company is currently assessing the best path forward for the ADAIR and ADMIR programs and has no other product candidates undergoing clinical trials. The Company’s future capital requirements are difficult to forecast and will depend on many factors, including but not limited to the terms and timing of any strategic alternatives including a merger or business combination, asset acquisitions or sales, collaborations or licensing arrangements.
If the Company raises additional funds by issuing equity securities, its stockholders may experience dilution. Any future debt financing may impose upon it covenants that restrict our operations, including limitations on its ability to incur liens or additional debt, pay dividends, repurchase its common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any equity or debt financing may contain terms that are not favorable to the Company or its stockholders. If the Company is unable to raise additional funds when needed, it may be required to delay, reduce or terminate some or all of its development programs and clinical trials. The Company may also be required to sell or license to other parties’ rights to develop or commercialize its drug candidates that it would prefer to retain. Therefore, there is substantial doubt about the Company’s ability to continue as a going concern. The Company expects to continue to incur expenses and operating losses at least for the foreseeable future as it evaluates future plans for the ADAIR and ADMIR programs as well as its strategic alternatives.
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. References in this Quarterly Report on Form 10-Q to “authoritative guidance” is meant to refer to GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). The December 31, 2021 balance sheet was derived from audited financial statements.
In the opinion of management, the unaudited interim financial statements furnished herein include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of September 30, 2022, and the results of operations and stockholders’ equity (deficit) for the three and nine months ended September 30, 2022 and 2021 and cash flows for the nine months ended September 30, 2022 and 2021. Results of operations for the three and nine months ended September 30, 2022, are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2022. 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, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 14, 2022.
Recapitalization
Immediately prior to the closing of the IPO (Note 7), the Company effected a one-for-40 reverse stock split of its common stock. All share and per share amounts, excluding the number of authorized shares and par value, contained in these financial statements and accompanying notes, and this Quarterly Report on Form 10-Q give retroactive effect to the reverse split.
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Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the unaudited interim financial statements and the reported amounts of expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of share options, the embedded derivative of convertible notes, warrant issuance and subsequent warrant revaluations, valuation allowances relating to deferred tax assets, revenue recognition, accrued expenses and estimation of the incremental borrowing rate for the finance lease. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.
Marketable Securities
Marketable securities consist of debt securities that are designated as available-for-sale. Marketable debt securities are recorded at fair value and unrealized holding gains or losses are reported as a component of accumulated other comprehensive income (loss).
Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a debt security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below the amortized cost basis, any adverse changes in the financial condition of the issuers and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Warrant Liabilities, Change in Fair Value and Warrant Conversion
The Company evaluated the warrants issued in connection with the May 2022 registered direct financing (Note 7) in accordance with ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity (ASC 815-40), and concluded that a provision in the warrants related to the reduction of the exercise price in certain circumstances precludes the warrants from being accounted for as components of equity. As the warrants meet the definition of a derivative as contemplated in ASC 815, the warrants are recorded as derivative liabilities on the accompanying Balance Sheets and measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the accompanying Statements of Operations and Comprehensive Loss in the period of change. The derivative liabilities will ultimately be converted into the Company’s common stock when the warrants are exercised, or will be extinguished upon expiry of the warrant term. Upon exercise, the intrinsic value of the shares issued is transferred to stockholders’ equity. The difference between the intrinsic value of the stock issued and the fair value of the warrant is recorded as gain or loss on the exchange in the accompanying Statements of Operations and Comprehensive Loss in the period of exercise.
Stock-based Compensation
The Company recognizes expense for employee and non-employee stock-based compensation in accordance with ASC Topic 718, Stock-Based Compensation (ASC 718). ASC 718 requires that such transactions be accounted for using a fair value-based method. The estimated fair value of the options is amortized over the vesting period, based on the fair value of the options on the date granted, and is calculated using the Black-Scholes option-pricing model. The Company accounts for forfeitures as incurred. In considering the fair value of the underlying stock when the Company granted options, the Company considered several factors including the fair values established by market transactions. Stock option-based compensation includes estimates and judgments of when stock options might be exercised and stock price volatility. The timing of option exercises is out of the Company's control and depends upon a number of factors including the Company's market value and the financial objectives of the option holders. These estimates can have a material impact on the stock compensation expense but will have no impact on the cash flows. The estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period the estimates are revised. The Company uses the expected term, rather than the contractual term, for both employee and consultant options issued.
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Recent Accounting Pronouncements
The Company considered the applicability and impact of all ASUs issued during the quarter ended September 30, 2022 and each was determined to be either not applicable or expected to have minimal impact on these financial statements.
4. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
Marketable Securities
The following is a summary of the Company’s available for sale securities as of the dates indicated:

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

| As of December 31, 2021
| Adjusted Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
Marketable Securities: |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |
Corporate bonds | $ | 1,153 |  |  | $ | — |  |  | $ | (1) |  |  | $ | 1,152 |
Municipal bonds | 2,657 |  |  | — |  |  | (1) |  |  | 2,656 |
Total | $ | 3,810 |  |  | $ | — |  |  | $ | (2) |  |  | $ | 3,808 |

Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820, Fair Value Measurement, establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of fair value hierarchy defined by ASC 820 are described below:
Level 1: 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 September 30, 2022, the Company’s financial instruments included cash and cash equivalents, marketable securities, prepaid expenses and other current assets, accounts payable, accrued expenses, and the warrant liability. The carrying amounts reported in the balance sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued expenses
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approximate their fair value based on the short-term maturity of these instruments. The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer.
The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2022:

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

On May 17, 2022, the Company issued 3,700,000 shares of common stock pursuant to a securities purchase agreement at a purchase price of $1.0632 per share in a registered direct offering (Note 7). In connection with the registered direct offering, the Company issued warrants to purchase an aggregate of 3,700,000 shares of common stock at an exercise price of $0.9382 per share. The warrants were classified as a liability in accordance with ASC 815-40 and the fair value of $225 is reflected in warrant liability on the accompanying Balance Sheets. The warrant liability was measured at fair value at inception and is revalued at each financial statement date, with changes in fair value presented within change in fair value of warrant liability in the accompanying Statements of Operations and Comprehensive Loss.
On July 25, 2022, the Company amended the terms of the warrants issued in May 2022 to obligate each warrant holder who signed the warrant amendment (Applicable Holder) to effect a cashless exercise, in whole, by August 10, 2022 (the Expiration Date). The warrant amendment entitled the Applicable Holder to receive one share of common stock for each warrant in lieu of the aggregate number of shares of common stock that would have been received using the cashless exercise formula set forth in the warrant agreement (Alternate Cashless Exercise). If the warrants held by the Applicable Holders were not exercised by the Expiration Date, they were automatically exercised pursuant to the Alternate Cashless Exercise. A total of 2,220,000 warrants were exercised pursuant to the Alternate Cashless Exercise. As a result of the warrant conversion, the Company recognized a $573 reversal of the warrant liability.
The following table presents the changes is the fair value of the Level 3 liability:

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

The Black-Scholes valuation model was used to estimate the fair value of the warrants with the following weighted-average assumptions:
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| (Initial Measurement) |  |
| May 17, 2022 |  | September 30, 2022
Volatility | 130.8 % |  | 133.3 %
Expected term in years | 2.5 |  | 2.5
Dividend rate | 0.0 % |  | 0.0 %
Risk-free interest rate | 2.665 % |  | 4.240 %

The fair value of the embedded derivative liability identified in the 2021 Convertible Notes (Note 6) was a Level 3 fair value measurement. As of February 12, 2021, the embedded derivative was remeasured based upon the conversion price of $8.00 per share upon closing of the IPO. As such, an expense of $89 was recorded during the nine months ended September 30, 2021.
The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:

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

5. ACCRUED EXPENSES
Accrued expenses consist of the following:

| September 30, 2022 |  | December 31, 2021
Research and development | $ | 297 |  |  | $ | 894
General and administrative | 106 |  | 183
Payroll and related | 297 |  | 291
Licensing related | — |  | 62
Total accrued expenses | $ | 700 |  |  | $ | 1,430 |

6. PPP NOTE AND CONVERTIBLE NOTES
In May 2020, the Company issued a promissory note under the PPP (the PPP Note) totaling $61. The PPP Note had a stated interest rate of 1% and had a two-year maturity. Payments were required to be made over a 1.5-year period beginning November 1, 2020 unless forgiven. In January 2021, the Company was notified that the loan along with accumulated interest had been forgiven. As a result, the Company recorded income from the extinguishment of its obligation in accordance with ASC 405-20-40-1, disclosed in the amount of $61 included in other income on the accompanying statements of operations and comprehensive loss. The Small Business Administration (SBA) reserves the right to audit any PPP loan, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain the PPP loan documentation for six years after the PPP loan was forgiven or repaid in full and to provide that documentation to the SBA upon request.
In January 2021, the Company entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including Salmon Pharma, an affiliate of Medice, and David Baker, the Company’s Chief Executive Officer, pursuant to which the Company issued the 2021 Convertible Notes, for cash proceeds of $350. The 2021 Convertible Notes bore an interest rate of 7.0% per annum, non-compounding, and had a maturity date of September 30, 2021. The 2021 Convertible Notes converted into 54,906 shares
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of the Company’s common stock upon completion of the IPO. The Company identified the mandatory conversion into shares of the Company’s common stock as a redemption feature, which requires bifurcation from the 2021 Convertible Notes and treated it as a derivative liability under ASC 815 as the redemption feature was not clearly and closely related to the debt. The Company evaluated the fair value of the derivative liability. Upon the conversion of the 2021 Convertible Notes to common stock at the closing of the IPO, the embedded derivative liability was remeasured and removed from the balance sheet.
7. STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
In February 2021, the Company completed the IPO of 2,250,000 shares of common stock at a public offering price of $8.00 per share. The gross proceeds from the IPO, before deducting underwriting discounts, commissions and other offering expenses payable by the Company, were $18,000. Underwriting discounts and expenses totaled $1,600 and the Company incurred approximately $905 of additional expenses related to completing the IPO for aggregate net proceeds were approximately $15,500.
On May 17, 2022, the Company sold 3,700,000 shares of common stock pursuant to a securities purchase agreement at a purchase price of $1.0632 per share in a registered direct offering (the Offering). The gross proceeds from the Offering were approximately $3,900, before deducting fees payable to the placement agent and other estimated offering expenses payable by the Company of approximately $572 of which $85 related to the warrants was expensed.
Common Stock Warrants
In connection with the IPO, the Company granted the underwriters warrants (the Underwriters' Warrants) to purchase an aggregate of 112,500 shares of common stock at an exercise price of $10.00 per share. The Underwriters’ Warrants have a five-year term and are not exercisable prior to August 12, 2021. The warrants were classified as equity and the fair value of $399 is reflected as additional paid-in capital. The Black-Scholes option-pricing model was used to estimate the fair value of the warrants with the following weighted-average assumptions:

Volatility | 85.0 %
Expected term in years | 2.5
Dividend rate | 0.0 %
Risk-free interest rate | 0.155 %

In connection with the Offering, the Company issued warrants to purchase an aggregate of 3,700,000 shares of common stock at an exercise price of $0.9382 per share. The warrants have a five-year term. The warrants were classified as a liability and are revalued at each balance sheet date.
On July 25, 2022, the Company amended the terms of the warrants issued in May 2022 to obligate each warrant holder who signed the warrant amendment (Applicable Holder) to effect a cashless exercise, in whole, by August 10, 2022 (the Expiration Date). The warrant amendment entitled the Applicable Holder to receive one share of common stock for each warrant in lieu of the aggregate number of shares of common stock that would have been received using the cashless exercise formula set forth in the warrant agreement (Alternate Cashless Exercise). If the warrants held by the Applicable Holders were not exercised by the Expiration Date, they were automatically exercised pursuant to the Alternate Cashless Exercise. A total of 2,220,000 warrants were exercised pursuant to the Alternate Cashless Exercise. As a result of the warrant conversion, the Company recognized a $573 reversal of the warrant liability and a loss of $388. The fair value of $225 as of September 30, 2022 is reflected in warrant liability on the accompanying Balance Sheets (Note 4).
As of September 30, 2022, the Company had the following warrants outstanding to purchase common stock.

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

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

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

Stock Options
The Company has granted stock options to purchase its common stock to employees and consultants under the 2018 Plan, under which the Company may issue stock options, restricted stock and other equity-based awards. The Company has also granted certain stock options outside of the 2018 Plan. Stock options granted by the Company generally have a contractual life of up to 10 years.
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. During the three and nine month periods ended September 30, 2022, the Company reversed stock based compensation related to performance awards with performance conditions deemed not probable of achievement.
The table below represents the activity of stock options granted to employees and non-employees for the nine months ended September 30, 2022:

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

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The Black-Scholes option-pricing model was used to estimate the grant date fair value of each stock option grant at the time of grant using the following weighted-average assumptions:

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

At September 30, 2022, the unrecognized compensation cost related to unvested stock options expected to vest was $839. This unrecognized compensation is expected to be recognized over a weighted-average amortization period of 2.85 years.
Restricted Stock Units
The Company has issued performance-based and time-based RSUs. Vesting of the performance-based RSUs is subject to the achievement of certain milestones.
The following table summarizes the activity related to RSUs granted to employees for the nine months ended September 30, 2022:

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

During the nine months ended September 30, 2022, the Company granted 188,023 RSUs at a weighted average grant date fair value of $0.5683, of which 150,000 were performance-based RSUs and 38,023 were time-based RSUs. As of September 30, 2022, the milestones associated with the performance-based RSUs were not probable of achievement, and accordingly, no stock-based compensation expense has been recognized for these awards. Compensation expense related to time-based RSUs was $6 for the nine months ended September 30, 2022. The unrecognized compensation cost related to unvested performance-based RSUs was $83, which will be recognized commencing in the period in which the performance condition is deemed probable of achievement. The unrecognized compensation cost related to unvested time-based RSUs was $18 and will be recognized over the vesting period.
9. RELATED PARTY TRANSACTIONS
In January 2021, the Company entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including Salmon Pharma, an affiliate of Medice, and David Baker, the Company’s Chief Executive Officer, pursuant to which the Company issued the 2021 Convertible Notes for cash proceeds of $350. The 2021 Convertible Notes bore an interest rate of 7.0% per annum, non-compounding, and had a maturity date of September 30, 2021. The 2021 Convertible Notes converted into 54,906 shares of the Company’s common stock upon completion of the IPO.
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10. COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has entered into employment contracts with its officers that provide for severance and continuation of benefits in the event of termination of employment by the Company without cause or by the employee for good reason. In addition, in the event of termination of employment following a change in control, the vesting of certain equity awards may be accelerated.
COVID-19 Impact
The global COVID-19 pandemic continues to present uncertainty and unforeseeable new risks to the Company’s operations and business plan. The Company has closely monitored recent COVID-19 developments, including the lifting of COVID-19 safety measures, the drop in vaccination rates, the implementation of, and reaction to, vaccine mandates, the spread of new strains or variants of coronavirus (such as the Delta and Omicron variants), and supply chain and labor shortages. In light of these developments, the full impact of the COVID-19 pandemic on the Company’s business, operations and clinical development plans remains uncertain and will vary depending on the pandemic’s future impact on the Company’s clinical trial enrollment (including the Company’s ability to recruit and retain patients), clinical trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as any legal or regulatory consequences resulting therefrom. To the extent possible, the Company is conducting business as usual, with necessary or advisable modifications to employee travel and with most of its employees and consultants working remotely. The Company will continue to actively monitor the COVID-19 pandemic and may take further actions that alter its operations, including those that may be required by federal, state or local authorities, or that the Company determines are in the best interests of its employees and other third parties with whom the Company does business.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report, and the audited financial statements (and notes thereto), and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2021, included in our Annual Report on Form 10-K that was filed with the SEC on February 14, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.
Overview
We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel abuse-deterrent medications for CNS disorders. Our lead investigational product candidate, ADAIR, is a proprietary, abuse-deterrent oral formulation of immediate-release dextroamphetamine (the main active ingredient in Adderall®), which we were developing for the treatment of attention-deficit/hyperactivity disorder (ADHD) and narcolepsy. In March 2022, we announced that our SEAL study for ADAIR did not reach its primary endpoint, and there is no assurance that ADAIR will receive approval by the U.S. Food and Drug Administration (the FDA). In addition to ADAIR, we completed formulation development work and selected the final formulation of our second product candidate, ADMIR, an abuse deterrent formulation of methylphenidate (Ritalin®), for the treatment of ADHD.
Recent Developments
The SEAL study (S tudy to E valuate the A buse L iability, Pharmacokinetics, Safety and Tolerability of an Abuse-Deterrent d-Amphetamine Sulfate Immediate Release Formulation), was our pivotal intranasal human abuse liability study assessing the pharmacodynamics (PD), pharmacokinetics (PK), safety and tolerability of snorting professional laboratory-manipulated ADAIR 30 mg when compared to crushed d-amphetamine sulfate and placebo in recreational drug users. ADAIR was prepared for snorting by a pharmacist using a multi-step technique that had been developed by a professional laboratory and agreed upon by the FDA. The SEAL study enrolled 55 subjects, of whom 53 completed the study and 52 were included in the final analysis. The study involved a four-way crossover design to evaluate professionally manipulated, intranasal ADAIR 30 mg, crushed intranasal dextroamphetamine, ADAIR 30 mg taken orally, and placebo. All subjects were non-dependent recreational stimulant users with an additional history of recreational intranasal drug use.
The SEAL study did not meet its primary endpoint, which was Emax Drug Liking. ADAIR scored similarly to what was observed in an earlier proof-of-concept study, however, reference dextroamphetamine did not score as high as expected and as seen in the previous study, thus driving the lack of statistical significance. The SEAL study did meet all pharmacodynamic secondary endpoints including Overall Drug Liking and willingness to Take Drug Again at 12 and 24 hours post-dosing, demonstrating statistical significance.
We are continuing to assess the best path forward for the ADAIR and ADMIR development programs. In addition, we have engaged Ladenburg Thalmann & Co. Inc. (Ladenburg) to evaluate our strategic alternatives with the goal of maximizing stockholder value. Ladenburg has been engaged to advise us on the strategic review process, which could include, without limitation, exploring the potential for a possible merger, business combination, investment into the Company, or a purchase, license or other acquisition of assets. In the meantime, and in conjunction with the exploration of strategic alternatives, we are streamlining our operations in order to preserve our capital and cash resources.
License Agreement
In January 2020, we entered into a license agreement with Medice, which grants Medice an exclusive license to develop, use, manufacture, market and sell ADAIR throughout Europe. Under the license agreement, Medice paid us a $0.1 million upfront payment and will pay milestone payments of up to $6.3 million in aggregate upon achieving certain regulatory and sales milestones. We are also entitled to low-double digit tiered royalties on net sales of ADAIR.
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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 new strains or variants of the coronavirus (such as the Delta and Omicron variants), and supply chain and labor shortages. In light of these developments, the full impact of the COVID-19 pandemic on our business, operations and clinical development plans remains uncertain and will vary depending on the pandemic’s future impact on our clinical trial enrollment (including our ability to recruit and retain patients), clinical trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as any legal or regulatory consequences resulting therefrom. 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. The Company accrues for costs incurred by external service providers, including contract research organizations and clinical investigators, based on its estimates of service performed and costs incurred.
Our research and development expenses have consisted primarily of in-process research and development expenses, costs related to the development program for ADAIR, commercial manufacturing of ADAIR and formulation development for ADMIR. Research and development costs are expensed as incurred. These expenses include:
•employee -related expenses, such as salaries, bonuses and benefits, consultant-related expenses such as consultant fees and bonuses, stock-based compensation, overhead related expenses and travel related expenses for our research and development personnel;
•expenses incurred under agreements with contract research organizations (CROs), as well as consultants that support the implementation of our clinical and non-clinical studies;
•manufacturing and packaging costs in connection with conducting clinical trials and for stability and other studies required to support an NDA filing as well as manufacturing drug product for commercial launch;
•formulation, research and development expenses related to ADMIR; and other products we may choose to develop; and
•costs for sponsored research.
We typically use our employee, consultant and infrastructure resources across our research and development programs. Although we track certain outsourced development costs by product candidate, we do not allocate personnel costs or other internal costs to specific product candidates.
We plan to significantly decrease our research and development expenses as we consider our future plans regarding ADAIR and ADMIR programs as well as strategic alternatives.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation and consulting related expenses for executives and other administrative personnel, professional fees and other corporate expenses, including legal and accounting fees, travel expenses, facilities-related expenses, and consulting services relating to our formation and corporate matters.
We incur costs associated with being a public company, including expenses related to services associated with maintaining compliance with The Nasdaq Capital Market and SEC requirements, directors and officers insurance, legal and accounting costs and investor relations costs. Our general and administrative expenses may increase due to increases in professional and advisory fees as we evaluate our strategic alternatives.
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Other Income
Other income consists of income recognized as a result of the extinguishment of the promissory note issued to us under the Paycheck Protection Program (PPP) as a result of the forgiveness of the note.
Revaluation of Derivative Instruments
In January 2021, we entered into a Convertible Promissory Note Purchase Agreement pursuant to which we issued $350,000 in convertible promissory notes (the 2021 Convertible Notes). The 2021 Convertible Notes automatically converted into 54,906 shares of our common stock concurrently with the closing of the IPO. We identified the mandatory conversion into shares our common stock as a redemption feature, which requires bifurcation from the 2021 Convertible Notes and treated it as a derivative liability under ASC 815 as the redemption feature was not clearly and closely related to the debt. We evaluated the fair value of the derivative liability at issuance. Upon the conversion of the 2021 Convertible Notes to common stock at the closing of the IPO, the embedded derivative liability was remeasured and removed from the balance sheet.
Warrant Liability, Change in Fair Value and Warrant Conversion
We evaluated the warrants issued in connection with the May 2022 registered direct financing in accordance with ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity (ASC 815-40), and concluded that a provision in the warrants related to the reduction of the exercise price in certain circumstances precludes the warrants from being accounted for as components of equity. As the warrants meet the definition of a derivative as contemplated in ASC 815, the warrants are recorded as derivative liabilities on the Balance Sheets and measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the accompanying Statements of Operations and Comprehensive Loss in the period of change. The derivative liabilities will ultimately be converted into the Company’s common stock when the warrants are exercised, or will be extinguished upon expiry of the warrant term. Upon exercise, the intrinsic value of the shares issued is transferred to stockholders’ equity. The difference between the intrinsic value of the stock issued and the fair value of the warrant is recorded as gain or loss on the exchange in the accompanying Statements of Operations and Comprehensive Loss in the period of exercise.
Interest Income (Expense), net
Interest income (expense), net, consists of interest earned on our cash, cash equivalents and marketable securities held with institutional banks, the amortization of discounts and accretion of premiums on marketable securities and interest expense on our finance lease of equipment utilized in the commercial scale manufacturing of ADAIR.
Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
The following table summarizes the results of our operations for the periods indicated (in thousands):

| Three Months Ended September 30,
| 2022 |  | 2021
Operating expenses: |  |  |
Research and development | (18) |  |  | 215 |
General and administrative | 1,422 |  |  | 1,038 |
Total operating expenses | 1,404 |  | 1,253
Loss from operations | (1,404) |  |  | (1,253) |
Change in fair value of warrant liability | 757 |  |  | — |
Loss on warrant conversion | (388) |  |  | — |
Interest income (expense), net | 2 |  |  | (4) |
Net loss | $ | (1,033) |  |  | $ | (1,257) |

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Research and Development Expenses
Research and development expenses were $(18,000) and $0.2 million for the three months ended September 30, 2022 and 2021, respectively. The $0.2 million decrease in research and development expenses was primarily due to a $0.2 million decrease in personnel expenses, including the reversal of stock compensation.
General and Administrative Expenses
General and administrative expenses were $1.4 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively. The $0.4 million increase was primarily related an increase in expenses and fees of $0.6 million as a result of our evaluation of strategic alternatives, offset by a decrease in personnel expenses, including stock compensation, of $0.2 million.
Change in Fair Value of Warrant Liability and Loss on Warrant Conversion
In May 2022, we issued 3,700,000 shares of common stock pursuant to a securities purchase agreement at a purchase price of $1.0632 per share in a registered direct offering. In connection with the registered direct offering, we issued warrants to purchase an aggregate of 3,700,000 shares of common stock at an exercise price of $0.9382 per share. The warrants were classified as a liability in accordance with ASC 815-40 and the fair value of $1.3 million was recorded as a liability at inception.
On July 25, 2022, we amended the terms of the warrants issued in May 2022 to obligate each warrant holder who signed the warrant amendment (Applicable Holder) to effect a cashless exercise, in whole, by August 10, 2022 (the Expiration Date). The warrant amendment entitled the Applicable Holder to receive one share of common stock for each warrant in lieu of the aggregate number of shares of common stock that would have been received using the cashless exercise formula set forth in the warrant agreement (Alternate Cashless Exercise). If the warrants held by the Applicable Holders were not exercised by the Expiration Date, they were automatically exercised pursuant to the Alternate Cashless Exercise. A total of 2,220,000 warrants were exercised pursuant to the Alternate Cashless Exercise. As a result of the warrant conversion, we recognized a $0.6 million reversal of the warrant liability and a loss of $0.4 million.
The change in fair value of $0.8 million represents a decrease in the fair value of the warrants outstanding during the three months ended September 30, 2022.
Interest Income (Expense), net
Interest income, net, was $2,000 for the three months ended September 30, 2022. Interest expense, net, was $4,000 for the three months ended September 30, 2021.
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Comparison of the Nine Months Ended September 30, 2022 and 2021
The following table summarizes the results of our operations for the periods indicated (in thousands):

| Nine Months Ended September 30,
| 2022 |  | 2021
License revenue-from related party | $ | — |  | $ | — |
Operating expenses: |  |  |
Research and development | 1,529 |  |  | 3,189 |
General and administrative | 4,014 |  |  | 2,976 |
Total operating expenses | 5,543 |  | 6,165
Loss from operations | (5,543) |  |  | (6,165) |
Other income | — |  |  | 61 |
Revaluation of derivative liability | — |  |  | (89) |
Change in fair value of warrant liability | 490 |  |  | — |
Loss on warrant conversion | (388) |  |  | — |
Interest expense, net | — |  |  | (14) |
Net loss | $ | (5,441) |  |  | $ | (6,207) |

Research and Development Expenses
Research and development expenses were $1.5 million and $3.2 million for the nine months ended September 30, 2022 and 2021, respectively. The $1.7 million decrease in research and development expenses was primarily due to decreases of $1.3 million in expenses related to the registration development program of ADAIR, decreases in personnel expense, including non-cash stock compensation, of $0.3 million and decreases in consulting expenses of $0.1 million.
General and Administrative Expenses
General and administrative expenses were $4.0 million and $3.0 million for the nine months ended September 30, 2022 and 2021, respectively. The $1.0 million increase was primarily related to increased expenses and fees as a result of our evaluation of strategic alternatives.
Other Income
In May 2020, the Company issued a promissory note under the PPP totaling $61,000. As of December 31, 2020, the Company had utilized the entire proceeds from such note for payroll costs (greater than 75%), costs related to health care benefits and rent payments and in January 2021, the Company was notified that the note along with accumulated interest had been forgiven. As the PPP note was forgiven, the Company recorded income from the extinguishment of its obligation in accordance with ASC 405-20-40-1.
Revaluation of Derivative Liability
During the nine months ended September 30, 2021, pursuant to ASC-815, we revalued the embedded derivative liability associated with the 2021 Convertible Notes, resulting in an $89,000 decrease in the fair value of the derivative liability associated with the 2021 Convertible Notes.
Change in Fair Value of Warrant Liability and Loss on Warrant Conversion
In May 2022, we issued 3,700,000 shares of common stock pursuant to a securities purchase agreement at a purchase price of $1.0632 per share in a registered direct offering. In connection with the registered direct offering, we issued warrants to purchase an aggregate of 3,700,000 shares of common stock at an exercise price of $0.9382 per share. The warrants were classified as a liability in accordance with ASC 815-40 and the fair value of $1.3 million was recorded as a liability at inception.
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On July 25, 2022, we amended the terms of the warrants issued in May 2022 to obligate each warrant holder who signed the warrant amendment (Applicable Holder) to effect a cashless exercise, in whole, by August 10, 2022 (the Expiration Date). The warrant amendment entitled the Applicable Holder to receive one share of common stock for each warrant in lieu of the aggregate number of shares of common stock that would have been received using the cashless exercise formula set forth in the warrant agreement (Alternate Cashless Exercise). If the warrants held by the Applicable Holders were not exercised by the Expiration Date, they were automatically exercised pursuant to the Alternate Cashless Exercise. A total of 2,220,000 warrants were exercised pursuant to the Alternate Cashless Exercise. As a result of the warrant conversion, we recognized a $0.6 million reversal of the warrant liability and a loss of $0.4 million.
The change in fair value of $0.5 million represents the decrease in the fair value of the warrant liability from inception to September 30, 2022.
Interest Expense, net
Interest expense was $50,000 and $24,000 for the nine months ended September 30, 2022 and 2021, respectively. Interest income was $50,000 and $10,000 for the nine months ended September 30, 2022 and 2021, respectively.
Liquidity and Capital Resources
Since inception, we have incurred losses and expect to continue to incur losses for the foreseeable future. We incurred net losses of $5.4 million and $6.2 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, we had an accumulated deficit of $27.3 million.
We have financed our working capital requirements to date through the issuance of common stock, warrants, convertible notes, short-term promissory notes, and a PPP promissory note. As of September 30, 2022, we had $4.7 million in cash and cash equivalents.
The following table summarizes our cash flows for the periods indicated (in thousands):

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

Cash Flows from Operating Activities
For the nine months ended September 30, 2022 and 2021, $5.8 million and $6.7 million were used in operating activities, respectively. The $0.9 million decrease was primarily due to a $0.8 million decrease in our net loss.
Cash Flows from Investing Activities
Net cash used in investing activities was $3.4 million for the nine months ended September 30, 2022, which was primarily related to the net purchase of marketable securities.
Cash Flows from Financing Activities
Net cash provided by financing activities was $3.4 million during the nine-month period ended September 30, 2022, which was related to the net proceeds from our registered direct financing in May 2022. Net cash provided by financing activities was $15.8 million for the nine months ended September 30, 2021 and was primarily related to the net proceeds from our IPO and 2021 Convertible Notes financings.
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2021 Convertible Note Financing
In January 2021, we entered into a Convertible Promissory Note Purchase Agreement with certain existing stockholders, including SALMON Pharma GmbH (Salmon Pharma), an affiliate of Medice, and David Baker, our Chief Executive Officer, pursuant to which we issued convertible promissory notes (the 2021 Convertible Notes) for cash proceeds of $350,000. The 2021 Convertible Notes bear an interest rate of 7.0% per annum, non-compounding, and had a maturity date of September 30, 2021. The 2021 Convertible Notes were convertible into shares of our capital stock offered to investors in any subsequent equity financing after the date of their issuance in which we issued any of our equity securities (a Qualified Financing) and were convertible at a twenty percent discount to the price per share offered in such Qualified Financing. Such Qualified Financing included the initial public offering of our common stock, consummated on February 12, 2021; therefore, the 2021 Convertible Notes converted into an aggregate of 54,906 shares of our common stock immediately prior to the closing of the IPO, as agreed upon among the parties thereto.
Future Funding Requirements
To date, we have not generated any revenue from the sale of any products. Substantially all of our revenue to date has been generated by the Medice license agreement from which we received a $0.1 million license fee in January 2020. We do not know when, or if, we will generate any revenue. In March 2022, we announced that the SEAL study of ADAIR for the treatment of ADHD did not meet statistical significance for its primary endpoint and that we are evaluating our strategic alternatives with the goal of maximizing stockholder value. We are continuing to assess the best path forward for the development of the ADAIR and ADMIR programs and have no other product candidate undergoing clinical trials. We expect to incur ongoing expenses as we assess these programs and evaluate our strategic options. Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to the terms and timing of any strategic alternatives including a merger or business combination, asset acquisitions or sales, collaborations or licensing arrangements.
If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any equity or debt financing may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to other parties’ rights to develop or commercialize our drug candidates that we would prefer to retain. Therefore, there is substantial doubt about our ability to continue as a going concern. We expect to continue to incur expenses and operating losses at least for the foreseeable future as we evaluate future plans for the ADAIR and ADMIR programs as well as our strategic alternatives.
See the “Risk Factors” section on this Form 10-Q for additional risks associated with our substantial capital requirements.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited interim financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results could differ from those estimates.
The Company’s critical accounting policies are described in Note 3, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K filed with the SEC on February 14, 2022. There have been no material changes to the significant accounting policies during the nine months ended September 30, 2022, except for items mentioned in Note 3 of the unaudited interim financial statements in this Quarterly Report on Form 10-Q.
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Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
•reduced disclosure about our executive compensation arrangements;
•no non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and
•exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.
We have taken advantage of reduced reporting requirements in this report and may continue to do so until such time that we are no longer an emerging growth company. We will remain an “emerging growth company” until the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (b) December 31, 2026, the last day of the fiscal year following the fifth anniversary of the completion of the our IPO, (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to a smaller reporting company.
Item 4. Controls and Procedures.
Management’s Evaluation of our Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of September 30, 2022. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures, as defined above, are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to any material legal proceedings. From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Regardless of the outcome, litigation can have a material adverse effect on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, except as set forth below.
Our ability to execute on our business strategy is subject to a number of risks, which are discussed more fully below in this section. You should carefully consider these risks before making an investment in our common stock. These risks include, among others, the following:
•Our activities to evaluate and pursue strategic alternatives may not be successful.
•If we do not successfully consummate a strategic transaction, our board of directors may decide to pursue a dissolution and liquidation of the company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
•We are substantially dependent on our remaining employees to facilitate the consummation of a strategic transaction. We could lose such key employees, in particular, as a result of the ADAIR data.
•Our prospects were highly dependent on a single product candidate, ADAIR. As the SEAL study of ADAIR did not meet its predefined clinical endpoint, we are currently assessing the best path forward for ADAIR and have been evaluating other strategic alternatives to maximize stockholder value, which may not be successful.
•We have no approved products and a limited operating history, which may make it difficult to evaluate our technology and product development capabilities and predict our future performance.
•We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the future.
•We are currently assessing the best path forward for ADAIR, and any further development of ADAIR or the development of any new product will require additional capital to fund our operations, which we may not be able to obtain.
•Negative perception of any product candidate that we develop could adversely affect our ability to conduct our business or obtain regulatory approvals for such product candidate.
•The market price of our common stock is expected to be volatile. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies.
Risks related to Our Evaluation of Strategic Alternatives
Our activities to evaluate and pursue strategic alternatives may not be successful.
In March 2022, we announced that topline data from our SEAL study of ADAIR for the treatment of ADHD did not meet statistical significance for the primary endpoint of E max Drug Liking. We are continuing to assess the best path forward for the ADAIR and ADMIR programs and we have commenced a process to evaluate strategic alternatives to maximize stockholder value. We have engaged a financial advisory firm to help explore our available strategic alternatives, including a possible merger, business combination, asset acquisitions or sales, and collaboration and licensing arrangements. We have significantly reduced our research and development activities to reduce operating expenses while we evaluate these opportunities. We expect to devote significant time and
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resources to identifying and evaluating strategic transactions; however, there can be no assurance that such activities will result in any agreements or transactions that will enhance stockholder value. In addition, potential strategic transactions that require stockholder approval may not be approved by our stockholders or a counterparty’s stockholders. Further, any strategic transaction that is completed ultimately may not deliver the anticipated benefits or enhance stockholder value.
We also may acquire additional businesses, products or product candidates. Integrating any newly acquired business, product or product candidate could be expensive and time-consuming. We may not be able to integrate any acquired business, product or product candidate successfully. If we do acquire any additional business, products, or product candidates, our future financial performance will depend, in part, on our ability to manage any future growth effectively and our ability to integrate any such acquired businesses, products or product candidates.
Any strategic transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:
•exposure to unknown liabilities;
•incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;
•higher than anticipated acquisition and/or integration costs;
•write downs of assets or goodwill or impairment charges;
•increased amortization expenses;
•difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;
•impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and
•the inability to retain our key employees or our other service providers or those of any acquired businesses.
Accordingly, there can be no assurance that we will undertake or successfully complete any strategic transactions of the nature described above and any transactions that we do complete may be subject to the foregoing or other risks and could have a material adverse effect on our business, financial condition and prospects.
If we do not successfully consummate a strategic transaction, our board of directors may decide to pursue a dissolution and liquidation of the Company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.
There can be no assurance that the process to identify a strategic transaction will result in a successfully consummated transaction. If no transaction is completed, our board of directors may decide to pursue a dissolution and liquidation of the Company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution will continue to decrease as we fund our operations while we evaluate our strategic alternatives. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of the Company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provisions for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include (i) regulatory and clinical obligations; (ii) obligations under our employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control; and (iii) potential litigation against us, and other various claims and legal actions arising in the ordinary course of business. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of the Company. If a dissolution and liquidation were pursued, our board of directors, in consultation with our advisors, would need to evaluate these matters and make a determination about a
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reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of the Company.
Our prospects were highly dependent on a single product candidate, ADAIR, and while we are assessing the best path forward for ADAIR, we may not complete the development or commercialization of ADAIR
Our long-term prospects were highly dependent on future acceptance and revenues from our lead product candidate, ADAIR. In March 2022, we announced that topline data from our SEAL study of ADAIR for the treatment of ADHD did not meet statistical significance for the primary endpoint of E max Drug Liking and that, given that result, we are currently assessing the best path forward for ADAIR. Any further development of ADAIR would require substantial capital and time to complete, and there is no guarantee that any future clinical trial, if pursued, would be timely or successful, or that ADAIR would be approved or, if approved, that commercialization would be successful. Concurrently, we have been evaluating strategic alternatives to maximize stockholder value, which could involve, without limitation, exploring the potential for a possible merger, business combination, investment into the Company, or a purchase, license or other acquisition of assets. However, there is no assurance that we will be successful in our pursuit of a strategic alternative, failure of which may have a material adverse impact on our business, financial condition, and results of operations.
We are substantially dependent on our remaining employees to facilitate the consummation of a strategic transaction. We could lose such key employees, in particular, as a result of the ADAIR data.
Our cash conservation activities may yield unintended consequences, such as attrition and reduced employee morale, which may cause remaining employees to seek alternative employment. Our ability to successfully complete a strategic transaction depends in large part on our ability to retain certain personnel, particularly David Baker, our Chief Executive Officer, and Leanne Kelly, our Chief Financial Officer. Despite our efforts to retain these employees, one or more may terminate their employment on short notice. The loss of the services of any of these employees could potentially harm our ability to evaluate and pursue strategic alternatives, as well as fulfill our reporting obligations as a public company.
Competition among biotechnology companies for qualified employees is intense, and our ability to retain our key employees is critical to our ability to effectively manage our resources and consummate a strategic transaction. If we develop new product candidates, such development would require expertise from a number of different disciplines, some of which are not widely available. The results of the SEAL study of ADAIR will likely make it more challenging to retain qualified personnel and more difficult to recruit personnel in the future, if necessary. If we fail to attract new personnel or fails to retain and motivate our current personnel, our business and future growth prospects and our ability to consummate a strategic transaction would be harmed.
Risks related to Our Business, Technology and Industry
We have no approved products and have a limited operating history, which may make it difficult to evaluate our technology and product development capabilities and predict our future performance.
We have no products approved for commercial sale and have not generated any revenue from product sales. Our ability to generate product revenue or profits was dependent on the successful development and eventual commercialization of ADAIR. Given that the topline data from our SEAL study of ADAIR for the treatment of ADHD failed to meet statistical significance for the primary endpoint of E max Drug Liking and we are assessing the best path forward for the ADAIR program, we may never be able to develop or commercialize a marketable product.
Our current and future programs and product candidates will require additional discovery research, preclinical development, clinical development, regulatory approval to commercialize the product, manufacturing validation, obtaining manufacturing supply, capacity and expertise, building of a commercial and distribution organization, substantial investment and significant marketing efforts before we generate any revenue from product sales. In addition, any drug product candidate must be approved for marketing by the FDA or certain other health regulatory agencies before we may commercialize any product in the respective jurisdictions.
Our limited operating history may make it difficult to evaluate our, or any new, technology and industry and predict its future performance. Our short history as an operating company makes any assessment of our future success or viability subject to significant
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uncertainty. We will encounter risks and difficulties frequently experienced by early-stage companies in evolving fields. If we do not address these risks successfully, our business will suffer. Similarly, we expect that our financial condition and operating results will fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. As a result, our stockholders should not rely upon the results of any quarterly or annual period as an indicator of future operating performance.
We have incurred net losses in every year since our inception and we anticipate that we will continue to incur net losses in the future.
We are a biopharmaceutical company with a limited operating history. Investment in product development in the healthcare industry, including of biopharmaceutical products, is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date. As a result, we are not profitable and have incurred losses in each period since our inception. For the nine months ended September 30, 2022, we reported a net loss of $5.4 million. As of September 30, 2022, we had an accumulated deficit of $27.3 million.
To become and remain profitable, we or any potential future collaborator must develop and eventually commercialize products with significant market potential at an adequate profit margin after cost of goods sold and other expenses. This will require us to be successful in a range of challenging activities, including completing clinical trials, manufacturing, marketing and selling products for which we may obtain marketing approval and satisfying any post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of the Company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations.
We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
Additional capital will be required to fund our operations, ADAIR product development activities or the development of any new product. If we fail to obtain necessary financing, we will not be able to complete the development and commercialization of product candidates.
Our operations have consumed substantial amounts of cash since inception. While we plan to significantly decrease our research and development expenses as we assess the best path forward for ADAIR, we expect to continue to spend a considerable amount of resources on pursuing strategic opportunities. Furthermore, to move forward with the development of ADAIR or any other product candidates, we would be required to spend substantial amounts to conduct clinical trials of such programs, to validate the manufacturing process and specifications for any such product candidate, to seek regulatory approvals for such product candidate and to launch and commercialize any products for which we receive regulatory approval, including potentially building our own commercial organization. As of September 30, 2022, we had $5.2 million of cash, cash equivalents and marketable securities on hand. Our future capital requirements and the period for which our existing resources will support our operations may vary significantly from what we currently expect and may change if our business plan changes from our current expected operating plan. Our monthly spending levels will vary based on development and corporate activities. Because of the uncertainty regarding our future development pathway, we are unable to estimate the actual funds we will require for development of any potential product candidate and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
•the timing and structure of any strategic options that we pursue;
•the terms of any collaboration agreements we may choose to initiate or conclude;
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•the outcome, timing and cost of meeting regulatory requirements established by the FDA, and other comparable foreign regulatory authorities;
•delay or failure in obtaining the necessary approvals from regulators or institutional review boards (IRBs) in order to commence a clinical trial at a prospective trial site, or their suspension or termination of a clinical trial once commenced;
•failure of third-party contractors, such as contract research organizations (CROs), or investigators to comply with regulatory requirements, including Good Clinical Practices (GCPs);
•governmental or regulatory delays and changes in regulation or policy relating to the development and commercialization of a product candidate by the FDA or other comparable foreign regulatory authorities;
•undertaking and completing additional pre-clinical studies to generate data required to support the clinical development of a product candidate;
•inability to enroll sufficient patients to complete clinical trials;
•difficulty in having patients complete a trial or return for post-treatment follow-up;
•clinical sites deviating from trial protocol or dropping out of a trial;
•problems with biopharmaceutical product candidate storage, stability and distribution;
•our inability to add new or additional clinical trial sites;
•varying interpretations of the data generated from our preclinical or clinical trials;
•inability to manufacture, or obtain from third parties, adequate supply of biopharmaceutical product candidate sufficient to complete our preclinical studies and clinical trials;
•the costs of establishing, maintaining, and overseeing a quality system compliant with current good manufacturing practice requirements (cGMPs) and a supply chain for the development and manufacture of our product candidate;
•the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;
•the effect of competing technological and market developments;
•the cost and timing of establishing, expanding and scaling manufacturing capabilities;
•the cost of establishing sales, marketing and distribution capabilities for any product candidate for which we may receive regulatory approval in regions where we choose to commercialize its products on our own; and
•potential unforeseen business disruptions or market fluctuations that delay our product development or clinical trials and increase our costs or expenses, such as business or operational disruptions, delays, or system failures due to malware, unauthorized access, terrorism, war, natural disasters, strikes, geopolitical conflicts, restrictions on trade, import or export restrictions, or public health crises, such as the current COVID-19 outbreak.
We do not have any committed external source of funds or other support for our development efforts, and we cannot be certain that additional funding will be available on acceptable terms, or at all. Until we can generate sufficient product or royalty revenue to finance our cash requirements, which we may never do, we expect to finance its future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If we raise additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Further, to the extent that we raise additional capital through the sale of common stock or securities convertible into or exchangeable for common stock, each existing investors’ ownership interest will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends or acquiring or licensing intellectual property rights. If we raise additional capital through marketing
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and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to its product candidate, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. We also could be required to seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or relinquish our rights to product candidates or technologies that we otherwise would seek to develop or commercialize ourself. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our other research and development initiatives. Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.
Item 2. Unregistered Sales of Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits.

Exhibit Number |  | Description
3.1 |  | Amended and Restated Certificate of Incorporation of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021).
3.2 |  | Amended and Restated Bylaws of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021).
3.3 |  | Certificate of Amendment to Amended and Restated Certificate of Incorporation of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed with the SEC on February 16, 2021).
3.4 |  | Amendment No. 1 to the Amended and Restated Bylaws of Vallon Pharmaceuticals, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on May 18 2022).
10.1 |  | Amendment No. 1 to Securities Purchase Agreement, dated July 25, 2022, (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC on July 26, 2022).
10.2 |  | Form of Amendment No.1 to Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed with the SEC on July 26, 2022).
31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS |  | iXBRL Instance Document
101.SCH |  | iXBRL Taxonomy Extension Schema Document
101.CAL |  | iXBRL Taxonomy Extension Calculation Linkbase Document
101.DEF |  | iXBRL Taxonomy Extension Definition Linkbase Document
101.LAB |  | iXBRL Taxonomy Extension Label Linkbase Document
101.PRE |  | iXBRL Taxonomy Extension Presentation Linkbase Document
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

____________________________________
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Unless otherwise indicated, exhibits are filed herewith.
*This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, except to the extent specifically incorporated by reference into such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| VALLON PHARMACEUTICALS, INC.
Date: November 3, 2022 | By: | /s/ Leanne M. Kelly
|  | Name: Leanne M. Kelly
|  | Title: Chief Financial Officer
|  | (Principal Financial and Accounting Officer)

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