10-Q

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 ☒ No ☐

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 ☒ No ☐

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.

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 ☒

As of November 10, 2021, there were 13,574,049 shares of common stock, $0.01 par value, outstanding.

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements Convertible Preferred Stock and Stockholders’ Equity (Deficit)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements Convertible Preferred Stock and Stockholders’ Equity (Deficit)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed Consolidated Statements Convertible Preferred Stock and Stockholders’ Equity (Deficit)

The accompanying notes are an integral part of these condensed consolidated financial statements.

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

In management’s opinion, the accompanying interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly the Company's financial position, results of operations and cash flows. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these condensed consolidated financial statements are read in conjunction with the financial statements and notes included in the Company’s financial statements filed on the Form 8-K/A for the year ended December 31, 2020, which was filed with the SEC on July 13, 2021.

The accompanying condensed consolidated financial statements prior to the closing of the Merger are representative of LBS’s operations. The condensed consolidated financial statements subsequent to the closing of the Merger include the accounts of the Company and its wholly owned subsidiaries, Leading Biosciences, Inc. and Suzhou Neuralstem Biopharmaceutical Co., Ltd. All the entities are consolidated in our condensed consolidated financial statements and all intercompany activity and transactions, if any, has been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and notes. The most significant estimates in the Company’s financial statements relate to clinical trial accruals and valuation of derivative liabilities and stock-based compensation. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as one operating segment which consists of research and development activities.

Cash and Cash Equivalents

Cash and cash equivalents represent cash available in readily available checking and money market accounts. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Restricted Cash

As of September 30, 2021 and December 31, 2020, the Company held restricted cash of $26,000, in a separate restricted bank account as collateral for the Company’s corporate credit card program. The Company has classified these deposits as long-term restricted cash on its condensed consolidated balance sheets.

Deferred Transaction Costs

Deferred Transaction Costs consists of the direct and incremental costs incurred by the Company related to the acquisition of assets under the Merger Agreement. These costs represent legal, accounting and other direct costs related to the acquisition of assets under the Merger Agreement. As of September 30, 2021, and December 31, 2020, deferred transaction costs were approximately $0 and $1.8 million, respectively (see Note 3 for additional disclosure).

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions and in money market accounts, and at times balances may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held nor has the Company experienced any losses in these accounts.

Property and Equipment, Net

Property and equipment, which consist of computers, are stated at cost less accumulated depreciation. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets (approximately three years). Repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred.

Convertible Preferred Stock

The Company’s Series C convertible preferred stock has been classified as temporary equity instead of permanent equity within the balance sheet, in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities as the stock is conditionally redeemable upon certain change in control events outside of the Company’s control, including the liquidation, sale or transfer of control of the Company. Upon such change in control events the holders of the convertible preferred stock can cause its redemption.

The Company did not adjust the carrying values of the convertible preferred stock to its redemption value as of December 31, 2020 since a liquidation event was not probable.

In connection with the Merger, the Series C Convertible Preferred Stock converted to Common Stock.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash equivalents, accounts receivable, restricted cash, accounts payable, accrued liabilities, debt and derivative liabilities. The carrying amounts of financial instruments such as cash equivalents, accounts receivable, restricted cash, accounts payable, and accrued liabilities approximate their related fair values due to the short-term nature of these instruments. The carrying value of the Company’s current and non-current debt approximates its fair value due to the market rate of interest. The Company’s derivative financial instruments are carried at fair value based on unobservable market inputs. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis.

Derivative Financial Instruments

valuation models, including Monte-Carlo simulations. Derivative instruments are valued at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities, is re-assessed at the end of each reporting period.

The Company reviews the terms of debt instruments, equity instruments and other financing arrangements to determine whether there are embedded derivative features, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Additionally, in connection with the issuance of financing instruments, the Company may issue freestanding options and warrants, including options or warrants to non-employees in exchange for consulting or other services performed.

The Company accounts for its common stock warrants and tranche liability in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 815, the Company accounts for common stock warrants as liabilities if the warrant requires net cash settlement or gives the holder the option of net cash settlement or it fails the equity classification criteria. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement and the warrants meet the requirements to be classified as equity. Common stock warrants classified as liabilities are initially recorded at fair value and remeasured at fair value each balance sheet date with the offset adjustments recorded in change in fair value of warrant liability within the condensed consolidated statements of operations. Common stock warrants classified as equity are initially measured at fair value on the grant date and are not subsequently remeasured.

Research and Development Costs

Research and development expenses consist primarily of salaries and other personnel related expenses including stock-based compensation costs, preclinical costs, clinical trial costs, costs related to acquiring and manufacturing clinical trial materials and contract services. All research and development costs are expensed as incurred.

Clinical Trial Expenses

Expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to the Company’s contract arrangements. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to the Company’s service providers will temporarily exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients, site initiation and the completion of clinical milestones. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual or prepaid expense balance accordingly. Historically, the Company’s estimated accrued liabilities have materially approximated actual expense incurred. Clinical trial expenses are included in research and development expense.

Patent Costs

Costs related to filing and pursuing patent applications (including direct application fees, and the legal and consulting expenses related to making such applications) are expensed as incurred, as recoverability of such expenditures is uncertain. These costs are included in general and administrative expenses.

Debt Issuance Costs

Debt issuance costs incurred to obtain debt financing are deferred and are amortized over the term of the debt using the effective interest method. Debt issuance costs are recorded as a reduction to the carrying value of the debt and are amortized to interest expense in the condensed consolidated statements of operations.

Income Taxes

The Company follows the ASC 740, Income Taxes, or ASC Topic 740 (“ASC 740”), in reporting deferred income taxes. ASC 740 requires a company to recognize deferred tax assets and liabilities for expected future income tax consequences of events that have been recognized in the Company’s financial statements. Under this method, deferred tax assets and liabilities are determined based on temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in the years in which the temporary differences are expected to reverse. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some of or all the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions pursuant to ASC 740, which prescribes a recognition threshold and measurement process for financial statement recognition of uncertain tax positions taken or expected to be taken in a tax return. If the tax position meets this threshold, the benefit to be recognized is measured as the tax benefit having the highest likelihood of being realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of employee and non-employee stock option grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. The Company recognizes forfeitures as they occur as a reduction of expense. The Company estimates the fair value of employee and non-employee stock option grants using the Black-Scholes option pricing model.

Net Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company’s Series C convertible preferred stock (the "Convertible Preferred Stock"), the Senior Secured Promissory Note Warrants, the May 2021 Warrants and the July 2021 Warrants (as defined at Note 5) contain non-forfeitable rights to dividends with the common stockholders, and therefore are considered to be participating securities. The Convertible Preferred Stock and the warrants do not have a contractual obligation to fund the losses of the Company; therefore, the application of the two-class method is not required when the Company is in a net loss position but is required when the Company is in a net income position such as the three months ended September 30, 2021.

Diluted earnings per share is computed using the more dilutive of the two-class method or the if-converted and treasury stock methods.

Basic and diluted earnings per share during the three months ended September 30, 2021 were calculated under the two-class method. Basic and diluted loss per share for the nine months ended September 30, 2021, and the three and nine months ended September 30, 2020 were calculated under the if-converted and treasury stock methods. Certain of the liability classified warrants were dilutive in the second quarter of 2021 resulting in a dilutive impact for the nine months ended September 30, 2021.

The following table presents the calculation of weighted average shares used to calculate basic and diluted earnings (loss) per share (in thousands, except share and per share amounts):


	Three Months Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Basic net income (loss) per common share
Net income (loss)	$	8,087		$	(1,843	)	$	(27,689	)	$	(6,078	)
Undistributed earnings allocated to participating securities		(2,969	)		—			—			—
Net income (loss) attributable to common shares - basic	$	5,118		$	(1,843	)	$	(27,689	)	$	(6,078	)
Weighted average shares used in calculating basic earnings (loss) per share		12,100,292			2,774,502			7,902,104			2,774,237
Basic net income (loss) per common share	$	0.42		$	(0.66	)	$	(3.50	)	$	(2.19	)

Diluted net income (loss) per common share
Net income (loss)	$	8,087		$	(1,843	)	$	(27,689	)	$	(6,078	)
Change in fair value of warrants		—			—			(5,119	)		—
Undistributed earnings allocated to participating securities		(2,968	)		—			—			—
Net income (loss) attributable to common shares - diluted	$	5,119		$	(1,843	)	$	(32,808	)	$	(6,078	)
Weighted-average shares outstanding		12,100,292			2,774,502			7,902,104			2,774,237
Effect of potentially dilutive securities		6,479			—			50,894			—
Weighted average shares used in calculating diluted earnings (loss) per share		12,106,771			2,774,502			7,952,998			2,774,237
Diluted net income (loss) per common share	$	0.42		$	(0.66	)	$	(4.13	)	$	(2.19	)

The following potentially dilutive securities were excluded from the calculation of diluted net earnings (loss) per share because their effects would be anti-dilutive:


	September 30,
	2021		2020
Employee stock options		799,562		826,771
Warrants for common stock		8,491,006		100,393
Series C convertible preferred stock		—		317,420
Total		9,290,568		1,244,584

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive income (loss) was the same as its reported net income (loss) for all periods presented.

Recently Adopted Accounting Pronouncements

In November 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (“ASU 2016-18”). The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash and equivalents. ASU 2016-18 is effective for fiscal years beginning after December 31, 2018, with early adoption permitted. The Company adopted this standard on January 1, 2021, which did not have a material impact on its financial position, results of operations or cash flows.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU 2019-12"), as part of its initiative to reduce complexity in accounting standards. The amendments in ASU 2019-12 are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. As required by ASU 2019-12, we adopted this ASU effective January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on the Company's financial position, results of operations or cash flows.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04"). The accounting standard update is effective for fiscal years beginning after December 15, 2021. The Company early adopted this standard effective January 1, 2021 and evaluated all outstanding financial instruments that would fall under the scope of ASU 2021-04.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The ASU introduced a new credit loss methodology, the Current Expected Credit Losses (“CECL”) methodology, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to maturity debt securities, trade receivables and other receivables measured at amortized cost at the time the financial asset is originated or acquired. After the issuance of ASU 2016-13, the FASB issued several additional ASUs to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. In November 2019, the FASB issued an amendment making this ASU effective for fiscal years beginning after December 15, 2022 for smaller reporting companies. The Company plans to adopt this standard in the first quarter of 2023 and does not expect the adoption will have a significant impact on its financial statements and related disclosures.

In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) — Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU- 2020-06"), which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered

shares, (2) whether counterparty rights rank higher stockholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. This ASU may be applied on a full retrospective of modified retrospective basis. For smaller reporting companies, this ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption of the ASU is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the potential impact that this standard may have on its financial statements and related disclosures and currently expects to adopt this standard in the first quarter of 2024.

3. Merger between Seneca and LBS

On December 16, 2020, Seneca entered into a Merger Agreement, pursuant to which Merger Sub merged with and into LBS with LBS surviving as a wholly owned subsidiary of Seneca. On April 27, 2021, the Merger was completed.

The transaction was accounted for as a reverse asset acquisition. Under this method of accounting, LBS was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) LBS’s stockholders owned a substantial majority of the voting rights in the combined company, (ii) LBS designated a majority of the members of the initial board of directors (five of eight total members) of the combined company, (iii) LBS’s senior management holds all key positions in the senior management of the combined company and (iv) the only employees remaining in the combined company are that of LBS employees (all Seneca employees were terminated on the date of Merger). As a result, as of the closing date of the Merger, the net assets of the Company were recorded at their acquisition-date relative fair values in the accompanying condensed consolidated financial statements of the Company and the reported operating results prior to the Merger are those of LBS.

Pursuant to the terms of the Merger Agreement, each share of LBS common stock outstanding immediately prior to the closing of the Merger was converted into approximately 0.02719 shares of Company common stock, such that, immediately following the effective date of the Merger, preexisting LBS equity holders held approximately 74.9% of the capital stock of Seneca outstanding immediately following the Merger, and the equity holders of Seneca immediately before the Merger held approximately 25.1% of the Seneca capital stock outstanding immediately following the Merger.

Holders of the Company’s common stock will be entitled to one vote for each share of common stock held of record for the election of directors and on all matters submitted to a vote of stockholders.

In accordance with the Merger Agreement, Seneca shareholders who held shares immediately prior to the effective date of the Merger retain the right to receive a portion of payments received within 48 months of the Merger closing from the sale of certain legacy Seneca patents or assets that are sold within the 18 months following the Merger close. The contingent value right (“CVR”) payment amount is calculated as 80% of the net proceeds received (i.e., gross proceeds minus selling expenses) with no CVR payment required in the event such amount is less than $300,000 during the CVR term. Based on the information available at the time of the Merger, any contingent consideration associated with the CVR payment was deemed to have a remote possibility. As such, no consideration was recorded on the Company’s financial statements.

Reverse Stock Split and Exchange Ratio

On April 27, 2021, in connection with, and prior to the completion of, the Merger, the Company effected a Reverse Stock Split of its then outstanding common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. The final Exchange Ratio incorporated the effect of this Reverse Stock Split, and all issued and outstanding common stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. All issued and outstanding LBS common stock and underlying shares of common stock of, convertible preferred stock, options and warrants prior to the effective date of the Merger have been retroactively adjusted to reflect the Exchange Ratio for all periods presented.

Merger

The Merger was accounted for as a reverse asset acquisition pursuant to Topic 805, Clarifying the Definition of a Business, as substantially all of the fair value of the assets acquired were concentrated in a group of similar identifiable intangible assets, and the acquired assets did not have outputs or employees. As Seneca had not yet received regulatory approval for its product candidates, the fair value attributable to these assets was recorded as acquired in-process research and development (“IPR&D”) expense in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2021.

The total purchase price paid in the Merger has been allocated to the net assets acquired and liabilities assumed based on their fair values as of the completion of the Merger. The following summarizes the purchase price paid in the Merger (in thousands, except share and per share amounts):


Purchase Price Consideration:
Number of shares of the combined company issued to Seneca's stockholders (i)		2,884,375
Multiplied by the fair value per share of Seneca's common stock (ii)	$	9.96
Total share value consideration		28,728
LBS transaction costs		4,670
Total purchase price	$	33,398

(i)

Represents the actual post reverse stock split effected number of shares of Seneca common stock outstanding immediately prior to the merger.

(ii)

The purchase price was based on the closing price as reported on the Nasdaq Capital Market on April 27, 2021 (i.e., the Merger close date).

The allocation of the purchase price is as follows (in thousands):


	Fair Value of Assets
Cash and cash equivalents	$	3,279
Accounts receivables		24
Prepaid and other current assets		1,270
Accounts payable and accrued expenses		(927	)
Accrued compensation		(165	)
Warrant liabilities, at fair value		(200	)
In-process research and development (IPR&D) (1)		30,117
Purchase price	$	33,398

(1)

Represents the research and development projects of Seneca which were in-process, but not yet completed as of the date of the acquisition. Current accounting standards require that the fair value of IPR&D projects acquired in an asset acquisition with no alternative future use be allocated a portion of the consideration transferred and charged to expense on the acquisition date.

5. Fair Value Measurements

The Company follows ASC 820-10, Fair Value Measurements and Disclosures, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In connection with the transactions contemplated by the Merger, on December 16, 2020, (i) the Company entered into a securities purchase agreement with Altium Growth Fund, LP (the “Investor”) pursuant to which, among other things, the Company agreed to issue senior secured promissory notes in the aggregate principal amount of up to $5.0 million, in exchange for an aggregate purchase price of up to $3.75 million, representing an aggregate original issue discount of up to $1.25 million (the “Senior Secured Promissory Notes”) and warrants (“Senior Secured Promissory Note Warrants”) to purchase shares of the Company’s common stock.

As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:


	1)	Level 1: observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;
	2)	Level 2: inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
	3)	Level 3: unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions, which reflect those that a market participant would use.

The Company has issued warrants that are accounted for as liabilities. Certain of these warrants were valued using a Monte Carlo based valuation model. The Monte Carlo valuation technique was utilized because it embodies all the requisite assumptions (including the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Because derivative financial instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes. Changes in fair value are recognized as a component of other income (expense) in the statement of operations.

During 2020, the Senior Secured Promissory Note Warrant liability fair value of $1.9 million was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $17.71, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 87 percent, (iv) risk-free interest rate of one-half percent, (v) contractual terms of approximately six years and (vi) a zero percent dividend rate.

The second tranche of the Senior Secured Promissory Notes and the Senior Secured Promissory Note Warrants were issued on February 1, 2021. The initial fair value of the second tranche of the Senior Secured Promissory Note Warrant liability of $1.8 million was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $17.71, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 88 percent, (iv) risk-free interest rate of approximately one-half percent, (v) contractual terms of approximately 5.8 years and (vi) a zero percent dividend rate.

As of September 30, 2021, the fair value of the Senior Secured Promissory Note Warrants in the amount of $1.1 million was determined using a Black-Scholes valuation model that used the following assumptions: (i) a stock price of $2.65, (ii) an exercise price per share of $3.88, (iii) an estimated risk-free interest rate of approximately 0.98 percent, (iv) an estimated contractual term of 4.9 years, (v) volatility of 72.3%, and (vi) a zero percent dividend rate.

On May 20, 2021, pursuant to the terms of the Securities Purchase Agreement, the Company issued to the Investor warrants to purchase 4,995,893 shares of Common Stock at a price of $4.70 per share (the “May 2021 Warrant”). The initial fair value of the May 2021 Warrants was $21.9 million and was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $10.15, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 91 percent, (iv) risk-free interest rate of approximately one percent, (v) contractual terms of approximately 5.6 years, and (vi) a zero percent dividend rate.

On July 21, 2021, the Company and the Investor entered into an agreement to waive certain provisions of the previous Security Purchase Agreement (the "Waiver Agreement"). As part of the Waiver Agreement, the Investor agreed to waive the reset provisions of the Senior Secured Promissory Note Warrants and the May 2021 Warrants such that the number of shares and exercise price in effect immediately prior to the effective date of the Waiver Agreement shall no longer be subject to price-based resets. The waiver of the reset provision of the Senior Secured Promissory Note Warrants and the May 2021 Warrant is considered a modification to those warrants and as a result,

the underlying warrants were re-valued using a Black-Scholes based valuation model, which resulted in a favorable change in the fair value of the underlying warrants of $3.9 million. As consideration for the Waiver Agreement, the Company issued the Investor additional warrants to purchase 1,100,000 shares of the Company's Common Stock at an exercise price of $3.631 per share (the "July 2021 Warrants"). The initial fair value of the July 2021 Warrants was $1.7 million and is included in loss on issuance of warrants at the condensed consolidated statements of operations. The initial fair value was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $3.58, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 99.1 percent, (iv) risk-free interest rate of approximately 0.82 percent, (v) contractual terms of approximately 5.5 years, and (vi) a zero percent dividend rate.

As of September 30, 2021, the fair value of the May 2021 Warrants in the amount of $7.1 million was determined using a Black-Scholes valuation model that used the follow assumptions: (i) a stock price of $2.65, (ii) an exercise price per share of $3.88, (iii) an estimated risk-free interest rate of approximately 0.98 percent, (iv) an estimated contractual term of 4.9 years, (v) volatility of 72.3%, and (vi) a zero percent dividend rate.

As of September 30, 2021, the fair value of the July 2021 Warrants in the amount of $1.2 million was determined using a Monte Carlo simulation model that considered: (i) a starting stock price of $2.74, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 95.2 percent; (iv) risk-free rate of approximately 1.03 percent, (v) contractual terms of approximately 5.3 years and (vi) a zero percent dividend rate.

There were no liability classified warrants during the nine months ended September 30, 2020. The following table summarizes the activity of the Company’s Level 3 warrant liabilities during the nine months ended September 30, 2021 (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
Warrant Liabilities	2021			2021
Fair value at beginning of period	$	20,526		$	1,830
Initial fair value at the original issuance date		1,672			25,417
Equity classified warrant put feature activated		—			51
Change in fair value during the period		(12,764	)		(17,939	)
Seneca liability classified warrants assumed		—			200
Expiration of equity classified warrant put feature		—			(26	)
Settlement of derivative liabilities		—			(99	)
Fair value at end of period	$	9,434		$	9,434

At December 31, 2020, Seneca had certain common stock purchase warrants that were originally issued in connection with the May 2016 and August 2017 offerings that are accounted for as liabilities whose fair value was determined using Level 3 inputs. The May 2016 warrants expired in the second quarter of 2021, with only the August 2017 warrants recorded as a liability as of September 30, 2021. As a result of the Merger, the put right was activated on the August 2017 offering warrants and these warrants were valued at their put right value using a Black-Scholes option pricing model. The Company settled the put feature for 7,813 of these warrants during the quarter ended June 30, 2021. The put right became inactive in July 2021 and the remaining warrants were valued using a Black-Scholes option pricing model.

Additionally, as a result of the Merger, a put feature was activated on certain equity classified warrants associated with the October 2018 offering that temporarily required liability classification. These warrants were valued at their put right value using a Black-Scholes option pricing model. The Company settled the put feature for 12,500 of these warrants during the second quarter ended June 30, 2021. Upon expiration of the put right in May 2021, the remaining warrants were reclassified back to equity.

The gains resulting from the changes in the fair value of the liability classified warrants are classified as a gain on change in fair value of warrant liability in the accompanying condensed consolidated statements of operations.

6. Debt

Debt consisted of the following as of September 30, 2021 and December 31, 2020 (in thousands):


	September 30, 2021			December 31, 2020
Financing agreements	$	346		$	22
Unsecured promissory notes		43			231
Related party note		184			510
Senior Secured debt		—			1,677
Paycheck Protection Program Loan		—			279
Total debt		573			2,719
Less: Unamortized debt discounts		(5	)		(1,578	)
Total debt, net		568			1,141
Less: current portion of debt		(568	)		(1,047	)
Non-current portion of debt	$	—		$	94

Financing Agreements

In June and October 2020, the Company entered into agreements to finance certain insurance policies (“Financing Agreements”). These Financing Agreements have a stated interest rate of 8.35%, are payable over ten months and are secured by the Company’s insurance policies. In April and May 2021, the Company entered into additional agreements to finance additional insurance policies (“Additional Financing Agreements”). The Additional Financing Agreements have a stated interest of 3.6% and 8.35%, respectively, and are payable over a nine- and ten-month period, respectively. The agreements are secured by the associated insurance policies. As of September 30, 2021 and December 31, 2020, the aggregate remaining balance due under the Financing Agreements was $346,000 and $22,000, respectively.

Unsecured Promissory Notes

December 2019 Note

On December 18, 2019, the Company issued an unsecured promissory note for a principal sum of $100,000 to a consultant as payment for consulting services performed in 2019 (the “December 2019 Note”). The December 2019 Note had a maturity date in December 2020. The outstanding principal under the December 2019 note accrued interest at the annual rate of five percent simple interest. All principal plus accrued interest on the note was due and payable the earlier of the date which the Company closes on five million or more in revenue or gross financing proceeds or the maturity date. The maturity of the December 2019 Note was extended to March 19, 2021 and again to June 19, 2021. As of December 31, 2020, the outstanding balance of this note, including accrued interest was $105,000. The entire amount of principal and accrued interest on the December 2019 Note was repaid in June 2021.

July 2020 Note

On July 9, 2020, the Company issued an unsecured promissory note for a principal sum of $125,000 with an original issue discount of 20 percent (the “July 2020 Note”). There were no issuance costs related to this transaction. Interest accrues on the unpaid principal amount at a rate equal to ten percent per annum, compounded annually. Principal and any accrued but unpaid interest under this note was due and payable upon demand of the holder at any time following the earlier to occur of (a) the date on which the Company received at least $1,250,000 in gross proceeds from the issuance of equity securities or securities convertible into or exercisable for equity securities or (b) the 120th day following the issuance date of the note. On November 6, 2020, the Company and the lender mutually agreed to extend the maturity date of the July 2020 Note for an additional 120 days, or through March 6, 2021. No other terms of the original agreement were amended. The Company paid all outstanding accrued interest, which approximated $4,000, in conjunction with the amendment and interest will continue to accrue at the original stated interest rate. On March 6, 2021, the maturity date was further extended to June 6, 2021. On May 25, 2021, the Company and the noteholder amended the note to (i) extend the maturity date of the note to November 15, 2021 and (ii) provide for six monthly payments of $21,445 starting June 15, 2021 in full amortization of the Note (the “July 2020 Note Amendment”). See Note 8 for details of the warrants issued with the July 2020 Note and the warrants issued with the July 2020 Note Amendment. The Company accounted for the amendment as a modification. As of September 30, 2021 and December 31, 2020, the outstanding balance of the July 2020 Note, including accrued interest, was $43,000 and $126,000, respectively.

October 2020 Note  

On October 16, 2020, the Company issued an unsecured promissory note for a principal sum of $500,000 with an original issue discount of ten percent. Interest accrued on the unpaid principal amount at a rate equal to ten percent per annum, compounded annually. The note

was due and payable 180 days from the issuance date, or April 14, 2021. On May 25, 2021, the Company and the noteholder amended the note to (i) extend the maturity date of the note to November 15, 2021 and (ii) provide for six monthly payments of $90,901 starting June 15, 2021 in full amortization of the Note (the “October 2020 Note Amendment”). See Note 8 for details of the warrants issued with the October 2020 Note and the warrants issued with the October 2020 Note Amendment. The Company accounted for the amendment as a modification. This noteholder was considered a related party due to its equity investment in the Company (see Note 12). As of September 30, 2021 and December 31, 2020, the outstanding balance of the October 2020 Note, including accrued interest, was $184,000 and $510,000 respectively.  

Senior Secured Promissory Notes

In connection with the transactions contemplated by the Merger, (i) the Company entered into a securities purchase agreement with the Investor pursuant to which, among other things, the Company agreed to issue the Senior Secured Promissory Notes and the Senior Secured Promissory Note Warrants, and (ii) Seneca and LBS entered into a separate securities purchase agreement with the Investor pursuant to which, among other things, the Investor agreed to invest $20.0 million in cash and cancel any outstanding principal and interest on the Senior Secured Promissory Notes immediately prior to the closing of the Merger in exchange for shares of Series 1 Preferred Stock of LBS to be issued immediately prior to the closing of the Merger and warrants to purchase shares of Palisade’s common stock to be issued after the closing of the Merger, in private placement transactions.

The Senior Secured Promissory Notes had a first closing on December 17, 2020 and a second closing on February 1, 2021. Each of the closings resulted in the issuance of $1.7 million in aggregate principal of Senior Secured Promissory Notes and Senior Secured Promissory Note Warrants to acquire 94,096 shares of common stock, with an exercise price of $17.71 per share. The third closing was at a date to be determined by the Company between March 16, 2021 and the closing of the Merger. The Company did not elect to draw down the third tranche. At issuance, the fair value of the first tranche of the Senior Secured Promissory Note Warrants exceeded the debt proceeds, resulting in a $0.8 million loss on issuance of debt. At issuance, the fair value of the second tranche of the Senior Secured Promissory Note Warrants exceeded the debt proceeds, resulting in a $0.7 million loss on issuance of debt. The debt was recognized at a zero-dollar carrying value and was being accreted to the principal amount of the debt, on a straight-line basis, through a charge to interest expense in the statement of operations. The Senior Secured Promissory Notes accrue interest at a rate of 15 percent based upon a 360-day year and was payable in arrears. In connection with the Merger, the outstanding principal and interest on the Senior Secured Promissory Notes was cancelled for shares of Series 1 Preferred Stock of the Company.

Paycheck Protection Program (“PPP”)

In April 2020, the Company applied for and received $279,000 from the PPP (the “PPP Loan”) as government aid for payroll, rent and utilities. There were no issuance costs related to this transaction. The PPP Loan accrued simple interest at a rate of one percent per annum and has an original maturity date of April 2022. Payments of principal and interest were deferred for the ten-month period following the loan forgiveness period, which is defined as the 8-week or 24-week period following the loan origination date, at which time the loan balance was payable in monthly installments unless the Company applied for, and received, forgiveness in accordance with the CARES Act and the terms of the loan executed by the Company and its lender.

The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The certification made by the Company did not contain any objective criteria and is subject to interpretation. Based in part on the Company’s assessment of other sources of liquidity, the uncertainty associated with future revenues created by the COVID-19 pandemic and related governmental responses, and the going concern uncertainty reflected in the Company’s financial statements, the Company believed in good faith that it met the eligibility requirements for the PPP Loan. If, despite the good-faith belief that given the Company’s circumstances all eligibility requirements for the PPP Loan were satisfied, it is later determined that the Company had violated any applicable laws or regulations or it is otherwise determined the Company was ineligible to receive the PPP Loan, it may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties and potential liabilities.

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “PPP Flexibility Act”) was signed into law, extending the PPP Loan forgiveness period from 8 weeks to 24 weeks after loan origination, reducing the required amount of payroll expenditures from 75 percent to 60 percent, removing the prior ban on borrowers taking advantage of payroll tax deferral after loan forgiveness and allowing for the amendment of the maturity date on existing loans from two years to five years.

In January 2021, the Company received notification the PPP Loan was forgiven and recognized a gain a $279,000, in other income in the condensed consolidated statements of operations.

The following table summarizes future minimum debt payments as of September 30, 2021 (in thousands):


Years ending December 31,
2021 (remaining)	$	227
2022		346
2023		—
2024		—
2025 and thereafter		—
Total debt maturities		573
Less: debt discounts		(5	)
Less: unamortized interest		—
Total future minimum payments		568
Less: current portion of debt		(568	)
Non-current portion of debt	$	—

8. Common Stock Warrants

From time to time, the Company issues warrants to its investors, creditors and various other individuals. The Company’s outstanding common stock warrants that are classified as equity warrants are included as a component of stockholder’s equity at the date of grant at the relative fair value at that grant date. Common stock warrants accounted for as liabilities in accordance with ASC 815 are included in non-current liabilities. The warrants have an exercise price ranging from $3.45 to $4,695.60 per share and generally expire between five and ten years after the date of issuance. The Company had common stock warrants issuable and outstanding of 8,491,007 and 195,712, at September 30, 2021 and December 31, 2020, respectively.

Amendment of Promissory Notes and Issuance of New Warrants

In 2020, LBS issued and sold to certain holders (i) unsecured promissory notes in the aggregate principal amount of $0.6 million with an interest rate of 10% per annum and (ii) warrants to purchase an aggregate of 70,000 shares of common stock of LBS at an exercise price of $0.73 per share (the “Old Warrants”) (see Note 5). In connection with the Merger, the Old Warrants automatically converted into warrants to purchase an aggregate of 1,904 shares of Common Stock at a purchase price of $26.84 per share.

On May 25, 2021, the Company, LBS and the noteholders amended the notes to extend the maturity date of the notes to November 15, 2021 (the “Notes Amendment”). In connection with the Notes Amendment, the Old Warrants were canceled, and the Company issued warrants to the noteholders to purchase an aggregate of 8,000 shares of Common Stock at a purchase price of $6.00 per share (the “New Warrants”). The incremental value of the New Warrants of $16,000 was recorded as a discount on the debt and is accreted to interest expense over the remaining term of the debt. The New Warrants were equity classified.

Issuance of Stock and Warrant to Ecoban Securities, LLC (“Ecoban”)

In connection with the closing of the Merger and the Pre-Merger Financing, on May 25, 2021, the Company issued to Ecoban (i) a warrant to purchase 18,353 shares of the Palisade’s Common Stock at a price of $17.72 per share (the “Ecoban Warrant”) and (ii) 118,833 shares of Common Stock (the “Ecoban Shares”), as payment for a success fee for closing the Merger and Pre-Merger Financing, respectively. The Ecoban Warrant was equity classified.

Senior Secured Promissory Note Warrants

In connection with the issuance of the Senior Secured Promissory Notes, the Company issued the Investors Senior Secured Promissory Note Warrants and identified an investor put right to offset future equity purchases in exchange for settlement of the Senior Secured Promissory Notes. The Senior Secured Promissory Note Warrants had an exercise price of $17.71 per share and expire five years from the date of registration or April 27, 2026. The Senior Secured Promissory Note Warrants did not meet the criteria for equity classification because of multiple features, including a potential adjustment to the exercise price and the potential for cash settlement of the warrants; therefore, the warrants are accounted for as liabilities in accordance with ASC 815. At each issuance date, the Company recognized the Senior Secured Promissory Note Warrants at fair value. The Company valued the Senior Secured Promissory Note Warrants upon the date of issuance using a Monte-Carlo valuation model with a resulting fair value of $1.8 million and $1.9 million at February 1, 2021 and December 31, 2020, respectively. As the fair value of the Senior Secured Promissory Note Warrants exceeded the proceeds from the Senior Secured Promissory Notes, a loss of $0.7 million and $0.8 million was recognized at issuance on February 1, 2021 and

December 17, 2020, respectively. (See Note 6 for further discussion). The Senior Secured Promissory Note Warrants will be revalued at fair value each reporting period in accordance with ASC 815. As of September 30, 2021, the Senior Secured Promissory Note Warrants were exercisable for 858,892 shares of the Company’s Common Stock at an exercise price of $3.88.

May 2021 Warrant

The May 2021 Warrants are immediately exercisable and will have a term of five years from the date all of the shares underlying the May 2021 Warrant have been registered for resale. The May 2021 Warrants were exercisable for 5,303,568 shares of the Company’s Common Stock at an exercise price of $3.88 based on the most recent price-based reset. On November 8, 2021, the Investor converted 644,138 warrants into shares of the Company's common stock in a cash-less exercise.

The May 2021 Warrants did not meet the criteria for equity classification and will therefore be accounted for in accordance with ASC 815. The Company valued the May 2021 Warrants using a Monte-Carlo valuation model with a resulting fair value of $21.9 million. As the fair value of the May 2021 Warrants exceeded the proceeds from the Pre-Merger Financing, a loss of $1.9 million was recognized at issuance on April 27, 2021. The Senior Secured Promissory Note Warrants, and the May 2021 Warrants will be revalued at fair value each reporting period in accordance with ASC 815.

July 2021 Warrant

The July 2021 Warrants are exercisable beginning six months following registration and for five years thereafter. The July 2021 Warrants are accounted for as liabilities in accordance with ASC 815 and are included in non-current liabilities at the condensed consolidated balance sheets (see Note 5 for further details on the July 2021 Warrants). The Waiver Agreement resulted in a change in fair value of the original warrants that the Company has recognized in earnings as of the date of the Waiver Agreement together with any associated transaction costs.

August 2021 Warrant

On August 19, 2021, pursuant to the terms of a Security Purchase Agreement, the Company issued to Yuma, a related party, a warrant to purchase up to 377,474 shares of Common Stock at a price of $3.45 per share, subject to certain adjustments (the "August 2021 Warrants"). The August 2021 Warrants are immediately exercisable and will have a term of five years from the date all of the shares underlying the August 2021 Warrants have been registered for resale.

The following table summarizes warrant activity for the nine months ended September 30, 2021:


	Number of Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Warrants outstanding, December 31, 2020		195,712			21.20		6.60
Granted		7,572,191			4.03
Seneca warrants		749,792
Exercised		—
Settled		(20,313	)
Forfeited, expired or cancelled		(6,375	)
Warrants outstanding, September 30, 2021		8,491,007			5.64		4.73

9. Equity Incentive Plans

In 2013, LBS adopted the 2013 Employee, Director, and Consultant Equity Incentive Plan (the “2013 Plan”). Upon the closing of the Merger, each outstanding, unexercised and unexpired LBS option under the 2013 Plan, whether vested or unvested, was assumed by the Company and converted into Palisade options and became exercisable by the holder of such option in accordance with its terms, with (i) the number of shares of common stock subject to each option multiplied by the Exchange Ratio and (ii) the per share exercise price upon the exercise of each option divided by the Exchange Ratio. In connection with the closing of the Merger, no further awards will be made under the 2013 Plan.

Seneca’s 2019 Equity Incentive Plan (the “2019 Plan”) was approved by Seneca’s stockholders on June 12, 2019. In April 2021, in connection with the Merger, all outstanding options under the 2019 Plan were cancelled and all outstanding restricted stock units were

vested. The vested shares were settled for shares of commons stock of the Company in the third quarter of 2021 (see below). In connection with the closing of the Merger, no further awards will be made under the 2019 Plan.

In April 2021, in connection with the closing of the Merger, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”). The maximum number of shares of the Company’s Common Stock available for issuance under the 2021 Plan will not exceed 1,502,583 shares. In addition, such aggregate number of shares of Common Stock will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2022 and ending on (and including) January 1, 2031, in an amount equal to 1% of the total number of shares of Common Stock outstanding on December 31st of the preceding year; provided, however, that the board of directors may act prior to January 1st of a given year to provide that the increase for such year will be a lesser number of shares of Common Stock. As of September 30, 2021, no options have been issued under this plan.

The following table summarizes stock option activity and related information under the 2013 Plan and the 2021 Plan for the nine months ended September 30, 2021:


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2020		826,769		$	32.72		6.49	$	1,541
Granted		59,818			17.72
Exercised		—
Forfeited, expired or cancelled		(87,025	)
Outstanding at September 30, 2021		799,562			33.12		6.39		—
Vested and expected to vest at September 30, 2021		799,562			33.12		6.39		—
Exercisable at September 30, 2021		769,332		$	33.20		6.33	$	—

The weighted-average grant date fair value of options granted during the nine months ended September 30, 2021 was $5.55 per share.

As of September 30, 2021, the unrecognized compensation cost related to outstanding options was $0.5 million which was expected to be recognized over a weighted-average period of approximately 1.1 years.

The allocation of stock-based compensation for all stock awards is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Research and development expense	$	26	$	125	$	349	$	415
General and administrative		77		539		859		1,129
Total	$	103	$	664	$	1,208	$	1,544

The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of stock option grants were as follows:


	September 30,
	2021			2020
Expected term (years)		5.0			8.18
Risk-free interest rate		0.88	%		0.98	%
Expected dividend yield		—			—
Volatility		76.05	%		80.0	%

Risk-free interest rate. The Company bases the risk-free interest rate assumption on observed interest rates appropriate for the expected term of the stock option grants.

Expected dividend yield. The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends.

Expected volatility. Due to the Company’s limited operating history and lack of company-specific historical or implied volatility, the expected volatility assumption is based on historical volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry.

Expected term. The expected term represents the period of time that options are expected to be outstanding. As the Company does not have sufficient historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period.

RSU’s

The Company has granted restricted stock units (RSU’s) to certain employees and board members that entitle the holders to receive shares of common stock upon vesting and subject to certain restrictions regarding the exercise of the RSU’s. The grant date fair value of RSU’s is based upon the market price of the underlying common stock on the date of grant.

There were 4,000 RSU’s granted under the 2019 Plan in the nine months ended September 30, 2021 with a weighted average grant date fair value of $10.14 per share. In connection with the closing of the Merger, these RSU’s became fully vested, and the Company recognized RSU vesting of $41,000 during the nine months ended September 30, 2021.

During the quarter ended September 30, 2021, 8,817 RSUs under the 2019 Plan were converted to Common Stock. After giving effect to this issuance, there were no outstanding RSUs as of September 30, 2021.

Officer Settlement Agreements

The Company’s former Chief Development Officer was terminated in February 2021. As part of the separation package, the Company’s board of directors agreed to (i) accelerate vesting by four months for the former employee’s outstanding options and (ii) allow up to seven years from the termination date for the former employee to exercise all vested options. The Company concluded the actions taken by the Company resulted in modification accounting for the stock options. The Company determined the incremental fair value of the modified stock options was $225,000, which was expensed to research and development expenses in the condensed consolidated statements of operations during the nine months ended September 30, 2021.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements in this Quarterly Report that are not strictly historical are forward-looking statements and include statements about products in development, our in-licensing/acquisition strategy, our out-licensing sales strategy, results and analyses of pre-clinical studies, clinical trials and studies, research and development expenses, cash expenditures, and alliances and partnerships, among other matters. You can identify these forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements as a result of any number of factors. Some of these factors are more fully discussed, as are other factors, in the Company’s Form 8-K/A , as filed with the SEC, in our subsequent filings with the SEC as well as in the section of this Quarterly Report entitled “Risk Factors” and elsewhere herein. The Company does not undertake to update any of these forward-looking statements or announce the results of any revisions to these forward-looking statements except as required by law.

The Company recommends investors read this entire Quarterly Report on Form 10-Q, including the “Risk Factors” section, the condensed consolidated financial statements, and related notes. As used in this Quarterly Report, unless the context otherwise requires, the words “we,” “us,” “our,” the “Company” and “Palisade” refers to Palisade Bio, Inc. and its subsidiary, post-Merger. Also, any reference to “common shares” or “common stock,” refers to our $0.01 par value common stock. Any reference to “Series A Preferred Stock” or “Preferred Stock” refers to our Series A 4.5% Convertible Preferred Stock. Any reference to “Series C Preferred Stock” refers to the Series C Preferred Stock. Any reference to “Leading Biosciences, Inc.” or “LBS” refers to the Company’s operations prior to the completion of the Merger. The information contained herein is current as of the date of this Quarterly Report (September 30, 2021), unless another date is specified.

On April 27, 2021, in connection with the consummation of the Merger, the Company completed a 1-for 6 reverse stock split of its common stock. All shares and per share data in this report have been adjusted to reflect the reverse stock split. The Company prepares its interim financial statements in accordance with U.S. GAAP. Palisade’s financials and results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of its prospective financial condition and results of operations for the pending full fiscal year ending December 31, 2021. The interim financial statements presented in this Quarterly Report on Form 10-Q as well as other information relating to Palisade contained in this Quarterly Report on Form 10-Q should be read in conjunction and together with the reports, statements and information filed by Palisade with the SEC.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided, in addition to the accompanying condensed consolidated financial statements and notes, to assist you in understanding our results of operations, financial condition and cash flows. The MD&A is organized as follows:

We are a clinical-stage biopharmaceutical company focused on discovering, developing, and commercializing innovative oral therapies that target serious diseases associated with the breakdown of the mucosal barrier protecting the gastrointestinal (“GI”) tract. Our goal is to be an industry leader in developing therapies to treat these diseases and to improve the lives of patients suffering from such diseases.

Our approach is founded on the discovery that damage to the intestinal epithelial barrier can result in the leakage of digestive enzymes from the GI tract that can damage tissue and promote inflammation, causing a broad array of acute and chronic conditions.

Using our scientific and drug development expertise, we are developing a portfolio of oral product candidates to treat conditions driven by protease (intestinal enzymes) leakage through the intestinal epithelial barrier, including surgical complications and inflammatory conditions.

* Commercial right to LB1148 in Greater China (excluding Taiwan) have been out-licensed to Newsoara.

Our lead therapeutic candidate, LB1148, is a novel oral liquid formulation of the well-characterized digestive enzyme inhibitor, tranexamic acid, intended to inhibit digestive enzyme activity and preserve gut integrity during intestinal stress, such as results from reduced blood flow to the intestine, infections, and surgery. Peer reviewed publications of third-party research suggest that digestive enzyme leakage from the GI tract drives GI and organ dysfunction following these events.

We are initially developing LB1148 to be administered to patients prior to major surgeries that risk disrupting the intestinal mucosal barrier. As announced in March of 2020, a randomized, double-blind, parallel, placebo-controlled Phase 2 investigator-sponsored clinical trial of LB1148 in 120 patients undergoing coronary artery bypass grafting and/or heart valve replacement surgery requiring cardiopulmonary bypass was completed. Patients were randomized to receive LB1148 or placebo in conjunction with surgery. The trial’s primary endpoint was time to return of bowel function. Secondary endpoints include Intensive Care Unit (“ICU”) length of stay, hospital length of stay, organ function changes, inflammatory response and glucose control. LB1148 provided an approximately 30% improvement in the time to normal bowel function following cardiovascular (“CV”) surgery (p<0.001) compared to placebo. The treatment group also had an average 1.1-day shorter length of stay in the ICU and an average 1.1-day shorter hospital stay. Generally,

treatment with LB1148 was well tolerated. Adverse events (“AEs”) were similar between the treatment groups and not considered unexpected for the subject population. None of the AEs or serious adverse events (“SAEs”) reported were considered drug-related by the sponsor-investigator. One of the primary factors in discharging patients from the hospital following surgery is the return of bowel function. LB1148 has been granted Fast Track designation from the “FDA” for the treatment of postoperative GI dysfunction (which may present as feeding intolerance, ileus, necrotizing enterocolitis (“NEC”), etc.) associated with gut hypoperfusion injury in pediatric patients who have undergone congenital heart disease repair surgery.

The Company and our co-development partner Newsoara announced positive topline Phase 2 clinical trial data that LB1148 had a statistically significant (p=0.0008) effect in accelerating the return of bowel function in patients undergoing elective bowel resection surgery.

Full results from this study are expected to be reported at an upcoming surgical-focused medical conference. Based on the beneficial clinical outcomes and good safety profile observed to date in Phase 2 trials in both CV surgery and GI surgery, Palisade Bio and Newsoara plan to advance LB1148 to pivotal Phase 3 clinical trials for accelerating the return of bowel function for major surgical indications. We are also currently conducting a randomized, double-blind, placebo-controlled, proof-of-concept Phase 2 clinical trial of LB1148 in patients undergoing elective bowel resection surgery in the Unites States. This trial will evaluate return of bowel function following surgery and whether patients treated with LB1148 also experience fewer postoperative intra-abdominal adhesions. We are planning to initiate a Phase 2/3 clinical trial of LB1148 in neonatal patients undergoing CV surgery to correct congenital heart defects. We anticipate that this clinical trial will enroll 100 patients, with an initial data readout from the first ten patients.

Beyond our lead product candidate, we are continuing to develop additional therapeutic candidates. We believe that protease-based therapeutics hold promise in meeting a number of unmet needs resulting from chronic protease leak, beyond our initial therapeutic focus on GI-related pathology triggered by major surgeries.

Immediately prior to the closing of the Merger, we issued each share of our common stock held by our stockholders of record, one contingent value right (“CVR”). Each CVR entitles the holder of such right (the “CVR Holder”) to receive their pro-rata share of 80% of the net proceeds (subject to certain conditions), if any, derived from the sale or licensing of all or any part of the intellectual property owned, licensed or controlled by us immediately prior to the closing of the Merger (the “Legacy Technology”) provided however that CVR Holders will only be entitled to receive such net proceeds if the sale or licensing of such Legacy Technology occurs on or before the 18-month anniversary of such closing (“Legacy Monetization”). Additionally, pursuant to the terms of the CVR agreement, CVR Holders are only entitled to participate in their pro-rata share of net proceeds which we receive during the 48-month period following the closing of the Merger. As of August 19, 2021, we have engaged a financial advisor to assist in the Legacy Monetization. As discussed below, the Company entered into an Asset Transfer Agreement to monetize one Legacy Technology whereby the licensee purchased the assets underlying the NSI-189 License. It is still too early in the process to determine if we will be successful in the sale or licensing of any of the remaining Legacy Technology. In the event we are not able to sell or license the remaining Legacy Technology, or the consideration received is not sufficient, CVR Holders may not receive any proceeds from their CVRs and the CVRs may expire valueless.

The Company has engaged a financial advisor to assist in monetizing NSI-566, the Company's stem cell therapeutic. It is still too early in the process to determine if the Company will be successful in the sale or licensing of NSI-566.

As previously disclosed, on December 16, 2020, the Company exclusively licensed certain patents and technologies, including a sublicense covering a synthetic intermediate, of its NSI-189 assets (“189 License”), along with a purchase option through December 16, 2023 (“Purchase Option”). On October 22, 2021, the licensee (“Purchaser”) agreed to terms of an early exercise of the Purchase Option under the 189 License and entered into an Asset Transfer Agreement (“ATA”). The Purchaser is a U.S. based private biopharmaceutical company focused on precision-medicine for CNS disorders, including depression, using AI-based brain biomarkers.

In connection with the ATA, we received gross proceeds of $0.4 million. Pursuant to the terms of the CVR Agreement, no distribution is required to be made to the holders of the CVR if such distribution would be less than $0.5 million. Accordingly, the gross proceeds from the sale of the NSI-189 assets, less any applicable transaction costs and expenses, are being deposited into the CVR escrow to be used to pay costs and expenses associated with the monetization of the Company's other Legacy Technologies, which may include but not be limited to: financial advisory and consulting fees, legal fees, and any other fees associated with the monetization. There can be no assurance that NSI-566 will ever be successfully monetized or that CVR holders will receive any distributions from the sale of the NSI-189 assets.

The Company's condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of expenses during the reporting period. The Company’s estimates are based on its historical trends and other factors that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company's significant accounting policies are described in more detail in Note 2 in the notes to its condensed consolidated financial statements included elsewhere herein and highlight the significant accounting policies used in the preparation of the consolidated financial statements. However, the Company believes that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations:

Stock-based compensation expense represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate the fair value of stock option awards using the Black-Scholes option pricing model and recognize forfeitures as they occur. The Black-Scholes option pricing model requires the use of subjective assumptions, including the risk-free interest rate, the expected stock price volatility, the expected term of stock options, the expected dividend yield and the fair value of the underlying common stock on the date of grant. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require judgment to develop. Due to the lack of an adequate history of a public market for the trading of our common stock and a lack of adequate company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. For these analyses, we have selected companies with comparable characteristics to ours, including enterprise value, risk profiles, and position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We compute the historical volatility data using the daily close prices for the selected companies’ shares during the equivalent period of the calculated expected term of our stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our common stock price becomes available. We have estimated the expected life of our employee stock options using the “simplified” method, whereby the expected life equals the average of the vesting term and the original contractual term of the option. The risk-free interest rates for periods within the expected life of the option are based on the yields of zero-coupon U.S. treasury securities. See Note 9 of the notes to the condensed consolidated financial statements for additional information and specific assumptions used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the year ended December 31, 2020, and the nine months ended September 30, 2021. Stock-based compensation totaled approximately $2.0 million for the year ended December 31, 2020, and $1.2 million for the nine months ended September 30, 2021.

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates its financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company values its derivatives using the Black-Scholes option-pricing model or other acceptable valuation models, including Monte-Carlo simulations. Derivative instruments are valued at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities, is re-assessed at the end of each reporting period.

The Company accounts for its common stock warrants and tranche liability in accordance with Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 815, the Company accounts for common stock warrants as liabilities if the warrant requires net cash settlement or gives the holder the option of net cash settlement or it fails the equity classification criteria. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement and the warrants meet the requirements to be classified as equity. Common stock warrants classified as liabilities are initially recorded at fair value and remeasured at fair value each balance sheet date with the offset adjustments recorded in change in fair value of warrant liability within the condensed statements of operations. Common stock warrants classified as equity are initially measured at fair value on the grant date and are not subsequently remeasured.

We are required to make estimates of our accrued expenses resulting from our obligations under contracts with CROs, clinical sites, manufacturers, vendors and consultants, in connection with conducting research and development activities. The financial terms of these contracts vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect research and development expenses in our financial statements by matching those expenses with the period in which services and efforts are expended. We account for these expenses according to the progress our study as measured by the timing of various aspects of the study or related activities. In accruing for these activities, we obtain information from various sources and estimate level of effort or expense allocated to each period.

Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period.

Prior to becoming a publicly traded company, Palisade was required to periodically estimate the fair value of common stock when issuing stock options and computing its estimated stock-based compensation expense. The fair value of common stock was determined on a periodic basis, with the assistance of an independent third-party valuation expert. The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of significant levels of management judgment.

The fair value of the common stock underlying Palisade’s stock options was estimated at each grant date. Palisade’s board of directors intended all options granted with an exercise price per share no less than the estimated fair value per share of common stock underlying those options on the date of grant.

In order to determine the fair value, Palisade considered, among other things, contemporaneous valuations of Palisade’s Common Stock, Palisade’s business, financial condition and results of operations, including related industry trends affecting its operations; the likelihood of achieving a liquidity event, such as an initial public offering or sale, given prevailing market conditions; the lack of marketability of Palisade’s common stock (pre-Merger); the market performance of comparable publicly traded companies; and U.S. and global economic and capital market conditions.

See Note 2 to the notes to the condensed consolidated financial statements for the quarter ended September 30, 2021, included elsewhere in this Quarterly Report on Form 10-Q.

The Company generated no revenues from the sale of its proposed therapies for any of the periods presented.

Research and development expenses consist primarily of costs incurred for the clinical development of Palisade’s lead product candidate LB1148, which include:

The Company’s direct research and development expenses are tracked by product candidate and consist primarily of external costs, such as fees paid under third-party license agreements and to outside consultants, contract research organizations (“CROs”), clinical site, contract manufacturing organizations (“CMOs”) and research laboratories in connection with its preclinical development, process development, manufacturing and clinical development activities. Palisade does not allocate employee costs and costs associated with its discovery efforts, laboratory supplies and facilities, including other indirect costs, to specific product candidates because these costs are deployed across multiple programs and, as such, are not separately classified. Palisade primarily uses internal resources to conduct its research as well as for managing its preclinical development, process development, manufacturing and clinical development activities.

General and administrative expenses consist primarily of personnel-related costs, insurance costs, facility costs and professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. Personnel-related costs consist of salaries and benefits. We expect our general and administrative expenses will increase substantially as we: (i) incur additional costs associated with being a public company, including audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements; director and officer insurance premiums; and investor relations costs, (ii) hire additional personnel, and (iii) protect our intellectual property.

The Company’s management has evaluated whether there is substantial doubt about the Company’s ability to continue as a going concern and has determined that substantial doubt existed as of the filing date of this Quarterly Report on Form 10-Q. This determination was based on the following factors: (i) the Company’s available cash as of the date of this filing will not be sufficient to fund its anticipated level of operations for the next 12 months; (ii) the Company will require additional financing by the second half of 2022 to continue at its expected level of operations; and (iii) if the Company fails to obtain the needed capital, it will be forced to delay, scale back, or eliminate some or all of its development activities or perhaps cease operations. In the opinion of management, these factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern as of the filing date of this Quarterly Report on Form 10-Q and for one year from the issuance of the condensed consolidated financial statements.

The COVID-19 pandemic has resulted in quarantines, restrictions on travel and other business and economic disruptions. Palisade has evaluated the impact of the pandemic on its business operations and plans, including but not limited to the impact on access to capital, planned and ongoing clinical trials, cash management and our investment policies regarding cash as well as the long-term effects in the medical and drug development fields.

The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020 (in thousands):

The increase of approximately $0.2 million, or 51%, in research and development expenses for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily attributable to an increase of $0.3 million in clinical trial activities as non-essential surgical procedures, which were virtually halted following the onset of the COVID-19 pandemic, have begun to return to pre-pandemic levels resulting in more patients enrolled in the Company's clinical trial. The increase was offset partially by a $0.1 million decrease in share-based compensation expense in three months ended September 30, 2021 compared to the same period last year.

General and administrative expenses for the three months ended September 30, 2021 increased approximately $1.0 million, or 70%, when compared to the three months ended September 30, 2020. This increase is primarily related to a $1.4 million increase in other general and administrative expenses associated with operating as a public company, including $0.9 million of accounting and legal costs associated with required SEC filings during the quarter, offset partially by a $0.5 million decrease in share-based compensation expense in three months ended September 30, 2021 compared to the same period last year.

Other income, net increased by $11.1 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase was primarily due a reduction in the fair value of warrant liabilities of $12.8 million, a portion of which was due to a due to an agreement entered into in July 2021 between the Company and Altium Growth Fund, L.P. (the "Investor") whereby the Investor agreed to waive certain provisions of the previous Security Purchase Agreement entered into between the parties (the "Waiver Agreement"), which resulted in a $3.9 million favorable change in the fair value of the underlying warrants. The gain from the reduction in the fair value of warrant liabilities was partially offset by a $1.7 million loss associated with the issuance of warrants in the three months ended September 30, 2021.

The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020 (in thousands):

The decrease of approximately $0.7 million, or 30%, in research and development expenses was primarily attributable to $0.7 million net decrease in clinical trial activities due to higher trailing enrollment in the prior period before the COVID-19 pandemic. Clinical and preclinical trial activities have begun to increase as of the third quarter of 2021 but are still below the ramped up levels in the first nine months of 2020.

In the nine months ended September 30, 2021, the Company recognized an in-process research and development expense of $30.1 million associated with the Merger. See Note 3 to our condensed consolidated financial statements for the quarter ended September 30, 2021, included elsewhere in this Quarterly Report on Form 10-Q, for further details regarding this expense.

General and administrative expenses increased approximately $2.3 million or 63%. This increase is primarily related to a $2.3 million increase in other general and administrative expenses associated with operating as a public company, including $1.1 million of accounting and legal costs associated with SEC filings during the nine months ended September 30, 2021, a $0.4 million increase in personnel-related compensation, partially offset by a $0.3 million decrease in share-based compensation expense in nine months ended September 30, 2021 compared to the same period last year.

Other income, net increased by $10.2 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increase was primarily due (i) a $0.3 million gain on the forgiveness of the Company’s PPP loan, (ii) a reduction in the fair value of warrant liabilities of $17.9 million, $3.9 million of which is attributable to the Waiver Agreement, and (iii) a $0.1 million reduction in the fair value of share liability. These increases were partially offset by (i) a $2.4 million decrease in interest expense is mostly due to the non-cash debt discount accretion related to the pre-merger senior secured debt financing that was accelerated when this debt was converted to equity at the close of the Merger; (ii) a $1.9 million loss on the issuance of LBS Series 1 Preferred Stock due to fair value of the liability classified warrants being in excess of the equity proceeds, (iii) $3.2 million of costs associated with on the issuance of warrants in the period, including a $1.7 million loss associated with the issuance of warrants in the three months ended September 30, 2021, and (iv) $0.7 million loss recorded on the issuance of secured debt in connection with the discount given for the pre-Merger senior secured debt.

Since the Company's inception, it has financed its operations through the sales of its securities, issuance of long-term debt, the exercise of investor warrants, and to a lesser degree from grants and research contracts as well as the licensing of its intellectual property to third parties.

Management expects the Company to incur substantial operating losses for the foreseeable future in order to complete clinical trials and launch and commercialize any product candidates for which it receives regulatory approval. The Company will need to raise additional capital through a combination of equity offerings, debt financings, collaborations, and other similar arrangements. The Company’s ability to raise additional capital may be adversely impacted by general political, economic conditions or a resurgence of COVID 19 or another pandemic. In the event the Company is unable to access additional capital, it may need to curtail or greatly reduce its operations, which could have an adverse impact its business, financial condition, and results of operations. In addition, the Company is restricted, pursuant to agreements with the Investor in the private financing conducted in connection with the Merger, from issuing equity securities in the near term without the consent of such Investor.

As of September 30, 2021, we had $14.1 million in cash, cash equivalents and restricted cash. The following table shows a summary of our cash flows for the nine months ended September 30, 2021 and 2020 (in thousands):

Cash used in operating activities for the nine months ended September 30, 2021, reflects a $27.7 million loss for the period adjusted for $5.4 million of net cash outflows related to changes in operating assets and liabilities, and certain non-cash items including: (i) $0.3 million gain on forgiveness of a PPP loan, (ii) $3.2 million in costs allocated to the warrant issuances, (iii) $1.2 million recorded for stock-based compensation, (iv) $17.9 million gain recorded for the change in the fair market value of the warrant liabilities, of which $3.9 million resulted from the Waiver Agreement, and (v) $0.7 million loss on the issuance of the senior secured debt. Additionally, the following net non-cash expenses of $35.7 million were incurred in connection with the Merger transaction:

For the nine months ended September 30, 2021, cash used investing activities consisted of $3.3 million in cash acquired in connection with the Merger that was more than offset by $3.3 million of cash used to pay for acquisition related costs in the same period.

For the nine months ended September 30, 2021, cash provided by financing activities was $23.7 million which was primarily generated as follows: (i) $19.9 million in net proceeds from the issuance of LBS Series 1 Preferred Stock, (ii) $5.2 million from the issuance of common stock and warrants, and (iii) $1.2 million in proceeds from the issuance of senior secured debt. These increases were partially offset by payments on debt of $0.9 million, redemption of warrants of $0.1 million, and payment of debt issuance costs of $0.1 million.

The Company has incurred significant operating losses and negative cash flows from operations since inception. To date, the Company has not been able to generate significant revenues nor achieve operating profitability. The Company plans to fund its current remaining debt obligations using cash on hand. The Company’s available cash as of the date of this filing will not be sufficient to fund its anticipated level of operations for the next 12 months and the Company will require additional financing by the second half of 2022 to continue at its expected level of operations. If the Company fails to obtain the needed capital, it will be forced to delay, scale back, or eliminate some or all of its development activities or perhaps cease operations.

We are not required to provide the information required by this item as we are considered a smaller reporting company, as defined by Rule 229.10(f)(1).

We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As of September 30, 2021, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934).

Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, our principal executive and financial officer concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level as a result of the material weakness that existed in our internal control over financial reporting, as described below.

Material Weakness in Internal Control over Financial Reporting and fair value calculations

The Company’s management has identified a material weakness in its internal control over financial reporting. The material weakness was due to a lack of controls in the financial closing and reporting process, including a lack of segregation of duties and the documentation and design of formalized processes and procedures surrounding the creation and posting of journal entries and account reconciliations. If not remediated, or if the Company identifies further material weaknesses in its internal controls, the Company’s failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in its financial statements and a failure to meet its reporting and financial obligations.

The Company’s management has identified an additional material weakness in its internal control over the fair value calculation of options granted during the period ended June 30, 2021. This material weakness resulted in a material audit adjustment being made to our consolidated financial statements as of and for the period ended June 30, 2021.

Management, with oversight from the Audit Committee of the Board of Directors of the Company, is actively engaged in remediation efforts to address the material weaknesses identified in the management’s evaluation of internal controls and procedures. The remediation efforts summarized below, which are in the process of being implemented, are intended to address the identified material weakness.

In addition to the items above, we have engaged a third-party service provider to complete an independent risk assessment of our internal control over financial reporting to evaluate sources of potential risks to our financial statements. This will also include an assessment of key systems supporting financial reporting in order to improve the design and operating effectiveness of information technology general controls. As a result of this risk assessment, we will identify and design key controls across several processes supporting internal control over financial reporting and develop a workplan for remediation of the enhancements identified.

We believe that the implementation of the above steps will allow us to make progress on addressing a number of the deficient controls within our internal control environment, which will help facilitate the remediation of the material weaknesses identified above. As we continue to evaluate and work to improve our internal control over financial reporting, we will take additional measures to address control deficiencies, or we may modify certain of the remediation measures described above. However, we require additional time to complete the design and implementation of our remediation plans and demonstrate the effectiveness of our remediation efforts. The material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Other than in connection with implementing a plan to remediate the material weakness described above, there were no changes in Palisade’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, Palisade’s internal control over financial reporting.

Below is a summary of material factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and should be carefully considered, together with other information in this Quarterly Report on Form 10-Q and our other filings with the SEC before making investment decisions regarding our common stock.

Investing in our common stock involves a high degree of risk. We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this Quarterly Report, may adversely affect our business, operating results and financial condition. The uncertainties and risks enumerated below as well as those presented elsewhere in this Quarterly Report should be considered carefully when evaluating our Company, business and the value of our securities. We have marked with an asterisk (*) those risk factors that reflect changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.

Risks Related to the Company’s Development, Commercialization and Regulatory Approval of the Company’s Investigational Therapies

The Company’s business depends on the successful clinical development, regulatory approval and commercialization of LB1148.*

The success of the Company’s business, including its ability to finance itself and generate revenue in the future, primarily depends on the successful development, regulatory approval and commercialization of LB1148. The clinical and commercial success of LB1148 depends on a number of factors, including the following:

If the Company does not achieve one or more of these factors, many of which are beyond its control, in a timely manner or at all, the Company could experience significant delays or an inability to obtain regulatory approvals or commercialize LB1148. Even if regulatory approvals are obtained, the Company may never be able to successfully commercialize LB1148. Accordingly, the Company cannot assure you that it will ever be able to generate sufficient revenue through the sale of LB1148, if approved, to continue its business.

Some of the initial indications in which the Company plans to pursue development of LB1148 are indications for which there are no FDA-approved therapies. This makes it difficult to predict the timing and costs of clinical development for LB1148 in these indications, as well as the regulatory approval path.*

There are no FDA-approved therapies for decreasing the time to normal feedings and bowel movement (or preventing necrotizing enterocolitis) in infants after heart surgery. While Entereg is approved to accelerate the time to upper and lower gastrointestinal recovery following surgeries that include partial bowel resection with primary anastomosis, there is no guarantee that regulatory precedence regarding Entereg will apply to the approval of other therapies that may accelerate the time to gastrointestinal recovery following surgery. While there are multiple medical devices approved for the reduction or elimination of postoperative intra-abdominal adhesions, there are no drugs approved to reduce postoperative intra-abdominal adhesions. The regulatory approval process for novel product candidates such as LB1148 can be more expensive and take longer than for other, better known or extensively studied therapeutic approaches.

The development and commercialization strategy for the Company’s product candidate LB1148 depends, in part, on published scientific literature and the FDA’s prior findings regarding the safety and efficacy of tranexamic acid. If the Company is not able to pursue this strategy, it may be delayed in receiving regulatory authority approval.*

The Hatch-Waxman Act added Section 505(b)(2) to the U.S. Federal Food, Drug, and Cosmetic Act (“FDCA”). Section 505(b)(2) permits the submission of an NDA or BLA where at least some of the information required for approval comes from investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. The FDA interprets Section 505(b)(2) of the FDCA, for purposes of approving an NDA/BLA, to permit the applicant to rely, in part, upon published literature and/or the FDA’s previous findings of safety and efficacy for an approved product. The FDA also requires companies to perform additional clinical trials or measurements to support any deviation from the previously approved product and to justify that it is scientifically appropriate to rely on the applicable published literature or referenced product, referred to as bridging. The FDA may then approve the new product candidate for all or some of the indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant, if such approval is supported by study data. The labeling, however, may be required to include all or some of the limitations, contraindications, warnings or precautions or restrictions on use included in the reference product’s labeling, including a boxed warning, or may require additional limitations, contraindications, warnings or precautions or restrictions on use.

The Company currently plans to pursue marketing approval for LB1148, in the United States through a 505(b)(2) NDA and will be completing bridging analyses prior to NDA submissions. If the FDA disagrees with the Company’s conclusions regarding the appropriateness of its reliance on the FDA’s prior findings of safety and efficacy for tranexamic acid (“TXA”) or on published literature, or if the Company is not otherwise able to bridge to the listed drug or published literature to demonstrate that its reliance is scientifically appropriate, the Company could be required to conduct additional clinical trials or other studies to support its NDA, which could lead to unanticipated costs and delays or to the termination of the development program for LB1148. If the Company is unable to obtain approval for LB1148 through the 505(b)(2) NDA process, it may be required to pursue the more expensive and time consuming 505(b)(1) approval process, which consists of full reports of investigations of safety and effectiveness conducted by or for the Company.

Notwithstanding the approval of a number of products by the FDA under Section 505(b)(2), pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its policies and practices with respect to Section 505(b)(2) regulatory approvals, which could delay or even prevent the FDA from approving any NDA that the Company submits pursuant to the 505(b)(2) process. Even if the Company is allowed to pursue the 505(b)(2) regulatory pathway to FDA approval, it cannot assure you that its product candidates will receive the requisite approvals for commercialization.

The Company may find it difficult to enroll patients in its clinical trials, which could delay or prevent it from proceeding with clinical trials of its product candidates.*

Identifying and qualifying subjects to participate in clinical trials of the Company’s product candidates is critical to its success. The timing of clinical trials depends on the Company’s ability to recruit subjects to participate, as well as the completion of required follow-up periods. Patients may be unwilling to participate in clinical trials because of negative publicity from adverse events related to the biotechnology or pharmaceutical fields, competitive clinical trials for similar patient populations, the existence of current treatments or for other reasons. The timeline for recruiting patients, conducting studies and obtaining regulatory approval of the Company’s product candidates may be delayed, which could result in increased costs, delays in advancing its product candidates, delays in testing the effectiveness of its product candidates or termination of the clinical trials altogether.

Patient enrollment and trial completion are affected by numerous additional factors, including the:

If the Company has difficulty enrolling a sufficient number of patients to conduct its clinical trials as planned, it may need to delay, limit or terminate ongoing or planned clinical trials, any of which would have an adverse effect on its business, financial condition, results of operations and prospects.

Clinical development for the Company’s product candidates is very expensive, time-consuming, difficult to design and implement, and the outcomes are inherently uncertain. Most product candidates that commence clinical trials are never approved by regulatory authorities for commercialization and of those that are approved many do not cover their costs of development. In addition, the Company, any partner with which it may in the future collaborate, the FDA, an institutional review board (“IRB”), or other regulatory authorities, including state and local agencies and counterpart agencies in foreign countries, may suspend, delay, require modifications to or terminate the Company’s clinical trials at any time.

The results of previous clinical trials may not be predictive of future results, and the results of the Company’s current and planned clinical trials may not satisfy the requirements of the FDA or non-U.S. regulatory authorities.*

The results from the prior preclinical studies and clinical trials for LB1148 discussed elsewhere in this prospectus may not necessarily be predictive of the results of future preclinical studies or clinical trials. Even if the Company is able to complete its planned clinical trials of its product candidates according to its current development timelines, the results from its prior clinical trials of its product candidates may not be replicated in these future trials. Many companies in the pharmaceutical and biotechnology industries (including those with greater resources and experience than the Company) have suffered significant setbacks in late-stage clinical trials after achieving positive results in early stage development, and the Company cannot be certain that it will not face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway or safety or efficacy observations made in clinical trials, including previously unreported adverse events. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless have failed to obtain FDA approval. If the Company fails to produce positive results in its clinical trials of any of its product candidates, the development timelines and regulatory approvals and commercialization prospects for its product candidates and its business and financial prospects, would be adversely affected. If the Company fails to produce positive results in its clinical trials of any of its product candidates, the development timelines, regulatory

approvals, and commercialization prospects for its product candidates, as well as the Company’s business and financial prospects, would be adversely affected. Further, the Company’s product candidates may not be approved even if they achieve their respective primary endpoints in Phase 3 registration trials. The FDA or non-U.S. regulatory authorities may disagree with the Company’s trial designs or its interpretation of data from preclinical studies and clinical trials. the Company has taken the position that LB1148 has a single active ingredient, TXA. LB1148 also contains polyethylene glycol 3350 (“PEG”). Across different countries and different circumstances, PEG may be regulated as an inactive ingredient, a medical device, or an active ingredient. There is uncertainty on how the FDA and other regulatory agencies will classify the PEG in LB1148. If the FDA determines that LB1148 is a combination product (of TXA and PEG) regulatory approval of this product candidate will require additional clinical trials for which there is not currently a feasible clinical trial design. In addition, any of these regulatory authorities may change requirements for the approval of a product candidate even after reviewing and providing comments or advice on a protocol for a pivotal clinical trial that has the potential to result in approval by the FDA or another regulatory authority. Furthermore, any of these regulatory authorities may also approve the Company’s product candidate for fewer or more limited indications than it requests or may grant approval contingent on the performance of costly post-marketing clinical trials.

If the clinical development of LB1148 is successful, the Company plans to eventually seek regulatory approvals of LB1148 initially in the United States, and may seek approvals in other geographies. Before obtaining regulatory approvals for the commercial sale of any product candidate for any target indication, the Company must demonstrate with substantial evidence gathered in preclinical studies and adequate and well-controlled clinical studies, and, with respect to approval in the United States, to the satisfaction of the FDA, that the product candidate is safe and effective for use for that target indication. The Company cannot assure you that the FDA or non-U.S. regulatory authorities would consider its planned clinical trials to be sufficient to serve as the basis for approval of its product candidates for any indication. The FDA and non-U.S. regulatory authorities retain broad discretion in evaluating the results of the Company’s clinical trials and in determining whether the results demonstrate that its product candidates are safe and effective. If the Company is required to conduct clinical trials of its product candidates in addition to those it has planned prior to approval, the Company will need substantial additional funds, and cannot assure you that the results of any such outcomes trial or other clinical trials will be sufficient for approval.

The Company’s product candidates may cause undesirable side effects or have other unexpected properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in post-approval regulatory action.*

Unforeseen side effects from LB1148 could arise either during clinical development or, if approved, after it has been marketed. Undesirable side effects could cause the Company, any partners with which the Company may collaborate, or regulatory authorities to interrupt, extend, modify, delay or halt clinical trials and could result in a more restrictive or narrower label or the delay or denial of regulatory approval by the FDA or comparable foreign authorities.

Results of clinical trials could reveal a high and unacceptable severity and prevalence of side effects. In such an event, trials could be suspended or terminated, and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of a product candidate for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in product liability claims. Any of these occurrences may harm the Company’s business, financial condition, operating results and prospects.

Additionally, if the Company or others identify undesirable side effects, or other previously unknown problems, caused by a product after obtaining U.S. or foreign regulatory approval, a number of potentially negative consequences could result, which could prevent the Company or its potential partners from achieving or maintaining market acceptance of the product and could substantially increase the costs of commercializing such product.

The Company may in the future conduct clinical trials for its product candidates outside the United States, and the FDA and applicable foreign regulatory authorities may not accept data from such trials.*

The Company, as well as investigator sponsors, have conducted clinical trials, is conducting clinical trials, and may in the future choose to conduct one or more clinical trials outside of the United States. Although the FDA or applicable foreign regulatory authority may accept data from clinical trials conducted outside the United States or the applicable jurisdiction, acceptance of such study data by the FDA or applicable foreign regulatory authority may be subject to certain conditions or exclusion. Where data from foreign clinical trials are intended to serve as the basis for marketing approval in the United States, the FDA will not approve the application on the basis of foreign data alone unless such data are applicable to the U.S. population and U.S. medical practice; the studies were performed by clinical investigators of recognized competence; and the data are considered valid without the need for an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means. Many foreign regulatory bodies have similar requirements. In addition, such foreign studies would be subject to the applicable local laws of the foreign jurisdictions where the studies are conducted. There can be no assurance the FDA or applicable foreign regulatory authority will accept data from trials conducted outside of the United States or the applicable home country. If the

FDA or applicable foreign regulatory authority does not accept such data, it would likely result in the need for additional trials, which would be costly and time-consuming and delay aspects of the Company’s business plan.

The Company expects to rely on third-party CROs and other third parties to conduct and oversee its clinical trials. If these third parties do not meet the Company’s requirements or otherwise conduct the trials as required, the Company may not be able to satisfy its contractual obligations or obtain regulatory approval for, or commercialize, its product candidates.*

The Company expects to rely on third-party contract research organizations (“CROs”) to conduct and oversee its LB1148 clinical trials and other aspects of product development. The Company also expects to rely on various medical institutions, clinical investigators and contract laboratories to conduct its trials in accordance with the Company’s clinical protocols and all applicable regulatory requirements, including the FDA’s regulations and good clinical practice (“GCP”) requirements, which are an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors, and state regulations governing the handling, storage, security and recordkeeping for drug and biologic products. These CROs and other third parties will play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials. the Company will rely heavily on these parties for the execution of its clinical trials and preclinical studies and will control only certain aspects of their activities. The Company and its CROs and other third-party contractors will be required to comply with GCP and good laboratory practice (“GLP”) requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities. Regulatory authorities enforce these GCP and GLP requirements through periodic inspections of trial sponsors, principal investigators and trial sites. If the Company or any of these third parties fail to comply with applicable GCP and GLP requirements, or reveal noncompliance from an audit or inspection, the clinical data generated in the Company’s clinical trials may be deemed unreliable and the FDA or other regulatory authorities may require the Company to perform additional clinical trials before approving the Company’s or the Company’s partners’ marketing applications. the Company cannot assure that upon inspection by a given regulatory authority, such regulatory authority will determine that any of the Company’s clinical or preclinical trials comply with applicable GCP and GLP requirements. In addition, the Company’s clinical trials generally must be conducted with product produced under cGMP regulations. The Company’s failure to comply with these regulations and policies may require it to repeat clinical trials, which would delay the regulatory approval process.

If any of the Company’s CROs or clinical trial sites terminate their involvement in one of its clinical trials for any reason, it may not be able to enter into arrangements with alternative CROs or clinical trial sites or do so on commercially reasonable terms. In addition, if the Company’s relationship with clinical trial sites is terminated, it may experience the loss of follow-up information on patients enrolled in its ongoing clinical trials unless the Company is able to transfer the care of those patients to another qualified clinical trial site. In addition, principal investigators for the Company’s clinical trials may serve as scientific advisors or consultants to it from time to time and could receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be questioned by the FDA.

Even if the Company receives marketing approval for LB1148, or any future product candidate, it may not be able to successfully commercialize its product candidates due to unfavorable pricing regulations or third-party coverage and reimbursement policies, which could make it difficult for the Company to sell its product candidates profitably.*

Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time consuming and costly process that could require the Company to provide supporting scientific, clinical and cost effectiveness data to the payor. There may be significant delays in obtaining such coverage and reimbursement for newly approved products, and coverage may be more limited than the purposes for which the product is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a product will be paid for in all cases or at a rate that covers costs, including research, development, intellectual property, manufacture, sale and distribution expenses. Interim reimbursement levels for new products, if applicable, may also not be sufficient to cover costs and may not be made permanent. Reimbursement rates may vary according to the use of the product and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost products and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors, by any future laws limiting drug prices and by any future relaxation of laws that presently restrict imports of product from countries where they may be sold at lower prices than in the United States.

There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting reimbursement policies, but also have their own methods and approval process apart from Medicare coverage and reimbursement determinations.

Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:

The Company cannot be sure that coverage and reimbursement will be available for any product that it commercializes and, if coverage and reimbursement are available, what the level of reimbursement will be. The Company’s inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that the Company develops could have a material adverse effect on its operating results, its ability to raise capital needed to commercialize products and its overall financial condition.

Reimbursement may impact the demand for, and the price of, any product for which the Company obtains marketing approval. Assuming the Company obtains coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments that patients find unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with those medications. Patients are unlikely to use the Company’s products unless coverage is provided and reimbursement is adequate to cover all or a significant portion of the cost of the Company’s products. Therefore, coverage and adequate reimbursement is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new products when more established or lower cost therapeutic alternatives are already available or subsequently become available.

The Company’s expects to experience pricing pressures in connection with the sale of any of its product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription medicines, medical devices and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the successful commercialization of new products. Further, the adoption and implementation of any future governmental cost containment or other health reform initiative may result in additional downward pressure on the price that the Company may receive for any approved product.

Outside of the United States, many countries require approval of the sale price of a product before it can be marketed and the pricing review period only begins after marketing or product licensing approval is granted. To obtain reimbursement or pricing approval in some of these countries, the Company may be required to conduct a clinical trial that compares the cost-effectiveness of its product candidate to other available therapies. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, the Company might obtain marketing approval for a product candidate in a particular country, but then be subject to price regulations that delay its commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues, if any, the Company is able to generate from the sale of the product in that country. Adverse pricing limitations may hinder the Company’s ability to recoup its investment in one or more product candidates, even if such product candidates obtain marketing approval.

Even if a product candidate obtains regulatory approval, it may fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success.*

The commercial success of both LB1148, if approved, will depend significantly on the broad adoption and use of them by physicians and patients for approved indications, and it may not be commercially successful even though it is shown to be safe and effective. The degree and rate of physician and patient adoption of a product, if approved, will depend on a number of factors, including but not limited to:

If LB1148 is approved for use but fails to achieve the broad degree of physician and patient adoption necessary for commercial success, the Company’s operating results and financial condition will be adversely affected, which may delay, prevent or limit its ability to generate revenue and continue its business.

The Company’s product candidates, if approved, will face significant competition and their failure to compete effectively may prevent them from achieving significant market penetration.*

The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition, less effective patent terms, and a strong emphasis on developing newer, fast-to-market proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing and marketing of healthcare products competitive with those that the Company is developing, including LB1148. The Company will face competition from a number of sources, such as pharmaceutical companies, generic drug companies, biotechnology companies, medical device companies and academic and research institutions, many of which have greater financial resources, marketing capabilities, sales forces, manufacturing capabilities, research and development capabilities, regulatory expertise, clinical trial expertise, intellectual property portfolios, more international reach, experience in obtaining patents and regulatory approvals for product candidates and other resources than the Company. Some of the companies that offer competing products also have a broad range of other product offerings, large direct sales forces and long-term customer relationships with the Company’s target physicians, which could inhibit the Company’s market penetration efforts.

With respect to the Company’s lead product candidate, LB1148, for the indication of postoperative improvement of bowel function, the Company expects to face competition in the pharmacological therapy space from alvimopan, marketed as a branded product, ENTEREG, by Merck, as well as in generic form. There are no pharmacotherapies for decreasing the time to normal feedings and bowel movement (or preventing necrotizing enterocolitis) in infants after heart surgery or for the reduction or elimination of postoperative intra-abdominal adhesions. However, the Company will face general competition from other medical interventions, namely surgical procedures and adhesion barrier products. Adhesion barrier products approved for abdominal or pelvic surgery in the United States consist of SEPRAFILM, INTERCEED and ADEPT. In addition, several products are used off-label for adhesion prevention in the United States, including EVICEL, SURGIWRAP, COSEAL and PRECLUDE. Adhesion barrier products available outside the United States include HYALOBARRIER, SPRAYSHIELD, PREVADH, and INTERCOAT. Such products are used as adjunctive interventions, have variable efficacy, and are not easily used with laparoscopic procedures, which are becoming increasingly common.

Any adverse developments that occur during any clinical trials conducted by Newsoara may affect the Company’s ability to obtain regulatory approval or commercialize LB1148.*

Newsoara Biopharma Co., Ltd. (“Newsoara”) has the rights to develop and commercialize LB1148 in China for return of bowel function, reduction of adhesions, and sepsis. If serious adverse events occur during any clinical trials Newsoara decides to conduct with respect to LB1148, the FDA and other regulatory authorities may delay, limit or deny approval of LB1148 or require the Company to conduct additional clinical trials as a condition to marketing approval, which would increase our costs. If the Company receives FDA approval for LB1148 and a new and serious safety issue is identified in connection with clinical trials conducted by Newsoara, the FDA and other regulatory authorities may withdraw their approval of the product or otherwise restrict the Company’s ability to market and sell the Company’s product. In addition, treating physicians may be less willing to administer the Company’s product due to concerns over such adverse events, which would limit the Company’s ability to commercialize LB1148.

The Company has a very limited operating history and has never generated any revenues from product sales.*

The Company is an clinical-stage biopharmaceutical company with a very limited operating history that may make it difficult to evaluate the success of its business to date and to assess its future viability. The Company was initially formed in 2001 and its operations, to date, have been limited to business planning, raising capital, developing the Company’s pipeline assets and other research and development. The Company has not yet demonstrated an ability to successfully complete any clinical trials and has never completed the development of any product candidate, nor has it ever generated any revenue from product sales or otherwise. Consequently, the Company has no meaningful operations upon which to evaluate its business, and predictions about its future success or viability may not be as accurate as they could be if it had a longer operating history or a history of successfully developing and commercializing biopharmaceutical products.

The Company currently has no products approved for sale, and it may never obtain regulatory approval to commercialize any of its product candidates.*

The research, testing, manufacturing, safety surveillance, efficacy, quality control, recordkeeping, labeling, packaging, storage, approval, sale, marketing, distribution, import, export and reporting of safety and other post-market information related to its biopharmaceutical products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and in foreign countries, and such regulations differ from country to country and frequently are revised.

Even after the Company achieves U.S. regulatory approval for a product candidate, if any, the Company will be subject to continued regulatory review and compliance obligations. For example, with respect to the Company’s product candidates, the FDA may impose significant restrictions on the approved indicated uses for which the product may be marketed or on the conditions of approval. A product candidate’s approval may contain requirements for potentially costly post-approval studies and surveillance, including Phase 4 clinical trials, to monitor the safety and efficacy of the product. The Company also will be subject to ongoing FDA obligations and continued regulatory review with respect to, among other things, the manufacturing, processing, labeling, packaging, distribution, pharmacovigilance and adverse event reporting, storage, advertising, promotion and recordkeeping for the Company’s product candidates. These requirements include submissions of safety and other post-marketing information and reports, registration, continued compliance with cGMP requirements and with the FDA’s GCP requirements and GLP requirements, which are regulations and guidelines enforced by the FDA for all of the Company’s product candidates in clinical and preclinical development, and for any clinical trials that it conducts post-approval, as well as continued compliance with the FDA’s laws governing commercialization of the approved product, including but not limited to the FDA’s Office of Prescription Drug Promotion (“OPDP”) regulation of promotional activities, fraud and abuse, product sampling, scientific speaker engagements and activities, formulary interactions as well as interactions with healthcare practitioners. To the extent that a product candidate is approved for sale in other countries, the Company may be subject to similar or more onerous (i.e., prohibition on direct-to-consumer advertising that does not exist in the United States) restrictions and requirements imposed by laws and government regulators in those countries.

In addition, manufacturers of drug and biologic products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP regulations. If the Company or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the manufacturing, processing, distribution or storage facility where, or processes by which, the product is made, a regulatory agency may impose restrictions on that product or the Company, including requesting that the Company initiate a product recall, or requiring notice to physicians or the public, withdrawal of the product from the market, or suspension of manufacturing.

If the Company, its product candidates or the manufacturing facilities for its product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

The regulations, policies or guidance of the FDA and other applicable government agencies may change, and new or additional statutes or government regulations may be enacted, including at the state and local levels, which can differ by geography and could prevent or delay regulatory approval of the Company’s product candidates or further restrict or regulate post-approval activities. The Company cannot predict the likelihood, nature or extent of adverse government regulations that may arise from future legislation or administrative action, either in the United States or abroad. If the Company is not able to achieve and maintain regulatory compliance, it may not be permitted to commercialize its product candidates, which would adversely affect its ability to generate revenue and achieve or maintain profitability.

The Company currently has no marketing capabilities and no sales organization. If the Company is unable to establish sales and marketing capabilities on its own or through third parties, the Company will be unable to successfully commercialize its product candidates, if approved, or generate product revenue.*

The Company currently has no marketing capabilities and no sales organization. To commercialize the Company’s product candidates, if approved, in the United States and other jurisdictions, the Company must build its marketing, sales, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and the Company may not be successful in doing so. Although the Company’s employees, consultants, contractors, and partners have experience in the marketing, sale and distribution of pharmaceutical products, and business development activities involving external alliances, from prior employment at other companies, the Company as a company has no prior experience in the marketing, sale and distribution of pharmaceutical products, and there are significant risks involved in building and managing a sales organization, including its ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of the Company’s internal sales, marketing, distribution and pricing/reimbursement/access capabilities would impact adversely the commercialization of these products.

The Company may face product liability exposure, and if successful claims are brought against it, the Company may incur substantial liability if its insurance coverage for those claims is inadequate.*

The Company faces an inherent risk of product liability or similar causes of action as a result of the clinical testing of its product candidates and will face an even greater risk if the Company commercializes any products. This risk exists even if a product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority and notwithstanding the Company complying with applicable laws on promotional activity. The Company’s products and product candidates are designed to affect important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with the Company’s product candidates could result in injury to a patient or potentially even death. The Company cannot offer any assurance that it will not face product liability suits in the future, nor can it assure that its insurance coverage will be sufficient to cover its liability under any such cases.

In addition, a liability claim may be brought against the Company even if its product candidates merely appear to have caused an injury. Product liability claims may be brought against the Company by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with its product candidates, among others, and under some circumstances even government agencies. If the Company cannot successfully defend itself against product liability or similar claims, it will incur substantial liabilities, reputational harm and possibly injunctions and punitive actions. In addition, regardless of merit or eventual outcome, product liability claims may result in:

The Company intends to obtain product liability insurance coverage for its clinical trials. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects. The Company’s insurance coverage may not be sufficient to cover all of its product liability-related expenses or losses and may not cover it for any expenses or losses it may suffer. Moreover, insurance coverage is becoming increasingly expensive, restrictive and narrow, and, in the future, the Company may not be able to maintain adequate insurance coverage at a reasonable cost, in sufficient amounts or upon adequate terms to protect it against losses due to product liability or other similar legal actions. The Company will need to increase its product liability coverage if any of its product candidates receive regulatory approval, which will be costly, and it may be unable to obtain this increased product liability insurance on commercially reasonable terms or at all and for all geographies in which the Company wishes to launch. A successful product liability claim or series of claims brought against the Company, if judgments exceed its insurance coverage, could decrease its cash and harm its business, financial condition, operating results and future prospects.

Our stockholders may not receive any payment on the CVRs and the CVRs may otherwise expire valueless. In addition, the tax treatment of CVRs is uncertain.

Although we sold our legacy assets related to NSI-189, sufficient proceeds were not received to require distribution of proceeds to our CVR holders as provided for in the CVR Agreement. The right of our stockholders to receive any future payment on or derive any value from the CVRs will be contingent upon: (i) our ability to sell or license certain legacy intellection property within the time periods specified in the CVR Agreement and (ii) the consideration received for such intellectual property being greater than the amounts permitted to be retained or deducted by us pursuant to the CVR Agreement. If we are not able to sell or license such intellectual property within the prescribed time period, or the consideration received by us is not greater than the amounts permitted to be retained or deducted by us, no payments will be made under the CVRs, and the CVRs will expire valueless. Following the closing of the Merger, we do not have any contractual obligation to support the development of the legacy asset, NSI-566.

Furthermore, the CVRs are unsecured obligations of the company and all payments under the CVRs, all other obligations under the CVR Agreement and the CVRs and any rights or claims relating thereto will be subordinated in right of payment to the prior payment in full of all current or future senior obligations of the company. Finally, the U.S. federal income tax treatment of the CVRs is unclear. There is no legal authority directly addressing the U.S. federal income tax treatment of the receipt of, and payments on, the CVRs, and there can be no assurance that the Internal Revenue Service would not assert, or that a court would not sustain, a position that could result in adverse U.S. federal income tax consequences to holders of the CVRs.

The Company’s employees, independent contractors, principal investigators, other clinical trial staff, consultants, vendors, CROs and any partners with whom the Company may collaborate may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.*

The Company is exposed to the risk that its employees, independent contractors, principal investigators, other clinical trial staff, consultants, vendors, CROs and any partners with which the Company may collaborate may engage in fraudulent or other illegal activity. Misconduct by these persons could include intentional, reckless, gross or negligent misconduct or unauthorized activity that violates: laws or regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA or foreign regulatory authorities; manufacturing standards; federal, state and foreign healthcare fraud and abuse laws and data privacy; anticorruption laws, antikickback and Medicare/Medicaid rules, or laws that require the true, complete and accurate reporting of financial information or data, books and records. If any such or similar actions are instituted against the Company and the Company is not successful in defending itself or asserting the Company’s rights, those actions could have a significant impact on the Company’s business, including the imposition of civil, criminal and administrative and punitive penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, debarments, contractual damages,

reputational harm, diminished profits and future earnings, injunctions, and curtailment or cessation of the Company’s operations, any of which could adversely affect the Company’s ability to operate the Company’s business and the Company’s operating results.

The Company may be subject to risks related to off-label use of its product candidates.*

The FDA strictly regulates the advertising and promotion of drug products, and drug products may only be marketed or promoted for their FDA approved uses, consistent with the product’s approved labeling. Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, state attorneys general, members of Congress and the public. Violations, including promotion of the Company’s products for unapproved or off-label uses, are subject to enforcement letters, inquiries and investigations, and civil, criminal and/or administrative sanctions by the FDA. Additionally, advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by relevant foreign regulatory authorities.

Even if the Company obtains regulatory approval for its product candidates, the FDA or comparable foreign regulatory authorities may require labeling changes or impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.

In the United States, engaging in impermissible promotion of the Company’s product candidates for off-label uses can also subject it to false claims litigation under federal and state statutes, which can lead to civil, criminal and/or administrative penalties and fines and agreements, such as a corporate integrity agreement, that materially restrict the manner in which the Company promotes or distributes its product candidates. If the Company does not lawfully promote its products once they have received regulatory approval, the Company may become subject to such litigation and, if it is not successful in defending against such actions, those actions could have a material adverse effect on its business, financial condition and operating results and even result in having an independent compliance monitor assigned to audit the Company’s ongoing operations for a lengthy period of time.

The Company’s or third party’s clinical trials may fail to demonstrate the safety and efficacy of its product candidates, or serious adverse or unacceptable side effects may be identified during their development, which could prevent or delay marketing approval and commercialization, increase the Company’s costs or necessitate the abandonment or limitation of the development of the product candidate.*

Before obtaining marketing approvals for the commercial sale of any product candidate, the Company must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that such product candidate is both safe and effective for use in the applicable indication, and failures can occur at any stage of testing. Clinical trials often fail to demonstrate safety and are associated with side effects or have characteristics that are unexpected. Based on the safety profile seen in clinical testing, the Company may need to abandon development or limit development to more narrow uses in which the side effects or other characteristics are less prevalent, less severe or more tolerable from a risk-benefit perspective. The FDA or an IRB may also require that the Company suspend, discontinue, or limit clinical trials based on safety information. Such findings could further result in regulatory authorities failing to provide marketing authorization for the product candidate. Many pharmaceutical candidates that initially showed promise in early stage testing and which were efficacious have later been found to cause side effects that prevented further development of the drug candidate and, in extreme cases, the side effects were not seen until after the drug was marketed, causing regulators to remove the drug from the market post-approval.

The Company may expend its limited resources to pursue a particular indication and fail to capitalize on indications that may be more profitable or for which there is a greater likelihood of success.*

Because the Company has limited financial and managerial resources, it is currently focusing only on development programs that it identifies for specific indications for its product candidates. As a result, the Company may forego or delay pursuit of opportunities for other indications, or with other potential product candidates that later prove to have greater commercial potential. the Company’s resource allocation decisions may cause it to fail to capitalize on viable commercial products or profitable market opportunities. The Company’s spending on current and future research and development programs for specific indications or future product candidates may not yield any commercially viable product. If the Company does not accurately evaluate the commercial potential or target market for its product candidates, it may not gain approval or achieve market acceptance of that candidate, and its business and financial results will be harmed.

The Company may choose not to continue developing or commercializing any of its product candidates, or may choose not to commercialize product candidates in approved indications, at any time during development or after approval, which would reduce or eliminate its potential return on investment for those product candidates.*

At any time, the Company may decide to discontinue the development of any of its product candidates for a variety of reasons, including the appearance of new technologies that make its product obsolete, competition from a competing product or changes in or failure to comply with applicable regulatory requirements. If the Company terminates a program in which it has invested significant

resources, the Company will not receive any return on its investment and it will have missed the opportunity to have allocated those resources to potentially more productive uses.

Healthcare reform measures could hinder or prevent the commercial success of the Company’s product candidates.*

The current presidential administration and certain members of the majority of the U.S. Congress have sought to repeal all or part of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, “Affordable Care Act”), and implement a replacement program. For example, the so-called “individual mandate” was repealed as part of tax reform legislation adopted in December 2017, such that the shared responsibility payment for individuals who fail to maintain minimum essential coverage under section 5000A of the Code was eliminated beginning in 2019. In addition, litigation may prevent some or all of the Affordable Care Act legislation from taking effect. For example, on December 14, 2018, the U.S. District Court for the Northern District of Texas held that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the tax reform legislation, the remaining provisions of the Affordable Care Act are invalid as well. The impact of this ruling is stayed as it is appealed to the Fifth Circuit Court of Appeals. While the ruling will have no immediate effect, it is unclear how this decision, and subsequent appeals, if any, will impact the law. In 2019 and beyond, the Company may face additional uncertainties as a result of likely federal and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the Affordable Care Act. There is no assurance that the Affordable Care Act, as amended in the future, will not adversely affect the Company’s business and financial results.

Additionally, in October 2018, the U.S. President proposed to lower Medicare Part B drug prices, in addition to contemplating other measures to lower prescription drug prices. While this proposal has not yet been enacted, the Company expects that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for its product candidates if approved or additional pricing pressures.

There are also calls to ban all direct-to-consumer advertising of pharmaceuticals, which would limit the Company’s ability to market its product candidates. The United States is in a minority of jurisdictions that allow this kind of advertising and its removal could limit the potential reach of a marketing campaign.

The Company may also be subject to stricter healthcare laws, regulation and enforcement, and its failure to comply with those laws could adversely affect its business, operations and financial condition.*

Certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to the Company’s business. The Company is subject to regulation by both the federal government and the states in which it or its partners conduct business. The healthcare laws and regulations that may affect the Company’s ability to operate include: the federal Anti-Kickback Statute; federal civil and criminal false claims laws and civil monetary penalty laws; the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act; the Prescription Drug Marketing Act (for sampling of drug product among other things); the federal physician sunshine requirements under the Affordable Care Act; the Foreign Corrupt Practices Act as it applies to activities outside of the United States; the new federal Right-to-Try legislation; and state law equivalents of many of the above federal laws.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of the Company’s business activities could be subject to challenge under one or more of such laws. In addition, recent healthcare reform legislation has strengthened these laws. For example, the recently enacted Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provided that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.

Achieving and sustaining compliance with these laws may prove costly. In addition, any action against the Company for violation of these laws, even if the Company successfully defends against it, could cause the Company to incur significant legal expenses and divert its management’s attention from the operation of its business and result in reputational damage. If the Company’s operations are found to be in violation of any of the laws described above or any other governmental laws or regulations that apply to the Company, it may be subject to penalties, including administrative, civil and criminal penalties, damages, including punitive damages, fines, disgorgement, the exclusion from participation in federal and state healthcare programs, individual imprisonment or the curtailment or restructuring of its operations, and injunctions, any of which could adversely affect the Company’s ability to operate its business and its financial results.

The Company’s inability to successfully to in-license, acquire, develop and market additional product candidates or approved products would impair its ability to grow its business.*

The Company intends to in-license, acquire, develop and market additional products and product candidates. Because the Company’s internal research and development capabilities are limited, it may be dependent on pharmaceutical companies, academic or government scientists and other researchers to sell or license products or technology to it. The success of this strategy depends partly on the Company’s ability to identify and select promising pharmaceutical product candidates and products, negotiate licensing or acquisition agreements with their current owners, and finance these arrangements.

The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing, sales and other resources, may compete with the Company for the license or acquisition of product candidates and approved products. The Company has limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into its current infrastructure. Moreover, the Company may devote resources to potential acquisitions or licensing opportunities that are never completed, or the Company may fail to realize the anticipated benefits of such efforts. The Company may not be able to acquire the rights to additional product candidates on terms that it finds acceptable or at all.

Further, any product candidate that the Company acquires may require additional development efforts prior to commercial sale, including preclinical or clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, the Company cannot provide assurance that any approved products that it acquires will be manufactured or sold profitably or achieve market acceptance.

The Company may seek to avail itself of mechanisms to expedite the development or approval for product candidates it may pursue in the future, such as fast track or breakthrough designation, but such mechanisms may not actually lead to a faster development or regulatory review or approval process.*

LB1148 has received Fast Track designation from the FDA for the treatment of postoperative GI dysfunction (which may present as feeding intolerance, ileus, necrotizing enterocolitis, etc.) associated with gut hypoperfusion injury in pediatric patients who underwent congenital heart disease repair surgery. In addition, the Company may seek fast track designation, breakthrough designation, orphan drug designation, rare pediatric disease designation, priority review, or accelerated approval for product candidates it may pursue in the future. For example, if a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA fast track designation. However, the FDA has broad discretion with regard to these mechanisms, and even if the Company believes a particular product candidate is eligible for any such mechanism, it cannot guarantee that the FDA would decide to grant it. Even if it does obtain fast track or priority review designation or pursue an accelerated approval pathway, the Company may not experience a faster development process, review, or approval compared to conventional FDA procedures. The FDA may withdraw a particular designation if it believes that the designation is no longer supported by data from the Company’s clinical development program.

The Company intends to seek breakthrough designation for LB1148 for the treatment of postoperative GI dysfunction associated with gut hypoperfusion injury in pediatric patients who underwent congenital heart disease repair surgery and for the treatment of postoperative GI dysfunction associated with major surgeries that risk disrupting the intestinal mucosal barrier. A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if the Company believes a product candidate meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. The Company cannot be sure that its evaluation of a product candidate as qualifying for breakthrough therapy designation will meet the FDA’s requirements. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review, or approval compared to conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more product candidates qualifies as a breakthrough therapy, the FDA may later decide that the product candidate no longer meets the conditions for qualification or may decide that the time period for FDA review or approval will not be shortened.

Designation of a drug or biologic as a rare pediatric disease therapy and/or as an orphan drug therapy may also come with accelerated approval rights. In addition, drugs and biologics can also obtain pediatric and/or orphan drug market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms and orphan drug designation may add additional years of exclusivity. However, even if one or more product candidates qualifies for rare pediatric disease designation and/or orphan drug designation, the FDA may later decide that the product candidate no longer meets the conditions for this designation or may decide that the time period for FDA review or approval will not be accelerated.

The Company expects to rely on collaborations with third parties for the successful development and commercialization of its product candidates.*

The Company expects to rely upon the efforts of third parties for the successful development and commercialization of the Company’s current and future product candidates. The clinical and commercial success of the Company’s product candidates may depend upon maintaining successful relationships with third-party partners which are subject to a number of significant risks, including the following:

The Company relies completely on third-party contractors to supply, manufacture and distribute clinical drug supplies for its product candidates, which may include sole-source suppliers and manufacturers; the Company intends to rely on third parties for commercial supply, manufacturing and distribution if any of its product candidates receive regulatory approval; and the Company expects to rely on third parties for supply, manufacturing and distribution of preclinical, clinical and commercial supplies of any future product candidates.*

The Company does not currently have, nor does it plan to acquire, the infrastructure or capability to supply, store, manufacture or distribute preclinical, clinical or commercial quantities of drug substances or products. Additionally, the Company has not entered into a long-term commercial supply agreement to provide it with such drug substances or products. As a result, the Company’s ability to develop its product candidates is dependent, and the Company’s ability to supply its products commercially will depend, in part, on the Company’s ability to obtain the active pharmaceutical ingredients (“APIs”) and other substances and materials used in its product candidates successfully from third parties and to have finished products manufactured by third parties in accordance with regulatory requirements and in sufficient quantities for preclinical and clinical testing and commercialization. If the Company fails to develop and maintain supply and other technical relationships with these third parties, it may be unable to continue to develop or commercialize its products and product candidates.

The Company does not have direct control over whether its contract suppliers and manufacturers will maintain current pricing terms, be willing to continue supplying the Company with APIs and finished products or maintain adequate capacity and capabilities to serve its needs, including quality control, quality assurance and qualified personnel. The Company is dependent on its contract suppliers and manufacturers for day-to-day compliance with applicable laws and cGMPs for production of both APIs and finished products. If the safety or quality of any product or product candidate or component is compromised due to a failure to adhere to applicable laws or for other reasons, the Company may not be able to commercialize or obtain regulatory approval for the affected product or product candidate successfully, and the Company may be held liable for injuries sustained as a result.

In order to conduct larger or late-stage clinical trials for its product candidates and supply sufficient commercial quantities of the resulting drug product and its components, if that product candidate is approved for sale, the Company’s contract manufacturers and suppliers will need to produce its drug substances and product candidates in larger quantities, more cost-effectively and, in certain cases, at higher yields than they currently achieve. If the Company’s third-party contractors are unable to scale up the manufacture of any of its product candidates successfully in sufficient quality and quantity and at commercially reasonable prices, or are shut down or put on clinical hold by government regulators, and the Company is unable to find one or more replacement suppliers or manufacturers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and the Company is unable to transfer the processes successfully on a timely basis, the development of that product candidate and regulatory approval or commercial launch for any resulting products may be delayed, or there may be a shortage in supply, either of which could significantly harm its business, financial condition, operating results and prospects.

The Company expects to continue to depend on third-party contract suppliers and manufacturers for the foreseeable future. the Company’s supply and manufacturing agreements, if any, do not guarantee that a contract supplier or manufacturer will provide services adequate for its needs. Additionally, any damage to or destruction of the Company’s third-party manufacturer’s or suppliers’ facilities or equipment, even by force majeure, may significantly impair its ability to have its products and product candidates manufactured on a timely basis. The Company’s reliance on contract manufacturers and suppliers further exposes it to the possibility that they, or third parties with access to their facilities, will have access to and may misappropriate the Company’s trade secrets or other proprietary information. In addition, the manufacturing facilities of certain of the Company’s suppliers may be located outside of the United States. This may give rise to difficulties in importing the Company’s products or product candidates or their components into the United States or other countries.

The Company has expressed substantial doubt about its ability to continue as a going concern.*

Management has determined that there is substantial doubt about the Company’s ability to continue as a going concern due to uncertainties that the Company’s cash flows generated from its operations will be sufficient to meet its current operating costs and the Company’s future financial statements may include a similar qualification about its ability to continue as a going concern. The Company’s year-end and interim financial statements were prepared assuming that it will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty.

If the Company is unable to meet its current operating costs, the Company would need to seek additional financing or modify its operational plans. If the Company seeks additional financing to fund its business activities in the future and there remains substantial doubt about its ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to the Company on commercially reasonable terms or at all.

The Company may be adversely affected by natural disasters and other catastrophic events and by man-made problems such as terrorism that could disrupt its business operations, and its business continuity and disaster recovery plans may not adequately protect it from a serious disaster.*

The Company’s headquarters and main research facility are located in the greater San Diego area, which in the past has experienced severe earthquakes and fires. If these earthquakes, fires, other natural disasters, health pandemics or epidemics, terrorism and similar unforeseen events beyond its control, including for example the ongoing COVID-19 pandemic, prevented it from using all or a significant portion of its headquarters or research facility, it may be difficult or, in certain cases, impossible for the Company to continue its business for a substantial period of time. The Company does not have a disaster recovery or business continuity plan in place and may incur substantial expenses as a result of the absence or limited nature of the Company’s internal or third party service provider disaster recovery and business continuity plans, which, particularly when taken together with its lack of earthquake insurance, could have a material adverse effect on its business. Furthermore, integral parties in the Company’s supply chain are operating from single sites, increasing their vulnerability to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect its supply chain, it could have a material adverse effect on the Company’s ability to conduct clinical trials, its development plans and its business.

The Company’s business and operations would suffer in the event of system failures, cyber-attacks or a deficiency in its cyber-security.*

Despite the implementation of security measures, the Company’s internal computer systems and those of its current and future CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. The risk of a security breach or disruption, particularly through cyber-attacks or cyber-intrusion, including by computer hackers, foreign governments, and cyber-terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. While the Company has not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in the Company’s operations, it could result in a material disruption of its development programs and its business operations. In addition, since the Company sponsors clinical trials, any breach that compromises patient data and identities causing a breach of privacy could generate significant reputational damage and legal liabilities and costs to recover and repair, including affecting trust in the Company to recruit for future clinical trials. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in the Company’s regulatory approval efforts and significantly increase its costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, the Company’s data or applications or inappropriate disclosure of confidential or proprietary information, the Company could incur liability and the further development and commercialization of its products and product candidates could be delayed.

Failure to remediate a material weakness in internal accounting controls could result in material misstatements in the Company’s financial statements.*

The Company’s management has identified a material weakness in its internal control over financial reporting. The material weakness was due to a lack of controls in the financial closing and reporting process, including a lack of segregation of duties and the documentation and design of formalized processes and procedures surrounding the creation and posting of journal entries and account reconciliations. Additionally, the Company’s management identified a material weakness in its internal control over the fair value calculation of options granted during the period ended September 30, 2021. If not remediated, or if the Company identifies further material weaknesses in its internal controls, the Company’s failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in its financial statements and a failure to meet its reporting and financial obligations.

The Company may not be able to obtain, maintain or enforce global patent rights or other intellectual property rights that cover its product candidates and technologies that are of sufficient breadth to prevent third parties from competing against the Company.*

The Company’s success with respect to its product candidates will depend, in part, on its ability to obtain and maintain patent protection in both the United States and other countries, to preserve its trade secrets and to prevent third parties from infringing on its proprietary rights. The Company’s ability to protect its product candidates from unauthorized or infringing use by third parties depends in substantial part on its ability to obtain and maintain valid and enforceable patents around the world.

The patent application process, also known as patent prosecution, is expensive and time-consuming, and the Company and its current or future licensors and licensees may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner in all the countries that are desirable. It is also possible that the Company or its current licensors, or any future licensors or licensees, will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, these and any of the Company’s patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of its business. Moreover, the Company’s competitors independently may develop equivalent knowledge, methods and know-how or discover workarounds to the Company patents that would not constitute infringement. Any of these outcomes could impair the Company’s ability to enforce the exclusivity of its patents effectively, which may have an adverse impact on its business, financial condition and operating results.

Due to legal standards relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, the Company’s ability to obtain, maintain and enforce patents is uncertain and involves complex legal and factual questions especially across countries. Accordingly, rights under any existing patents or any patents the Company might obtain or license may not cover its product candidates or may not provide the Company with sufficient protection for its product candidates to afford a sustainable commercial advantage against competitive products or processes, including those from branded, generic and over-the-counter pharmaceutical companies. In addition, the Company cannot guarantee that any patents or other intellectual property rights will issue from any pending or future patent or other similar applications owned by or licensed to the Company. Even if patents or other intellectual property rights have issued or will issue, the Company cannot guarantee that the claims of these patents and other rights are or will be held valid or enforceable by the courts, through injunction or otherwise, or will provide the Company with any significant protection against competitive products or otherwise be commercially valuable to the Company in every country of commercial significance that the Company may target.

The Company’s ability to obtain and maintain valid and enforceable patents depends on whether the differences between its technology and the prior art allow its technology to be patentable over the prior art. The Company does not have outstanding issued patents covering all of the recent developments in its technology and is unsure of the patent protection that it will be successful in obtaining, if any. Even if the patents do successfully issue, third parties may design around or challenge the validity, enforceability or scope of such issued patents or any other issued patents the Company owns or licenses, which may result in such patents being narrowed, invalidated or held unenforceable. If the breadth or strength of protection provided by the patents the Company holds or pursues with respect to its product candidates is challenged, it could dissuade companies from collaborating with the Company to develop or threaten its ability to commercialize or finance its product candidates.

The laws of some foreign jurisdictions do not provide intellectual property rights to the same extent or duration as in the United States, and many companies have encountered significant difficulties in acquiring, maintaining, protecting, defending and especially enforcing such rights in foreign jurisdictions. If the Company encounters such difficulties in protecting or are otherwise precluded from effectively protecting its intellectual property in foreign jurisdictions, its business prospects could be substantially harmed, especially internationally.

Proprietary trade secrets and unpatented know-how are also very important to the Company’s business. Although the Company has taken steps to protect its trade secrets and unpatented know-how by entering into confidentiality agreements with third parties, and intellectual property protection agreements with officers, directors, employees, and certain consultants and advisors, there can be no assurance that binding agreements will not be breached or enforced by courts, that the Company would have adequate remedies for any breach, including injunctive and other equitable relief, or that its trade secrets and unpatented know-how will not otherwise become known, inadvertently disclosed by the Company or its agents and representatives, or be independently discovered by its competitors. If trade secrets are independently discovered, the Company would not be able to prevent their use and if the Company and its agents or representatives inadvertently disclose trade secrets and/or unpatented know-how, the Company may not be allowed to retrieve this and maintain the exclusivity it previously enjoyed.

The Company may not be able to protect its intellectual property rights throughout the world.*

Filing, prosecuting and defending patents on the Company’s product candidates does not guarantee exclusivity. The requirements for patentability differ in certain countries, particularly developing countries. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as laws in the United States, especially when it comes to granting use and other kinds of patents and what kind of enforcement rights will be allowed, especially injunctive relief in a civil infringement proceeding. Consequently, the Company may not be able to prevent third parties from practicing its inventions in all countries outside the United States and even in launching an identical version of the Company’s product notwithstanding the Company has a valid patent in that country. Competitors may use the Company’s technologies in jurisdictions where it has not obtained patent protection to develop their own products, or produce copy products, and, further, may export otherwise infringing products to territories where the Company has patent protection but enforcement on infringing activities is inadequate or where the Company has no patents. These products may compete with the Company’s products, and the Company’s patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, and the judicial and government systems are often corrupt, which could make it difficult for the Company to stop the infringement of its patents or marketing of competing products in violation of its proprietary rights generally. Proceedings to enforce its patent rights in foreign jurisdictions could result in substantial costs and divert its efforts and attention from other aspects of its business, could put its global patents at risk of being invalidated or interpreted narrowly and its global patent applications at risk of not issuing, and could provoke third parties to assert claims against it. The Company may not prevail in any lawsuits that the Company initiates or infringement actions brought against the Company, and the damages or other remedies awarded, if any, may not be commercially meaningful when the Company is the plaintiff. When the Company is the defendant it may be required to post large bonds to stay in the market while it defends itself from an infringement action.

In addition, certain countries in Europe and certain developing countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties, especially if the patent owner does not enforce or use its patents over a protracted period of time. In some cases, the courts will force compulsory licenses on the patent holder even when finding the patent holder’s patents are valid if the court believes it is in the best interests of the country to have widespread access to an essential product covered by the patent. In these situations, the royalty the court requires to be paid by the license holder receiving the compulsory license is not calculated at fair market value and can be inconsequential, thereby disaffecting the patentholder’s business. In these countries, the Company may have limited remedies if its patents are infringed or if the Company is compelled to grant a license to its patents to a third party, which could also materially diminish the value of those patents. This would limit its potential revenue opportunities. Accordingly, the Company’s efforts to enforce its intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that the Company owns or licenses, especially in comparison to what it enjoys from enforcing its intellectual property rights in the Unites States. Finally, the Company’s ability to protect and enforce its intellectual property rights may be adversely affected by unforeseen changes in both U.S. and foreign intellectual property laws, or changes to the policies in various government agencies in these countries, including but not limited to the patent office issuing patents and the health agency issuing pharmaceutical product approvals. Finally, many countries have large backlogs in patent prosecution, and in some countries in Latin America it can take years, even decades, just to get a pharmaceutical patent application reviewed notwithstanding the merits of the application.

Obtaining and maintaining the Company’s patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental patent agencies, and its patent protection could be reduced or eliminated for non-compliance with these requirements.*

Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can, in many cases, be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in

which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction just for failure to know about and/or timely pay a prosecution fee. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees in prescribed time periods, and failure to properly legalize and submit formal documents in the format and style the country requires. If the Company or its licensors fail to maintain the patents and patent applications covering its product candidates for any reason, the Company’s competitors might be able to enter the market, which would have an adverse effect on the Company’s business.

If the Company fails to comply with its obligations under its intellectual property license agreements, it could lose license rights that are important to its business. Additionally, these agreements may be subject to disagreement over contract interpretation, which could narrow the scope of its rights to the relevant intellectual property or technology or increase its financial or other obligations to its licensors.*

The Company has entered into in-license arrangements with respect to certain of its product candidates. These license agreements impose various diligence, milestone, royalty, insurance and other obligations on the Company. If the Company fails to comply with these obligations, the respective licensors may have the right to terminate the license, in which event the Company may not be able to develop or market the affected product candidate. The loss of such rights could materially adversely affect its business, financial condition, operating results and prospects.

If the Company is sued for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and could prevent or delay it from developing or commercializing its product candidates.*

The Company’s commercial success depends on its ability to develop, manufacture, market and sell its product candidates and use its proprietary technologies without infringing the proprietary rights of third parties. The Company cannot assure that marketing and selling such candidates and using such technologies will not infringe existing or future patents. Numerous U.S.- and foreign-issued patents and pending patent applications owned by third parties exist in the fields relating to its product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that others may assert that its product candidates, technologies or methods of delivery or use infringe their patent rights. Moreover, it is not always clear to industry participants, including us, which patents and other intellectual property rights cover various drugs, biologics, drug delivery systems or their methods of use, and which of these patents may be valid and enforceable. Thus, because of the large number of patents issued and patent applications filed in the Company’s fields across many countries, there may be a risk that third parties may allege they have patent rights encompassing the Company’s product candidates, technologies or methods.

In addition, there may be issued patents of third parties that are infringed or are alleged to be infringed by the Company’s product candidates or proprietary technologies notwithstanding patents the Company may possess. Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing and because publications in the scientific literature often lag behind actual discoveries, the Company cannot be certain that others have not filed patent applications for technology covered by its own and in-licensed issued patents or its pending applications. the Company’s competitors may have filed, and may in the future file, patent applications covering the Company’s own product candidates or technology similar to the Company’s technology. Any such patent application may have priority over the Company’s own and in-licensed patent applications or patents, which could further require the Company to obtain rights to issued patents covering such technologies, which may mean paying significant licensing fees or the like. If another party has filed a U.S. patent application on inventions similar to those owned or in-licensed to us, the Company or, in the case of in-licensed technology, the licensor may have to participate, in the United States, in an interference proceeding to determine priority of invention.

The Company may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that its product candidates or proprietary technologies infringe such third parties’ intellectual property rights, including litigation resulting from filing under Paragraph IV of the Hatch-Waxman Act or other countries’ laws similar to the Hatch-Waxman Act. These lawsuits could claim that there are existing patent rights for such drug, and this type of litigation can be costly and could adversely affect its operating results and divert the attention of managerial and technical personnel, even if the Company does not infringe such patents or the patents asserted against the Company is ultimately established as invalid. There is a risk that a court would decide that the Company is infringing the third party’s patents and would order the Company to stop the activities covered by the patents. In addition, there is a risk that a court will order the Company to pay the other party significant damages for having violated the other party’s patents.

Because the Company relies on certain third-party licensors and partners and will continue to do so in the future, if one of its licensors or partners is sued for infringing a third party’s intellectual property rights, the Company’s business, financial condition, operating results and prospects could suffer in the same manner as if the Company were sued directly. In addition to facing litigation risks, the Company has agreed to indemnify certain third-party licensors and partners against claims of infringement caused by the

Company’s proprietary technologies, and the Company has entered or may enter into cost-sharing agreements with some its licensors and partners that could require the Company to pay some of the costs of patent litigation brought against those third parties whether or not the alleged infringement is caused by its proprietary technologies. In certain instances, these cost-sharing agreements could also require the Company to assume greater responsibility for infringement damages than would be assumed just on the basis of its technology.

The occurrence of any of the foregoing could adversely affect the Company’s business, financial condition or operating results.

The Company may be subject to claims that its officers, directors, employees, consultants or independent contractors have wrongfully used or disclosed to us alleged trade secrets of their former employers or their former or current customers.*

As is common in the biotechnology and pharmaceutical industries, certain of the Company’s employees were formerly employed by other biotechnology or pharmaceutical companies, including its competitors or potential competitors. Moreover, we engage the services of consultants to assist us in the development of our products and product candidates, many of whom were previously employed at, or may have previously been or are currently providing consulting services to, other biotechnology or pharmaceutical companies, including its competitors or potential competitors. We may be subject to claims that these employees and consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Although we have no knowledge of any such claims being alleged to date, if such claims were to arise, litigation may be necessary to defend against any such claims. Even if we are successful in defending against any such claims, any such litigation could be protracted, expensive, a distraction to its management team, not viewed favorably by investors and other third parties, and may potentially result in an unfavorable outcome.

The Company will need to raise additional financing in the future to fund its operations, which may not be available to it on favorable terms or at all.*

The Company will require substantial additional funds to conduct the costly and time-consuming clinical efficacy trials necessary to pursue regulatory approval of LB1148 and any other product candidates. The Company’s future capital requirements will depend upon a number of factors, including: the number and timing of future product candidates in the pipeline; progress with and results from preclinical testing and clinical trials; the ability to manufacture sufficient drug supplies to complete preclinical and clinical trials; the costs involved in preparing, filing, acquiring, prosecuting, maintaining and enforcing patent and other intellectual property claims; and the time and costs involved in obtaining regulatory approvals and favorable reimbursement or formulary acceptance. Raising additional capital may be costly or difficult to obtain and could significantly dilute stockholders’ ownership interests or inhibit the Company’s ability to achieve its business objectives. If the Company raises additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely the rights of its common stockholders. Further, to the extent that the combined company raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, its stockholder’s ownership interest in the Company will be diluted. In addition, any debt financing may subject the Company to fixed payment obligations and covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the Company raises additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, the Company may have to relinquish certain valuable intellectual property or other rights to its product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to it. Even if the Company were to obtain sufficient funding, there can be no assurance that it will be available on terms acceptable to the Company or its stockholders.

The Company’s business could be adversely affected by the effects of health pandemics or epidemics, including the recent COVID-19 pandemic, in regions where it or third parties on which it relies have significant manufacturing facilities, concentrations of clinical trial sites or other business operations. The COVID-19 pandemic could materially affect the Company’s operations, including at its headquarters in California, which has been in the past, and could be in the future, subject to a county-wide stay-at-home order, and at clinical trial sites, as well as the business or operations of manufacturers, CROs or other third parties with whom the Company conducts business.*

The Company’s business could be adversely affected by the effects of health pandemics or epidemics in regions where it has concentrations of clinical trial sites or other business operations, and could cause significant disruption in the operations of third-party manufacturers and CROs upon whom it relies. For example, in December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to most countries, including the United States and many other countries. The Company’s headquarters is located in San Diego County, California, and many of the Company’s raw materials for manufacture of LB1148 are produced in foreign countries. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and the U.S. government imposed travel restrictions on travel between the United States and numerous other countries. Further, the President of the United States declared the COVID-19 pandemic a national

emergency, invoking powers under the Stafford Act, the legislation that directs federal emergency disaster response. Similarly, the State of California declared a state of emergency related to the spread of COVID-19. Further, on March 19, 2020 the State of California declared a statewide stay at home order for an indefinite period of time (subject to certain exceptions to facilitate authorized necessary activities) to mitigate the impact of the COVID-19 pandemic. Due to the stay at home order, the Company implemented work-from-home policies for all of its employees. The stay at home order has since expired and currently not in effect. The effects of future stay-at-home orders and work-from-home policies may negatively impact productivity, disrupt business and delay clinical programs and timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on its ability to conduct business in the ordinary course. These and similar, and perhaps more severe, disruptions in operations could negatively impact the Company’s business, operating results and financial condition.

Quarantines, stay at home and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases, may impact personnel at third-party manufacturing facilities in the United States and other countries, or the availability or cost of materials, which could disrupt the Company’s supply chain. In particular, some of the Company’s suppliers of certain materials used in the production of the Company’s drug products are located in countries outside the United States, where there have been government-imposed quarantines. While many of these materials may be obtained by more than one supplier, restrictions resulting from the COVID-19 pandemic may disrupt the Company’s supply chain or limit its ability to obtain sufficient materials for its product candidates.

In addition, the Company’s clinical trials may be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some patients may not be able or willing to comply with clinical trial protocols if quarantines interrupt healthcare services, particularly surgical services. Similarly, the Company’s ability to recruit and retain patients, principal investigators and site staff (who as healthcare providers may have heightened exposure to COVID-19) may be hindered, which would adversely affect clinical trial operations. In addition, the COVID-19 pandemic may cause interruption or delays in the operation of the FDA or other regulatory authorities which could negatively affect the Company’s planned clinical trials.

The spread of COVID-19, which has caused a broad impact globally, may materially affect the Company economically. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, it is currently resulting in significant disruption of global financial markets. This disruption, if sustained or recurrent, could make it more difficult for the Company to access capital, which could in the future negatively affect its liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect the Company’s business and the value of its common stock.

The global pandemic of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic or a similar health pandemic or epidemic is highly uncertain and subject to change. The Company does not yet know the full extent of potential delays or impacts on its business, its clinical trials, healthcare systems or the global economy as a whole. These effects could have a material impact on the Company’s operations, and it will continue to monitor the COVID-19 situation closely. To the extent the COVID-19 pandemic adversely affects the Company’s operations, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section.

The market price of shares of the Company could be subject to significant fluctuations. Since the completion of the Merger on April 27, 2021, the Company’s stock price has already been subject to significant fluctuation. Market prices for securities of biotechnology and other life sciences companies historically have been particularly volatile subject even to large daily price swings. Some of the factors that may cause the market price of shares of the Company to fluctuate include, but are not limited to:

Moreover, the stock markets in general have experienced substantial volatility in the biotech industry that has often been unrelated to the operating performance of individual companies or a certain industry segment. These broad market fluctuations may also adversely affect the trading price of the Company’s shares.

In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the Company’s profitability and reputation. In addition, such securities litigation often has ensued after a reverse merger or other merger and acquisition activity of the type that the Company recently completed with LBS. Such litigation if brought could impact negatively the Company’s business.

The Company is expected to take advantage of reduced disclosure and governance requirements applicable to smaller reporting companies, which could result in its common stock being less attractive to investors.*

As of the date of this Quarterly Report, the public float of the Company is less than $250 million and therefore qualifies as a smaller reporting company under the rules of the SEC. As a smaller reporting company, the Company will be able to take advantage of reduced disclosure requirements, such as simplified executive compensation disclosures and reduced financial statement disclosure requirements in its SEC filings. Decreased disclosures in the Company’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze its results of operations and financial prospects. We cannot predict if investors will find the Company’s common stock less attractive if it relies on these exemptions. If some investors find its common stock less attractive as a result, there may be a less active trading market for its common stock and its stock price may be more volatile. The Company may take advantage of the reporting exemptions applicable to a smaller reporting company until it is no longer a smaller reporting company, which status would end once it has a public float greater than $250 million. In that event, the Company could still be a smaller reporting company if its annual revenues were below $100 million and it has a public float of less than $700 million.

The Company does not anticipate paying any dividends in the foreseeable future.*

The current expectation is that the Company will retain its future earnings to fund the development and growth of the company’s business. As a result, capital appreciation, if any, of the shares of the Company will be your sole source of gain, if any, for the foreseeable future.

If the Company fails to attract and retain management and other key personnel, it may be unable to successfully develop or commercialize its product candidates or otherwise implement its business plan.*

The biotech industry has experienced a high rate of turnover in recent years. The Company’s ability to compete in the highly competitive biopharmaceuticals industry depends upon the ability to attract, retain and motivate highly skilled and experienced personnel with scientific, medical, regulatory, manufacturing and management skills and experience. The Company will conduct its operations in the greater San Diego area, a region that is home to many other biopharmaceutical companies as well as many academic and research institutions, resulting in fierce competition for qualified personnel. The Company may not be able to attract or retain qualified personnel in the future due to the intense competition for a limited number of qualified personnel among biopharmaceutical companies. Many of the other biopharmaceutical companies against which the Company will compete have greater financial and other resources, different risk profiles and a longer history in the industry. The Company’s competitors may provide higher compensation, more diverse opportunities and/or better opportunities for career advancement. Any or all of these competing factors may limit the Company’s ability to continue to attract and retain high quality personnel, which could negatively affect its ability to successfully develop and commercialize our product candidates and to grow the business and operations as currently contemplated.

The Company’s ability to use NOL carryforwards and certain other tax attributes may be limited.*

The Company has incurred substantial losses during its history and does not expect to become profitable in the near future, and it may never achieve profitability. Unused losses for the tax year ended December 31, 2017 and prior tax years will carry forward to offset future taxable income, if any, until such unused losses expire. Pursuant to U.S. federal tax legislation enacted in late 2017, informally referenced as the Tax Cuts and Jobs Act, as modified under the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, unused federal losses generated after December 31, 2017 will not expire and may be carried forward indefinitely but will be only deductible to the extent of 80% of current year taxable income in any given year. However, the CARES Act temporarily repealed the

80% taxable income limitation for tax years beginning before January 1, 2021; NOL carryforwards generated from 2018 or later and carried forward to taxable years beginning after December 31, 2020 will be subject to the 80% limitation. Also, under the CARES Act, NOLs arising in 2018, 2019 and 2020 can be carried back five years. Many states have similar laws. In addition, both current and future unused losses and other tax attributes may be subject to limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if we undergo an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in our equity ownership by certain stockholders over a three-year period. The Company has not completed a Section 382 study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since its formation due to the complexity and cost associated with such a study and the fact that there may be additional such ownership changes in the future. As a result, if the Company earns net taxable income, its pre-2018 NOL carryforwards may expire prior to being used, its NOL carryforwards generated in 2018 and thereafter will be subject to a percentage limitation after 2020 and, if the Company undergoes an ownership change (or if it previously underwent such an ownership change), its ability to use all of the pre-change NOL carryforwards, and other pre-change tax attributes (such as research tax credits) to offset post-change income or taxes may be limited. Similar provisions of state tax law may also apply to limit our use of accumulated state tax attributes. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. As a result, even if the Company or the Company attains profitability, it may be unable to use all or a material portion of its NOLs and other tax attributes, which could adversely affect future cash flows.

The rules dealing with U.S. federal, state and local income taxation are constantly under review by the Internal Revenue Service, the U.S. Treasury Department and other governmental bodies. Changes to tax laws (which changes may have retroactive application) could adversely affect the Company or holders of its common stock. In recent years, many such changes have been made and changes are likely to continue to occur in the future. Future changes in tax laws could have a material adverse effect on the Company’s business, cash flow, financial condition or results of operations.

The Company will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.*

The Company will incur significant legal, accounting and other expenses that the Company did not incur as a private company prior to the Merger, including costs associated with public company reporting requirements. The Company also incurs costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as new implemented requirements by the SEC and Nasdaq. These rules and regulations are expected to increase the Company’s legal and financial compliance costs and to make some activities more time consuming and costly. For example, the Company’s management team consists of the executive officers of the Company prior to the Merger, some of whom have not previously managed and operated a public company. These executive officers and other personnel need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations also may make it difficult and expensive for the Company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for the Company to attract and retain qualified individuals to serve on the Company’s board of directors or as executive officers of the Company, which may adversely affect investor confidence in the Company and could cause its business or stock price to suffer.

Anti-takeover provisions in the Company’s charter documents and under Delaware law could make an acquisition of the Company more difficult and may prevent attempts by the Company stockholders to replace or remove the Company management.*

Provisions in the Company’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. In addition, because the Company is incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding Company voting stock from merging or combining with the Company. Although the Company believes these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with the Company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the Company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about the Company, its business or its market, its stock price and trading volume could decline.*

The trading market for the Company’s common stock is and will be influenced by the research and reports that equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of the Company’s common stock, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, the Company will not have any control over the analysts, or the content and opinions included in their reports. The price of the Company’s common stock could decline if one or more equity research analysts downgrade its stock or issue other

unfavorable commentary or research. If one or more equity research analysts ceases coverage of the Company or fails to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading volume to decline.

If the Company fails to maintain proper and effective internal controls, its ability to produce accurate financial statements on a timely basis could be impaired.*

The Company is subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of Nasdaq. The Sarbanes-Oxley Act requires, among other things, that the Company maintain effective disclosure controls and procedures and internal control over financial reporting. The Company must perform system and process evaluation and testing of its internal control over financial reporting to allow management to report on the effectiveness of its internal controls over financial reporting in its Annual Report on Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. This has required that the Company incur substantial professional fees and internal costs to expand its accounting and finance functions and that it expend significant management efforts. The Company may experience difficulty in meeting these reporting requirements in a timely manner.

The Company may discover weaknesses in its system of internal financial and accounting controls and procedures that could result in a material misstatement of its financial statements. Prior to the Merger, LBS’s management identified a material weakness in its internal control over financial reporting. The material weakness was due to a lack of controls in the financial closing and reporting process for LBS, including a lack of segregation of duties and the documentation and design of formalized processes and procedures surrounding the creation and posting of journal entries and account reconciliations. If the Company does not remediate this material weakness, or if the Company identifies further material weaknesses in its internal controls, the Company’s failure to establish and maintain effective internal financial and accounting controls and procedures could result in material misstatements in its financial statements and a failure to meet its reporting and financial obligations.

The Company’s internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If the Company is not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if it is unable to maintain proper and effective internal controls, the Company may not be able to produce timely and accurate financial statements. If that were to happen, the market price of its common stock could decline and it could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.

Our board of directors has broad discretion to issue additional securities, which might dilute the net tangible book value per share of our common stock for existing stockholders.*

The Company is entitled under its certificate of incorporation to issue up to 300,000,000 shares of common stock and 7,000,000 “blank check” shares of preferred stock. Shares of the Company’s blank check preferred stock provide its board of directors with broad authority to determine voting, dividend, conversion, and other rights. The Company expects that significant additional capital may be needed in the future to continue its planned operations. To the extent the Company raises additional capital by issuing equity securities, its existing shareholders may experience substantial dilution. The Company may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner the Company determines from time to time. If the Company sells common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to the Company’s existing shareholders, and new investors could gain rights superior to existing shareholders. Pursuant to the Company’s equity incentive plans and employee stock purchase plan, management is authorized to grant stock options, restricted stock units and other equity-based awards to employees, directors and consultants, and to sell common stock to employees, respectively. Any increase in the number of shares outstanding as a result of the exercise of outstanding options, the vesting or settlement of outstanding stock awards, or the purchase of shares pursuant to the employee stock purchase plan will cause shareholders to experience additional dilution, which could cause the stock price to fall.

During the quarter ended September 30, 2021, the Company issued 8,817 shares of common stock related to the settlement of restricted stock units (RSUs) awarded under the Seneca 2019 Equity Incentive Plan. These RSUs were granted by Seneca and vested prior to the closing of the Merger.

The foregoing transaction did not involve any underwriters, underwriting discounts or commissions, or any public offering. The Company believes the issuance of the above securities were exempt from registration under the Securities Act (or Regulation D or Regulation S promulgated thereunder) by virtue of Section 4(a)(2) of the Securities Act because the issuance of securities to the recipients did not involve a public offering.

** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.

# Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned hereunto duly authorized.


Delaware	52-2007292
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5800 Armada Drive, Suite 210 Carlsbad, California	92008
(Address of principal executive offices)	(Zip Code)


		Page
PART I -	FINANCIAL INFORMATION	1

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)	3
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	34

PART II -	OTHER INFORMATION	36

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosure	60
Item 5.	Other Information	60
Item 6.	Exhibits	60

SIGNATURES		63


	September 30, 2021			December 31, 2020

ASSETS
Current assets:
Cash and cash equivalents	$	14,104		$	713
Accounts receivable		—			59
Prepaid expenses and other current assets		1,988			124
Total current assets		16,092			896
Restricted cash		26			26
Deferred transaction costs		—			1,817
Right-of-use asset		153			275
Property and equipment, net		3			5
Total assets	$	16,274		$	3,019

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	1,383		$	2,537
Accrued liabilities		722			2,740
Accrued compensation and benefits		89			1,590
Current portion of lease liability		158			168
Current portion of debt		387			578
Current portion of related party debt, net		181			469
Total current liabilities		2,920			8,082
Warrant liability		9,434			1,830
Non-current portion of debt		—			94
Lease liability, net of current portion		—			112
Total liabilities		12,354			10,118
Commitments and contingencies (Note 11)
Series C convertible preferred stock, $0.001 par value; 0 and 33,594,625 shares authorized as of September 30, 2021 and December 31, 2020, respectively; 0 and 11,674,131 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively; liquidation preference of $10.4 million as of December 31, 2020		—			9,503
Stockholders' equity (deficit):
Series A convertible preferred stock, 7,000,000 shares authorized, $0.01 par value; 200,000 and 0 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		2			—
Common stock, $0.01 par value; 300,000,000 and 6,797,500 shares authorized as of September 30, 2021 and December 31, 2020, respectively; 12,929,911 and 2,774,501 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		130			28
Additional paid-in capital		99,503			51,396
Accumulated deficit		(95,715	)		(68,026	)
Total stockholders' equity (deficit)		3,920			(16,602	)
Total liabilities, convertible preferred stock and stockholders' equity (deficit)	$	16,274		$	3,019


	Nine Months Ended September 30,
	2021			2020

Net loss	$	(27,689	)	$	(6,078	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2			2
In-process research and development		30,117			—
Noncash transaction costs shared with Seneca		(135	)		—
Noncash lease expense		122			105
Gain on forgiveness of PPP loan		(279	)		—
Accretion of debt discount and non-cash interest expense		2,334			32
Loss on issuance of LBS Series 1 Preferred Stock		1,881			—
Loss on issuance of secured debt		686			—
Loss on issuance of warrants		3,247			—
Change in fair value of warrant liabilities		(17,939	)		—
Change in fair value of share liability		(91	)		—
Stock-based compensation		1,208			1,544
Accrued and unpaid interest		—			7
Other		191			—
Changes in operating assets and liabilities:
Trade and other receivables		84			(53	)
Prepaid and other assets		(1,264	)		24
Accounts payable and accrued liabilities		(2,527	)		1,299
Accrued compensation		(1,544	)		—
Operating lease liabilities		(122	)		(102	)
Net cash used in operating activities		(11,718	)		(3,220	)
Cash flows from investing activities:
Cash acquired in connection with the Merger		3,279			—
Acquisition related costs paid		(3,333	)		—
Purchases of property and equipment		—			(5	)
Net cash used in investing activities		(54	)		(5	)
Cash flows from financing activities:
Payments on debt		(949	)		—
Proceeds from issuance of debt		1,250			379
Proceeds from issuance of LBS Series 1 Preferred Stock		19,900			—
Proceeds from issuance of common stock and warrants		5,209			—
Redemption of warrants		(99	)		—
Payment of debt issuance costs		(148	)		—
Net cash provided by financing activities		25,163			379
Net increase (decrease) in cash, cash equivalents and restricted cash		13,391			(2,846	)
Cash, cash equivalents and restricted cash, beginning of period		739			3,623
Cash, cash equivalents and restricted cash, end of period	$	14,130		$	777
Reconciliation of cash, cash equivalents and restricted cash to the balance sheets:
Cash and cash equivalents		14,104			751
Restricted cash		26			26
Total cash, cash equivalents and restricted cash	$	14,130		$	777
Supplemental disclosure of cash flows:
Interest paid	$	61		$	—
Supplemental disclosures of non-cash investing and financing activities:
Equity issuance costs included in accounts payable	$	67		$	—
Transaction costs shared with Seneca	$	135		$	—
Acquisition costs related to stock issuance	$	1,184		$	—
Issuance of common stock to former Seneca stockholders	$	28,728		$	—
Conversion of LBS Series C Preferred stock into common stock	$	9,503		$	—
Net assets acquired in the Merger	$	2		$	—
Acquisition related vesting of RSU’s assumed in the Merger	$	41		$	—
Acquisition related fair value change in warrant liability assumed in the Merger	$	51		$	—


	September 30, 2021		December 31, 2020
Accrued accounts payable	$	346	$	1,018
Accrued clinical trial costs		247		875
Accrued director stipends		102		759
Accrued other		27		88
	$	722	$	2,740


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


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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐


	Three Months Ended September 30, 2021
	Series C Convertible Preferred Stock				Preferred Stock				Common Stock				Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Equity (Deficit)
	Shares		Amount		Shares		Amount		Shares		Amount
Balance, June 30, 2021		—	$	—		200,000	$	2		11,398,698	$	114	$	94,242	$	(103,802	)	$	(9,444	)
Net income		—		—		—		—		—		—		—		8,087			8,087
Stock-based compensation expense		—		—		—		—		—		—		103		—			103
Issuance of common stock and warrants in private placement, net of issuance costs of $67		—		—		—		—		1,509,896		15		5,126		—			5,141
Conversion of share liability to common stock		—		—		—		—		12,500		1		32		—			33
Conversion of restricted stock units to common stock		—		—		—		—		8,817		—		—		—			—
Balance, September 30, 2021		—	$	—		200,000	$	2		12,929,911	$	130	$	99,503	$	(95,715	)	$	3,920


	Three Months Ended September 30, 2020
	Series C Convertible Preferred Stock				Preferred Stock				Common Stock				Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Equity (Deficit)
	Shares		Amount		Shares		Amount		Shares		Amount
Balance, June 30, 2020		11,674,131	$	9,503		—	$	—		2,774,501	$	28	$	50,233	$	(61,939	)	$	(11,678	)
Net loss		—		—		—		—		—		—		—		(1,843	)		(1,843	)
Issuance of common stock warrants related to promissory note		—		—		—		—		—		—		10		—			10
Stock-based compensation expense		—		—		—		—		—		—		664		—			664
Balance, September 30, 2020		11,674,131	$	9,503		—	$	—		2,774,501	$	28	$	50,907	$	(63,782	)	$	(12,847	)


	Nine Months Ended September 30, 2021
	Series C Convertible Preferred Stock						Preferred Stock					Common Stock				Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity (Deficit)
	Shares			Amount			Shares			Amount		Shares		Amount
Balance, December 31, 2020		11,674,131		$	9,503			—		$	—		2,774,502	$	28	$	51,396		$	(68,026	)	$	(16,602	)
Net loss		—			—			—			—		—		—		—			(27,689	)		(27,689	)
Issuance of common stock to vendor		—			—			—			—		118,833		1		1,183			—			1,184
Issuance of common stock warrants related to promissory note		—			—			—			—		—		—		16			—			16
Issuance of LBS Series 1 Preferred shares upon conversion of senior secured debt		—			—			786,957			—		—		—		2,421			—			2,421
Issuance of LBS Series 1 Preferred shares		—			—			4,516,611			—		—		—		—			—			—
Conversion of LBS Series 1 Preferred stock to common shares upon Merger		—			—			(5,303,568	)		—		5,303,568		53		(53	)		—			—
Conversion of LBS Series C Preferred shares to common shares upon Merger		(11,674,131	)		(9,503	)		—			—		317,420		3		9,500			—			9,503
Issuance of common shares to former shareholders of Seneca upon Merger		—			—			—			—		2,884,375		29		28,699			—			28,728
Acquisition of Seneca Series A Preferred Stock upon Merger		—			—			200,000			2		—		—		—			—			2
Equity warrant put rights activated upon Merger		—			—			—			—		—		—		(51	)		—			(51	)
Expiration of put rights on equity classified warrants		—			—			—			—		—		—		26			—			26
Stock-based compensation expense		—			—			—			—		—		—		1,208			—			1,208
Issuance of common stock and warrants in private placement, net of issuance costs of $67		—			—			—			—		1,509,896		15		5,126			—			5,141
Conversion of share liability to common stock		—			—			—			—		12,500		1		32			—			33
Conversion of restricted stock units to common stock		—			—			—			—		8,817		—		—			—			—
Balance, September 30, 2021		—		$	—			200,000		$	2		12,929,911	$	130	$	99,503		$	(95,715	)	$	3,920


	Nine Months Ended September 30, 2020
	Series C Convertible Preferred Stock				Preferred Stock				Common Stock				Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Equity (Deficit)
	Shares		Amount		Shares		Amount		Shares		Amount
Balance, December 31, 2019		11,674,131	$	9,503		—	$	—		2,774,176	$	28	$	49,344	$	(57,704	)	$	(8,332	)
Net loss		—		—		—		—		—		—		—		(6,078	)		(6,078	)
Issuance of common stock to vendor		—		—		—		—		325		—		9		—			9
Issuance of common stock warrants related to promissory note		—		—		—		—		—		—		10		—			10
Stock-based compensation expense		—		—		—		—		—		—		1,544		—			1,544
Balance, September 30, 2020		11,674,131	$	9,503		—	$	—		2,774,501	$	28	$	50,907	$	(63,782	)	$	(12,847	)


	September 30, 2021		December 31, 2020
Prepaid insurances	$	1,696	$	31
Other receivables		116		—
Prepaid subscriptions and fees		97		35
Prepaid software licenses		36		0
Deposits		26		16
Deferred financing costs		—		41
Prepaid other		17		1
	$	1,988	$	124


	Three Months Ended September 30,						Change
	2021			2020			$			%
Operating expenses
Research and development	$	624		$	412			212			51	%
General and administrative		2,392			1,404			988			70	%
Total operating expenses		3,016			1,816			1,200			66	%
Loss from operations		(3,016	)		(1,816	)		(1,200	)		66	%
Other income (expense):
Gain on change in fair value of warrant liability		12,764			—			12,764		n/a
Gain on change in fair value of share liability		18			—			18		n/a
Interest expense		(26	)		(28	)		2			(7	)%
Other income		20			1			19		n/a
Loss on issuance of warrants		(1,673	)		—			(1,673	)	n/a
Total other income (expense)		11,103			(27	)		11,130		n/a
Net loss	$	8,087		$	(1,843	)	$	9,930			(539	)%


Exhibit No.		Description	Filed/ Furnished Herewith	Form	Exhibit No.	File No.		Filing Date

2.01#		Contingent Value Rights Agreement, dated as of April 27, 2021, by and among the Company, American Stock Transfer & Trust Company, and Raul Silvestre.		8-K	10.1	001-33672		4/27/21

3.01(i)		Amended and Restated Certificate of Incorporation of Neuralstem, Inc. filed on 1/5/2017		S-1/A	3.01(i)	001-33672		1/6/17

3.01(ii)		Amended and Restated Certificate of Incorporation of Neuralstem, Inc. effective on 7/17/2019		8-K	3.01(i)	001-33672		7/18/19

3.01(iii)		Amendment to Amended and Restated Certificate of Incorporation of Neuralstem, Inc. effective 10/28/19		8-K	3.01	001-33672		10/30/19

3.01(iv)		Certificate of Validation of Certificate to the Amended and Restated Certificate of Incorporation of Palisade Bio, Inc.		S-4	3.01(iv)	333-251659		12/23/20

3.01(v)		Amended and Restated Certificate of Incorporation of Seneca Biopharma dated as of April 27, 2021		8-K	3.1	001-33672		4/27/21

3.02(i)		Certificate of Designation of Series A 4.5% Convertible Preferred Stock		8-K	3.01	001-33672		12/12/16

3.02(ii)	Amended and Restated Bylaws of Neuralstem, Inc. adopted on 11/10/2015			8-K	3.01	001-33672	11/16/15

4.01	Form of Common Stock Purchase Warrant Issued to Karl Johe on 6/5/07			10-KSB	4.22	333-132923	3/27/08


	PALISADE BIO, INC.

Date: November 12, 2021		/s/ Tom Hallam
		Tom Hallam, PhD, Chief Executive Officer
		(Principal Executive Officer)



4.02**		Form of Restricted Stock Unit Agreement	S-8	4.08	333-172563	3/1/11

4.03		Form of Consulting Warrant issued January 2011 and March 2012	S-3	4.01	333-188859	5/24/13

4.04**		Inducement Stock Option Plan adopted 2/15/2016 and as amended on 12/12/2018, 9/13/2019, and 3/23/20	10-K	4.31	001-33672	3/27/20

4.05**		Form of Inducement Award Non-Qualified Stock Option Grant pursuant to Inducement Stock Option Plan	8-K	4.02	001-33672	2/19/16

4.06		Form of Common Stock Purchase Warrant from May 2016 Public Offering dated May 6, 2016	8-K	4.01	001-33672	5/4/16

4.07		Form of Common Stock Purchase Warrant from May 2016 Private Offering Dated May 12, 2016	8-K	4.01	001-33672	5/13/16

4.08		Form of Series A Preferred Stock Certificate	8-K	4.01	001-33672	9/12/16

4.09		Form of Inducement Warrant issued March 20, 2017 and March 31, 2017	8-K	4.01	001-33672	3/20/17

4.10		Form of Common Stock Purchase Warrant from August 2017 Public Offering Dated August 1, 2017	8-K	4.01	001-33672	7/28/17

4.11		Form of Common Stock Purchase Warrant from October 2018 Offering	8-K	4.1	001-33672	10/29/18

4.12		Form of Placement Agent Common Stock Purchase Warrant from October 2018 Offering	8-K	4.2	001-33672	10/29/18

4.13		Consultant Warrant for Hibiscus BioVentures, LLC issued January 2019	10-Q	4.40	001-33672	5/14/19

4.14**		Form of Restricted Stock Unit from 2019 Equity Incentive Plan	S-1	4.42	333-232273	6/21/19

4.15**	Form of Restricted Stock Grant from 2019 Equity Incentive Plan		S-1	4.44	333-232273	6/21/19

4.16	Form of Series M and Series N warrant from July 2019 Offering		S-1/A	4.45	333-232273	7/24/19

4.17	Form of Series O Pre-Funded Warrant from July 2019 Offering		S-1/A	4.46	333-232273	7/24/19

4.18	Form of Series P Replacement Warrant issued in January 2020 Offering		8-K	4.01	001-33672	1/22/20

4.19	Form of Series Q Replacement Warrant issued in January 2020 Offering		8-K	4.02	001-33672	1/22/20

4.20	Form of Placement Agent Warrant issued in January 2020 Offering		8-K	4.03	001-33672	1/22/20

4.21	Form of Placement Agent Warrant issued in May 2020 Offering		8-K	4.01	001-33672	5/27/20

4.22	Form of Warrant to Purchase Shares of Common Stock of Leading Biosciences, Inc.		S-4	4.30	333-251659	12/23/20

4.23	Form of Bridge Warrant		8-K	4.1	001-33672	12/21/20

4.24	Form of Equity Warrant		8-K	4.2	001-33672	12/21/20


4.25	Form of Senior Secured note of Leading BioSciences, Inc.			S-4	4.33	333-251659	12/23/20

4.26	Registration Rights Agreement, by and between Palisade Bio, Inc. and the investor party thereto, dated December 16, 2020			8-K	4.3	001-33672	12/21/20

4.27	Securities Purchase Agreement, by and between Leading Biosciences, Inc. and the investor party thereto, dated December 16, 2020			8-K	10.5	001-33672	12/21/20

4.28	Securities Purchase Agreement, by and between Seneca Biopharma, Inc. and the investor party thereto, dated December 16, 2020			8-K	10.6	001-33672	12/21/20

4.29	2021 Equity Incentive Plan			10-Q	4.29	001-33672	8/23/21

4.30	2021 Employee Stock Purchase Plan			10-Q	4.30	001-33672	8/23/21

4.31**	Leading BioSciences, Inc. Amended and Restated 2013 Employee, Director and Consultant Equity Incentive Plan and Forms of Stock Option Grant Notice, Stock Option Agreement and Notice of Exercise of Stock Option thereunder			S-4	10.24	333-25165	12/23/20

4.32	Waiver Agreement, by and among Palisade Bio, Inc. and Altium Growth Fund, LP, dated July 21, 2021			8-K	4.1	001-33672	7/22/21

4.33	Warrant issued to Altium Growth Fund, LP, dated July 21, 2021.			8-K	4.2	001-33672	7/22/21

4.34	Securities Purchase Agreement, by and between Palisade Bio, Inc. and Yuma Regional Medical Center, dated August 19, 2021			8-K	4.1	001-33672	8/24/21

4.35	Warrant issued to Yuma Regional Medical Center, dated August 19, 2021			8-K	4.2	001-33672	8/24/21

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

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

32.1		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. § 1350	*

101		The following materials from the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) condensed consolidated balance sheets; (ii) condensed consolidated statements of operations; (iii) condensed consolidated statements of stockholders' equity (deficit); (iv) condensed consolidated statements of cash flows; and (v) notes to condensed consolidated financial statements.	*

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)	*