UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
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.
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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.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of a share of the registrant’s common stock on June 30, 2022 as reported by the Nasdaq Capital Market on such date, was approximately $
As of March 15, 2023, the registrant had
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to the 2023 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. The proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2022.
Table of Contents
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Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary |
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Item 1A. |
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Item 1B. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Some of these factors are more fully discussed, as are other factors, in section 1A of this Annual Report on Form 10-K entitled “Risk Factors”, and elsewhere herein.
Forward-looking statements may include, but are not limited to, statements about:
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” "intend," “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. There can be no assurance that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on our business, results of operations and financial condition. You should not rely on forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions, and other factors described in Part I, Item 1A Risk Factors and elsewhere in this Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Also, these forward-looking statements represent our estimates and assumptions only as of the date of the document containing the applicable statement. Except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking
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statements. You should read this Annual Report on Form 10-K, together with the documents that we have previously filed with the Securities and Exchange Commission ("SEC") completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in the foregoing documents by these cautionary statements.
RISK FACTOR SUMMARY
We face many risks and uncertainties, as more fully described in this Annual Report on Form 10-K under the heading “Risk Factors.” Some of these risks and uncertainties are summarized below. The summary below does not contain all of the information that may be important to you, and you should read this summary together with the more detailed discussion of these risks and uncertainties contained in “Risk Factors.”.
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PART I
As used in this Annual Report on Form 10-K, unless the context indicates or otherwise requires, “Palisade,” “Palisade Bio,” “the Company,” “we,” “us,” and “our” or similar designations in this report refer to Palisade Bio, Inc., a Delaware Corporation, and its subsidiaries. In addition, references to “Seneca” and “Seneca Biopharma, Inc.” are to the Registrant prior to the completion of the Merger. Any reference to “common shares” or “common stock,” refers to the Company's $0.01 par value common stock. Any reference to “Series A Preferred Stock” refers to the Company's Series A 4.5% Convertible Preferred Stock. Any reference to “Series B Preferred Stock” refers to the Series B Convertible Preferred Stock
On April 27, 2021, Seneca Biopharma, Inc. (“Seneca”) completed its previously announced merger transaction with Leading BioSciences, Inc. (“LBS”) in accordance with the terms of the Agreement and Plan of Merger, dated as of December 16, 2020 (the “Merger Agreement”), by and among Seneca, Townsgate Acquisition Sub 1, Inc., a wholly
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owned subsidiary of Seneca (“Merger Sub”), and LBS, pursuant to which Merger Sub merged with and into LBS, with LBS surviving as a wholly owned subsidiary of Seneca (the “Merger”). Immediately following the Merger, Seneca changed its name to “Palisade Bio, Inc.”
Item 1. Business.
Overview
We are a biopharmaceutical company focused on developing therapeutics that protect the integrity of the intestinal barrier. We utilize over three decades of research and established science that links the role of intestinal barrier biology and human disease to develop novel therapeutics that target and improve the integrity of the intestinal barrier.
Our approach is founded on the discovery that damage to the intestinal epithelial barrier can result in the leakage of digestive enzymes from the gastrointestinal (“GI”) tract into the peritoneal cavity that can damage tissues and promote inflammation, causing a broad array of acute and chronic conditions. Our goal is to be an industry leader in developing therapies to prevent or treat conditions resulting from intestinal barrier dysfunction and to improve the lives of patients suffering from such conditions.
Our lead therapeutic candidate, LB1148, is a novel oral liquid formulation of the well-characterized digestive enzyme inhibitor tranexamic acid (“TXA”) that is currently being developed for administration prior to surgeries that are at risk of disrupting the intestinal epithelial barrier. By inhibiting the activity of digestive proteases, we believe that LB1148 has the potential to reduce the formation of postoperative adhesions between intra-abdominal tissues and accelerate the time to the return of normal GI function.
We believe that LB1148, if successfully developed and approved, may have the ability to become a suitable treatment option across a broad range of acute and chronic conditions associated with GI barrier dysfunction. Our strategy is to maintain a capital efficient organization focused on pursuing the approval of LB1148 for the reduction of postoperative adhesions following major surgeries. As part of our strategy, we are exploring possible indication expansion, partnering, and out-licensing opportunities and, if advantageous opportunities arise, in-licensing and partnering of other product candidates.
Postoperative Adhesions
Intra-abdominal adhesions are bands of scar tissue that form inside the abdomen. The fibrous bands form between two or more organs and/or surfaces that are not normally connected, causing the surfaces to become bound together. Intra-abdominal adhesions can lead to kinking, twisting, pulling (traction), or compression of the intestines and other organs in the abdomen, causing symptoms and complications, such as pain, bloating, intestinal obstruction or blockage.
Abdominal adhesions are common and often develop after open or laparoscopic abdominal surgery. In surgery with an open approach, the surgeon makes a large incision to open the abdominal cavity, whereas in laparoscopic surgery, the surgeon makes small openings in the abdomen and inserts special tools to view, remove, or repair organs and tissues. Adhesions may arise during these abdominal surgeries by a variety of mechanisms. We believe that injuries resulting from incisions, sutures, surgical manipulation, bleeding, and hypoperfusion can lead to leakage of digestive proteases. Digestive enzymes that escape from the intestine may create proteolytic damage to mesothelial surfaces. The body’s response is to generate scar tissue to heal such damage. As the new scar tissue grows it can connect these surfaces with adhesions. It is estimated that postoperative intra-abdominal adhesions may develop in up to 93% of patients undergoing abdominal or pelvic surgery.
Although many patients with intra-abdominal adhesions are asymptomatic, a significant portion of patients will develop “adhesive disease,” a symptomatic state inclusive of chronic, highly distressing, and even life-threatening symptoms. Approximately 6% to 10% of these cases require follow-up medical care. Abdominal adhesions are the most common cause of obstruction of the small intestine and can lead to the death of intestinal tissues, peritonitis (an infection of the lining of the abdominal cavity) and, in severe cases, death. In fact, although adhesion related bowel obstruction is the number ten cause of emergent surgery, intestinal obstruction from adhesions is one of the top causes of emergency surgery death in the United States. In women, abdominal adhesions in the abdomen and pelvis can compress, deform, or block parts of the reproductive system and lead to infertility.
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Data from preclinical and clinical studies suggest that LB1148 administration may prevent postoperative adhesions in surgical patients. Postoperative adhesions are (i) costly for patients and hospitals; (ii) the number one cause of secondary infertility in women; (iii) the most common cause of bowel obstruction, accounting for up to 75% of cases; and (iv) the tenth most frequent cause of emergency surgeries. They also account for approximately 80% of emergency surgery deaths and more than 400,000 adhesion lysis surgeries annually in the United States.
By preventing or minimizing adhesions in abdominal and pelvic surgery patients, we believe that LB1148 may minimize numerous medical complications and reduce the need for additional surgeries or other treatments, benefiting both patients and providers.
Postoperative Ileus and Return of Bowel Function in Adults
Patients undergoing GI or cardiovascular ("CV") surgery often experience some degree of GI dysfunction, or delayed return of GI function, manifested by a transient cessation of bowel motility, termed postoperative ileus (“POI”). Bowel function typically returns three to five days after abdominal surgery. However, about 8.5% of abdominal surgery patients experience severe POI that delays the return of bowel function by six or more days. Some procedures result in ileus incident rates of over 20%.
Prolonged POI is a serious complication of GI or CV surgery, resulting in increased morbidity, longer hospital stays, and higher costs. Patients experience bloating and major abdominal pain and, with extended lengths of stay in the hospital, may be at increased risk of hospital acquired infections. The mechanism of POI is likely multifactorial, involving digestive proteases, the nervous system (specifically the autonomic and enteric nervous systems), inflammation (mast cell inflammatory process), hormones, neuropeptides, anesthesia, and when used, narcotics.
There are key criteria for patients to meet prior to discharge following major surgery, which may include return of bowel function, infection source control and pain management. Antibiotics and analgesics can greatly help achieve two of these criteria, yet there is still an unmet need for therapeutics to help improve return of GI function.
Preliminary data from preclinical and clinical studies seem to indicate that LB1148 may protect the mucosal barrier and neutralizes digestive enzyme leakage, and promote return of bowel function after surgery.
By potentially accelerating return of bowel function and thereby reducing length of stay in surgical patients, we believe LB1148 may be able to improve patient outcomes, decrease health care costs, and increase operating margins for providers. Furthermore, we believe that these benefits may extend to patients undergoing GI/abdominal and CV surgery, expediting bowel recovery and return to normal feedings to improve long-term outcomes.
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.
Our Lead Product Candidate, LB1148
Our lead therapeutic candidate, LB1148, is a novel oral liquid formulation of the well-characterized digestive enzyme inhibitor, TXA, intended to inhibit digestive enzyme activity and preserve gut integrity during intestinal stress resulting from, among other things, reduced blood flow to the intestine, infections, or due to surgery. Peer reviewed publications of third-party research suggest that digestive enzyme leakage from the GI tract increases the incidence of GI and organ dysfunction following these events.
LB1148 is formulated as an aqueous solution for oral (enteral) administration. In addition to TXA, the patented LB1148 formulation contains polyethylene glycol, carbohydrates, and electrolytes. The components of LB1148 are provided as dry powders for reconstitution in water prior to administration. Such reconstitution may be carried out in a pharmacy (by a pharmacist), or in an outpatient setting (by a patient).
The potential of LB1148 relies on its formulation as a liquid composition for oral administration, which is designed to stop the downstream effects of a disruption of the intestinal mucosal barrier. We are not aware of any other approved oral TXA-containing liquid compositions in the marketplace suitable for such administration.
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Prevention of Postoperative Abdominal Adhesions: GI Surgery
Adhesion prevalence is reported to be >90% in patients who have undergone abdominal surgery and represents a significant contributory factor to serious complications such as small bowel obstruction, infertility, chronic abdominal pain, subsequent surgery, and other morbidities. On March 16, 2022 we announced data from a pooled-analysis of studies LBS-IST-POI-101 and LBS-POI-201-CN (PROFILE-CN) at the Society of American Gastrointestinal and Endoscopic Surgeons (SAGES) 2022 Annual Meeting. The results from the pooled analysis showed that 8/9 (89%) of subjects in the placebo group versus 2/8 (25%) in the LB1148 group had adhesions observed during a second follow-up surgery, representing a relative risk reduction of 72% (p = 0.0152). The mean total adhesion score which measures both the extent and severity of adhesions was 1.0 (8/8) for LB1148 and 14.3 (129/9) for placebo, representing relative risk reduction of 93% (p = 0.0162). We believe the reduction in the incidence of postoperative intra-abdominal adhesions as well as the reduction in the extent and severity of adhesions provides preliminary evidence of the clinically meaningful efficacy of LB1148 to reduce postoperative adhesions when compared to placebo.
In December 2022, we concluded enrollment of a randomized, double-blind, placebo-controlled, Phase 2 clinical trial of LB1148 in patients undergoing elective bowel resection surgery in the United States to evaluate if patients treated with LB1148 experience fewer postoperative intra-abdominal adhesions compared to placebo treated patients. We have enrolled a total of 35 of the planned 70 patients in this Phase 2 study. Of the patients enrolled, as of March 2, 2023, 31 patients had completed a first surgery, and 19 patients had completed a second surgery, which is primary assessment endpoint for data under the current study protocol. The Company believes that the data collected to date is sufficient for its evaluation purposes, including an evaluation of its risk profile, and for such reason, the Company voluntarily ceased enrollment in the trial. The Company expects to report topline data from the 35 patients in the second quarter of 2023.
The Company is currently planning a dose optimization study for all indications to determine if a different dosing protocol in healthy volunteers would enhance the risk profile of LB 1148 while simultaneously providing efficacy. It is anticipated that this study will generate pharmacokinetic and pharmacodynamic data across multiple doses in patients, with enrollment expected to commence in the second quarter of 2023.
Postoperative Return of Bowel Function: GI Surgery
On July 29, 2021, we and our co-development partner Newsoara announced topline data from a Phase 2 clinical trial (LBS-POI-201-CN (PROFILE-CN)) demonstrating that LB1148 had a statistically significant (p=0.001) effect in accelerating the return of bowel function in patients undergoing elective bowel resection surgery.
Results from the trial include:
In May 2022, the Company’s co-development partner in China received clearance from the Center for Drug Evaluation ("CDE") of the National Medical Products Administration ("NMPA") of the People’s Republic of China to proceed with their Phase 3 clinical trial to evaluate LB1148 for accelerated return of bowel function in adult patients undergoing gastrointestinal surgery. In June 2022, based on data generated by this co-development partner in its earlier Phase 2 study, the Company initiated a Phase 3 clinical trial in the U.S. evaluating LB1148 to accelerate the return of bowel function in adult patients undergoing gastrointestinal surgery. LB1148 also received Fast Track designation from the FDA in November 2022 for the acceleration of time to return of bowel function, as defined as upper and lower GI recovery in adult patients undergoing abdominal surgery.
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In late September of 2022, the Board, in connection with a special clinical subcommittee it appointed, initiated a review of the Company’s operations, including its ongoing clinical programs. As part of the review, the Company engaged the services of independent third-party clinical development experts to assist in the review. In October of 2022, the review identified that in 2020, a former member of the Company’s management received unblinded clinical data related to bowel function from a subset of patients in the Company’s ongoing U.S. Phase 2 study.
Upon discovery of this information, the special clinical subcommittee of the Board commenced a thorough review of the Company’s ongoing clinical programs. As a result of the review, the Company determined that the current U.S. Phase 3 study protocol required additional standardization across sites and further clarification in the definition of endpoints to permit an adequate assessment of the efficacy of LB1148 to recover GI function. The Company does not believe that the favorable safety and tolerability profiles of LB1148 were impacted by these findings.
Prior Regulatory History of Third-Party Products with TXA Active Ingredients
The active ingredient in LB1148, TXA, is a marketed drug that has been evaluated in human clinical trials and in tens of thousands of patients. Supporting these observations is also over 40 years of post-marketing data from approved TXA products. Studies and regulatory bodies have suggested that TXA administration, while accompanied by a potential increased risk of thrombosis and rare hypersensitivity, may be generally safe and well-tolerated. TXA is an over-the-counter medicine for treating heavy menses in multiple countries, including the United Kingdom, Canada, Japan, and Sweden.
Clinical Development of LB1148
Completed Clinical Trials
GI Surgery Phase 1, LBS-IST-POI-101
LBS-IST-POI-101 was a Phase 1, single-site, open-label, investigator-sponsored trial that enrolled 11 and evaluated 10 patients at a hospital in the United States. The trial evaluated the use of LB1148 for safety and preliminary efficacy in subjects undergoing elective bowel resection. Safety and preliminary data were collected and interpreted by the investigator. Data from this study was used to inform our future studies in the prevention of postoperative abdominal adhesions and acceleration of postoperative return of bowel function.
GI Surgery Phase 2, LBS-POI-201-CN (PROFILE-CN)
LBS-POI-201-CN was a multicenter, randomized, double-blind, parallel, placebo-controlled, proof-of-concept Phase 2 study of LB1148 in patients undergoing bowel resection conducted by Newsoara, our co-development partner in the People’s Republic of China. The study evaluated 120 subjects. Subjects were randomized into 2 treatment groups (LB1148 or placebo) at a ratio of 1:1. Subjects were stratified by: (1) surgical method (minimally invasive or laparotomy), and 2) whether or not there was a planned stoma. Subjects received a split, oral dose of LB1148 or placebo: 350 mL 6-10 hours before surgery and 350 mL 2-6 hours before surgery. Perioperative care was standardized at all sites per study protocol. The primary outcome was GI-2, defined in the study as the recovery of bowel function measured as the time from the end of surgery to passage of stool with tolerance of oral food within 14 days.
For the LB1148 group, the median time to the primary endpoint of recovery of bowel function was 2.77 days for subjects treated with LB1148 and 3.83 days for subjects receiving placebo. The median time difference between the two groups was 25.5 hours, that is, the median time from the LB1148 group to the GI-2 as defined by the study was 25 hours less than the placebo group (hazard ratio = 1.886; p = 0.0008).
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The difference between groups increased at the 3rd quartile (75th percentile), with LB1148 (3.4 days) demonstrating a 1.5-day shorter recovery of bowel function compared to placebo (4.9 days).
LB1148 appeared to be well tolerated in this trial. The most common adverse events were fever, nausea, hypoalbuminemia, vomiting, bloating, constipation, abdominal pain, diarrhea, lowered blood sugar, expectorant cough, cough, hypotension and anemia. There was no significant difference in the distribution of adverse events between LB1148 and placebo groups. A total of 13 subjects had serious adverse events ("SAE"), including 5 (7.8%) in the LB1148 group and 8 (12.7%) in the placebo group. No SAEs related to the drug occurred in the trial, and there were no adverse events that led to drug discontinuation or withdrawal of subjects from the trial.
For AEs of special interest, there were there were 3 (4.7%) cases of POI in the LB1148 group and 2 cases (3.2%) in the placebo group. No subjects in the LB1148 group had postoperative complications compared to 5 (7.9%) in the
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placebo group. No subject had a venous thrombotic event. Overall, AEs are balanced between the groups and there are no apparent trends for type or severity of AEs.
Taken together, we believe these data demonstrate that LB1148 may potentially accelerate the time to return of GI function following GI surgery with a favorable safety and tolerability profile. We believe these data lay the groundwork for proceeding to pivotal studies for the return of bowel function indication.
Pooled-Analysis of Postoperative Intra-abdominal Adhesions LBS-IST-POI-101 and LBS-POI-201-CN
Studies LBS-IST-POI-101 and LBS-POI-201-CN assessed the efficacy of LB1148 to reduce the formation of adhesions in subjects undergoing abdominal surgery. Study LBS-IST-POI-101 was a Phase 1, single-site, open-label, investigator-sponsored trial at a hospital in the United States. Study LBS-POI-201-CN was a Phase 2, randomized, double-blind, placebo-controlled study to evaluate LB1148 for return of gastrointestinal function in subjects undergoing elective bowel resection (PROFILE-CN). In both trials, adhesions were quantified at the time of surgical closure during a first surgery and at the time of opening a second surgery for those subjects who had a second surgical procedure.
A total of 3/11 subjects in LBS-IST-POI-101 and 14/120 subjects in LBS-POI-201-CN underwent a second surgery at which time adhesion formation was assessed. In both studies, study drug was administered as part of the bowel preparation prior to surgery. Data were pooled from the two trials and the incidence, extent and severity of adhesion for subjects treated with LB1148 or placebo were compared. Grading of the adhesions (extent and severity) was performed by the surgeon during the second surgical procedure.
The results from the pooled analysis showed that 8/9 (89%) of subjects in the placebo had one or more adhesions. For subjects treated with LB1148, 2/8 (25%) had adhesions observed during the second follow-up surgery, representing a relative risk reduction of 72% (P-value of 0.0152).
The mean extent and severity adhesion score in subjects who had a second surgery in the pooled analysis was 1.0 (±0.672 SEM) for LB1148 treated subjects and 14.3 1.0 (±9.19 SEM) for placebo subjects, representing reduction in the extent and severity score of 93% (P = 0.0162).
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Although this analysis includes a small number of subjects across two studies, the lower incidence of postoperative intra-abdominal adhesions, and the reduction in the extent and severity of adhesions seems to indicate that LB1148 has the potential to reduce postoperative adhesions when compared to placebo. The overall surgical procedural types between placebo and drug were comparable and reflect the increasing trend toward minimally invasive techniques in abdominal surgery.
Ongoing Clinical Trials
GI Surgery Phase 2, LBS-POI-201-US (PROFILE-US)
LBS-POI-201-US is a multicenter, randomized, double-blind, parallel, placebo-controlled, adaptive design, proof-of-concept Phase 2 study of LB1148 in patients undergoing bowel resection. The study enrolled patients in the United States to evaluate a pre-operative dose of LB1148 as compared to placebo, with the purpose of establishing preliminary evidence of efficacy safety and tolerability of LB1148, for the treatment of POI and prevention of intra-abdominal adhesions in patients undergoing elective bowel resection. The PROFILE-US study was amended so that reduction in intra-abdominal adhesions is the primary endpoint. Further, the study design was amended to ensure adequate enrollment of patients receiving an adhesions assessment to inform the statistical design of pivotal studies for adhesions indications. The trial completed enrollment in December of 2022 with a total of 114 patients having been enrolled. A subset of the enrolled patients is anticipated to complete their planned second surgery for an adhesions assessment in 2023.
All randomized patients were divided between two treatment groups (LB1148 or placebo) in a 1:1 ratio stratified by surgical approach (either minimally invasive technique or laparotomy). All patients enrolled after the primary endpoint was amended to assess intra-abdominal adhesions are expected to have a planned repeat abdominal operation (i.e., stoma takedown), and are expected to participate in the study until the repeat abdominal operation and intra-abdominal adhesion assessments have been completed. For the planned second surgery, the additional efficacy endpoints include physician-recorded values evaluating the extent and severity of visible intra-abdominal adhesions using an assessment worksheet recorded at both the first and second surgeries, and physician assessment of the clinical consequences of the visible intra-abdominal adhesions on bowel function and pain.
Patients received 700 mL of LB1148 (or placebo) administered as a split dose in the two to ten hours prior to surgery. The primary endpoint is the change from baseline in extent and severity of intra-abdominal adhesions. The secondary endpoints include the incidence of intra-abdominal adhesions, time to GI-2, hospital length of stay, time to GI-3 (time to toleration of solid food and first flatus or first bowel movement), time to resolution of POI (if present), and time to resolution or appearance, as appropriate, of one or more of the components common to GI dysfunction following elective bowel surgery with or without a planned stoma.
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Global Phase 3 to Accelerate the Return of GI Function following Abdominal Surgery, PBI-POI-301
In the second half of 2022, we initiated a Phase 3, multicenter, randomized, double-blind, placebo-controlled, clinical study to evaluate the safety and efficacy of LB1148 in 600 subjects undergoing planned bowel resection. All subjects were to receive 700 mL of LB1148 or placebo in a split, oral dose of 350 mL at 6-10 hours and 2-6 hours prior to surgery. The primary objective was to compare the time to GI-2, defined as the time from the end of surgery to the time of recovery of the upper GI tract (toleration of solid food) and the lower GI tract (first bowel movement) following surgery. Secondary measures included safety, measures of bowel movement and hospital length of stay. This study was intended to be a confirmatory trial to provide evidence that LB1148 is safe and effective in accelerating the time to return of bowel function in subjects undergoing abdominal surgery. The population for this study included adult patients scheduled to undergo a planned (non-emergent) bowel resection via minimally invasive technique or laparotomy. That included any subject in which a resection of the small intestine, colon, or rectum was performed for any elected indication. The exclusion criteria included underlying conditions that might put a subject at risk (i.e., where treatment with TXA is contraindicated) or has condition such that their inclusion would make either safety or efficacy analyses difficult to interpret. The postoperative follow-up for an individual subject was approximately 90 days after surgery. Enrollment for the study was paused in November 2022, as the study design requires additional standardization across sites and further clarification in the definition of endpoints to permit an adequate assessment of the efficacy of LB1148 to recover GI function. At the time of enrollment pause, 23 patients were enrolled.
Planned Clinical Trials
U.S Phase 1 Healthy Volunteer Pharmacokinetic (PK) and Pharmacodynamic (PD) Study, PBI-ADH-101
The Company is currently planning a dose optimization study for all indications to determine if a different dosing protocol in healthy volunteers would enhance the risk profile of LB 1148 while simultaneously providing efficacy. It is anticipated that this study will generate pharmacokinetic and pharmacodynamic data across multiple doses in patients, with enrollment expected to commence in the second quarter of 2023.
Newsoara GI Surgery Phase 3
As discussed above, in May 2022, Newsoara received clearance from the CDE of the NMPA of the People’s Republic of China to proceed with their Phase 3 clinical trial to evaluate LB1148 for accelerated return of bowel function in adult patients undergoing gastrointestinal surgery. The Company anticipates that this trial will be initiated in 2023.
Regulatory Considerations for LB1148
LB1148 has been granted Fast Track designation from the FDA for the following indications:
The LB1148 final drug product contains polyethylene glycol 3350 (“PEG”). In certain circumstances, in different countries and across different regulatory authorities, PEG may be regulated as an inactive ingredient, a medical device, or an active ingredient. We believe that there is ambiguity and risk regarding the PEG in LB1148 being classified as an active ingredient. From our communications with regulatory authorities including the FDA about our development of LB1148, there remains uncertainty about (1) whether regulatory agencies will classify LB1148 as a fixed-combination drug product and (2) consequential implications of, for example, FDA’s fixed-combination drug product regulation concerning the evaluation of each active drug component’s individual contribution to the overall treatment effect. The treatment of PEG and any regulatory requirements, if it is considered an active ingredient, may differ across regulatory authorities. If LB1148 is considered a fixed-combination drug product, then this may impact the design and overall number of required clinical trials as well as additional requirements for nonclinical studies. Due to this, we may be required to conduct additional trials, which could include the use of a factorial design, and nonclinical
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studies if, for example, FDA (1) concludes that PEG is an active ingredient in LB1148 and (2) is unwilling to provide a waiver from meeting their fixed-combination drug product regulation/requirements. It is important to note that before GI surgery, most patients undergo a mechanical bowel prep. Traditionally, the standard of care for a bowel prep includes PEG. Therefore, including a treatment arm of a clinical trial that would not allow for a standard bowel prep containing PEG may be impractical. As a result, we believe that it would be impractical and infeasible to exclude the use of PEG as part of the mechanical bowel prep for GI surgery studies.
Manufacturing
We do not own or operate any manufacturing facilities. We rely on third-party contract manufacturing organizations (“CMOs”) to manufacture and supply our preclinical and clinical materials to be used during the development of our drug candidates, including our lead drug product. As our product candidates advance through development, we expect to enter into longer-term commercial supply agreements with key suppliers and manufacturers to fulfill and secure our production needs.
To that end, we have entered into an umbrella services agreement with a manufacturing company who we expect to lead our drug manufacturing efforts and under which we plan to enter into individual project agreements to meet our future drug manufacturing needs. Although we rely on CMOs, we have personnel and third-party consultants with extensive drug manufacturing experience to oversee the relationships with our CMOs. It is also our intent to identify and qualify additional manufacturers to provide API and drug product manufacturing.
LB1148 is a dry powder for reconstitution, consisting of the previously approved API (tranexamic acid) as well as other components. Drug product manufacturing is a relatively straightforward operation, involving the blending of dry components. To date, controlled stability experiments indicate that the active ingredient is highly stable and that the drug product has a long shelf life.
Sales and Marketing
We do not currently have any approved products. However, where we believe it is appropriate, we may build internal commercial infrastructure, utilize strategic partners, distributors, or contract sales forces to effectively support the commercialization of LB1148, if approved, and any other products that we develop in the future. In the U.S. we estimate that cardiovascular and abdominal surgeries collectively represent close to seven million addressable patients, which we believe, based on certain assumptions, could translate into over $2 billion in annual sales for LB1148, if approved for marketing. We believe that we may be able to address the market using our own targeted, specialty sales and marketing organization supported by internal sales personnel, an internal marketing group, and distribution support.
We plan to utilize a variety of marketing programs to promote LB1148, if approved, including sales promotional materials, speaker programs, journal advertising, industry publications, medical conferences, electronic media, and product sampling. Additional capabilities important to commercialization of LB1148, if approved, and any other products that we may develop in the future, include the management of key accounts, such as managed care organizations, hospital and specialty pharmacies, and government accounts – where formulary acceptance is necessary for product adoption and reimbursement.
We currently do not expect that we will require large pharmaceutical partners for the commercialization of our product candidates, although we may consider partnering in certain territories or indications or for other strategic purposes. We intend to continuously evaluate our commercialization strategy as we advance our clinical and preclinical programs.
Competition
Drug development is highly competitive and subject to rapid and significant technological advancements. Our ability to compete will greatly depend upon our ability to complete necessary clinical trials and the related regulatory approval processes, and successfully market any product that we may successfully develop. The key competitive factors that will affect the commercial success of any product candidate for which we may receive marketing approval include efficacy, safety, tolerability, dosing convenience, price, coverage and reimbursement.
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Our current and potential future competitors are diverse. There are many public and private biopharmaceutical companies, universities, governmental agencies and other research organizations actively engaged in the research and development of products that may be similar to our product candidates or address similar markets. In addition, the number of companies seeking to develop and commercialize products and therapies similar to our product candidates is likely to increase.
To our knowledge, there are no approved therapeutics for treating or preventing postoperative intra-abdominal adhesions. The only potential oral therapeutic in clinical development we are aware of is TTX 333 Evitar™ being developed by Temple Therapeutics based in the Netherlands. However, we face general competition from other medical interventions for adhesions, namely surgical procedures and adhesion barrier products. Adhesion barrier products approved for abdominal or pelvic surgery in the United States consist of SEPRAFILM, by Baxter, INTERCEED®, by Gynecare, and ADEPT® by Baxter. In addition, several products are used off-label for adhesion prevention in the United States, including EVICEL®, by Omrix Biopharmaceuticals Ltd., SURGIWRAP®, by MAST Biosurgery, COSEAL™, by Baxter, and PRECLUDE™, by Gore Medical. Adhesion barrier products available outside the United States include HYALOBARRIER®, by Anika, SPRAYSHIELD™, by Covidien, PREVADH™, by Medtronic and INTERCOAT™, by Ethicon Ltd. Such products are used as adjunctive interventions, have variable efficacy, and are not easily used with laparoscopic procedures, which are becoming increasingly common.
We expect to face competition related to postoperative improvement of bowel function from alvimopan, marketed as a branded product, ENTEREG®, by Merck, as well as in generic form. Alvimopan, a peripherally acting μ-opioid receptor antagonist, is currently the only approved therapeutic indicated to accelerate return for bowel function. However, the alvimopan label is restricted to those surgeries that include partial bowel resection with primary anastomosis. Other companies may be developing product candidates for postoperative improvement of bowel function that could pose future competition if approved for sale in overlapping territories.
Intellectual Property
Our commercial success depends in part on our ability to (i) obtain and maintain proprietary protection to protect our current and future product candidates, novel discoveries, product development technologies, improvements, and know-how; (ii) preserve the confidentiality of our trade secrets and confidential information; (iii) maintain our co-development agreements and licenses for exclusive commercial rights to intellectual property, including patent rights co-owned with third parties; (iv) defend and enforce our proprietary rights, including our patents; and (v) operate without infringing valid and enforceable patents and other proprietary rights of third parties.
We seek to protect our proprietary position by, among other methods, filing or in-licensing U.S. and foreign patents and patent applications related to technology, inventions and improvements that are important to the development and implementation of our business. As for the product candidates we develop and plan to commercialize, as a normal course of business, we generally have pursued, or intend to pursue, composition and therapeutic use patents, as well as patents directed to dosing regimens and additional prospective indications. We also rely, as needed, on trademarks, trade secrets, copyright protection, know-how, continuing technological innovation and confidential information to develop and maintain our proprietary position. We also will pursue data exclusivity, market exclusivity, and other regulatory exclusivities, as applicable and available.
Regardless of the coverage we seek under our existing patent families, there is always a risk that an alteration to our products, methods, or processes may provide sufficient basis for a competitor to avoid infringement claims. In addition, the coverage claimed in a patent application can be significantly reduced before a patent is issued, and courts can reinterpret patent scope after issuance. Moreover, many jurisdictions, including the United States, permit third parties to challenge issued patents in administrative proceedings, which may result in further narrowing or even cancellation of patent claims. Moreover, we cannot provide any assurance that any patents will be issued from our pending or any future applications or that any current or future issued patents will adequately protect our intellectual property.
While we seek broad coverage under our existing patent applications, there is always a risk that an alteration to the products or processes may provide sufficient basis for a competitor to avoid infringing our patent claims. In addition, patents, if granted, expire and we cannot provide any assurance that any patents will be issued from our pending or any future applications or that any potentially issued patents will adequately protect our products or product candidates.
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Individual patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, patents issued for regularly filed applications in the United States are granted a term of 20 years from the earliest non-provisional filing date from which priority is claimed. In addition, in certain instances, a patent term can be extended to recapture a period due to delay by the United States Patent and Trademark Office ("USPTO") in issuing the patent as well as a portion of the term effectively lost as a result of the FDA regulatory review period. However, as to the FDA component, the restoration period cannot be longer than five years and the total patent term including the restoration period must not exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective non-provisional filing date. However, the actual protection afforded by a patent varies on a product-by-product basis, from country to country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent.
Our commercial success will also depend in part on not infringing upon the proprietary rights of third parties. It is uncertain whether the issuance of any third-party patent would require us to alter our development or commercial strategies for our products, if approved, or processes, or to obtain licenses or cease certain activities. Our breach of any license agreements or failure to obtain a license to proprietary rights that we may require to develop or commercialize our future products may have an adverse impact on us. If third parties prepare and file patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference or derivation proceedings.
LB1148 Patent Portfolio
Currently, we solely own (or co-own with exclusive commercial rights) four patent families with claims directed to compositions covering components of LB1148, including the protease inhibitor tranexamic acid, or their therapeutic uses and dosing regimens:
The First Family is directed to compositions comprising four components of LB1148 and their therapeutic use in treating shock and other indications. As of March 14, 2023, this patent family includes a patent in Europe , three granted patents in the United States, two granted patents in Taiwan, granted patents in Australia, India, Japan, and Mexico, a recently granted patent in Korea (KR 2397379) that granted on May 9, 2022, an application in Canada (CA 2942358) that was recently allowed on October 3, 2022, and a pending application in the U.S., all of which we solely own. In addition, this family includes a granted patent in China that we previously assigned to Newsoara to support our co-development agreement which is described below. The expected expiration date of the issued patents (or any patents that may issue from pending applications) is 2035, excluding any adjustments or extensions of patent term that may be available.
The Second Family, which we jointly own with the University of California, is directed to compositions comprising three (or fewer) components of LB1148 and their therapeutic use in treating shock and other indications. Under our 2015 License with the University of California (as discussed in the section entitled "License Agreements and Collaborations"), we have exclusive commercial rights to this family. As of March 14, 2023, this patent family includes three granted patents in the U.S., granted patents in China, Canada, and Korea, an application in Europe (EP 19209258) that recently received an intention to grant on November 16, 2022, and a pending application in the U.S. The expected expiration date of the issued patents (or any patents that may issue from pending applications) is 2031, excluding any adjustments or extensions of patent term that may apply.
The Third Family covers the use of LB1148 (or its active ingredient, tranexamic acid) in certain therapeutic indications, including POI and adhesions, which align with our current clinical and commercial strategy. This family also covers specific split-dose regimens of LB1148 that can apply to the current therapies. As of March 14, 2023, this patent family includes a patent in the United States, a recent patent in Australia (AU 2017207745) that was issued on February 9, 2023, as well as pending applications in Europe, Canada, and Hong Kong, all of which we solely own. In addition, this family includes a patent in China that we previously assigned to Newsoara to support our co‑development agreement with Newsoara (as discussed in the section entitled "License Agreements and Collaborations"). The expected expiration date of any patents (or patents that may issue from pending applications) is 2037, excluding any adjustments or any extensions of patent term that may apply.
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The Fourth Family, which we solely own, consists of a U.S. patent application with claims covering the use of LB1148 in methods of controlling glucose levels in diabetic patients in hospital and non-hospital settings. The expected expiration date of any patents that may issue from pending applications is 2038, excluding any adjustments or any extensions of patent term that may apply.
License Agreements and Collaborations
2015 License Agreement with the Regents of the University of California
In August 2015, LBS entered into a license agreement with the Regents of the University of California (the “Regents”), as amended in December 2019 and September 2022 (the “2015 UC License”). Pursuant to the 2015 UC License, we have an exclusive, sublicensable, worldwide license under certain patent rights to make, use, sell, offer for sale and import products and practice methods covered by the claims of the licensed patent rights in the field of protease inhibitor administration in therapeutic indications including, among others, uses in surgery generally, and treatment of shock, sepsis, inflammatory disease and postoperative ileus and adhesions. We utilize these licensed patent rights in certain compositions comprising components of LB1148, including the active ingredient, tranexamic acid.
Upon the execution of the 2015 UC License, LBS paid a one-time license issue fee of $3,500 and are obligated to pay an annual license maintenance fee in the mid four-digit dollar range until such time that we are commercially selling a licensed product. We are also obligated to make: (i) payments up to $250,000 in the aggregate upon achievement of certain regulatory milestones and (ii) tiered royalty payments in the low single-digit percentage range on annual net sales of licensed products, subject to a minimum annual royalty in the low five-digit dollar range and adjustments to the royalty percentage in certain events. Further, we are obligated to pay a percentage of non-royalty licensing revenue we receive from our sublicensees under the 2015 UC License to the Regents.
Under the 2015 UC License, we are required to diligently proceed with the development, manufacture, and sale of licensed products and is subject to a number of diligence obligations relating to developmental, regulatory and commercialization milestones for the licensed products, as well as a minimum annual spend requirement in the low six-digit dollar range.
The 2015 UC License will expire upon the expiration date of the longest-lived patent right licensed under the 2015 UC License. The Regents may terminate the 2015 UC License if: (i) a material breach by us is not cured within 60 days, (ii) we file a claim asserting the Regents licensed patent rights are invalid or unenforceable, or (iii) we file for bankruptcy. We also have the right to terminate the 2015 UC License at any time upon at least 90 days’ written notice.
2020 License Agreement with the Regents of the University of California
In April 2020, LBS entered into another license agreement with the Regents (the “2020 UC License”). Pursuant to the 2020 UC License Agreement, we have an exclusive, sublicensable, worldwide license under certain patent rights to make, use, sell, offer for sale and import products and practice methods covered by the claims of the licensed patent rights as directed to synthetic charge-changing substrates and methods for detecting protease activity in animal and human clinical samples. Under the 2020 UC License, the exclusive rights include analysis of animal samples and human clinical samples (including microbial samples from an animal or human), including detecting and measuring proteases, enzymes, and biomolecules in bodily fluids, breath, and other sources but excluding analysis of human clinical samples associated with blood cancers, solid tumors, and other samples related to oncology conditions and diseases. We expect these licensed patent rights to support our pipeline activities, including those focused on identifying new drug targets and diagnostics.
Upon the execution of the 2020 UC License, LBS paid a one-time license issue fee of $5,000, agreed to reimburse the Regents for past patent costs and are obligated to pay an annual license maintenance fee in the mid four-digit dollar range until such time that it is commercially selling a licensed product. We are also obligated to make: (i) payments up to approximately $1.9 million in the aggregate upon achievement of certain development, regulatory and commercial milestones and (ii) royalty payments in the low- to mid-single-digit percentage range on annual net sales of licensed products, subject to a minimum annual royalty in the low five-digit dollar range and adjustments the royalty percentage in certain events. Further, we are obligated to pay to the Regents a percentage of non-royalty licensing revenue we receive from our sublicensees under the 2020 UC License.
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Under the 2020 UC License, we are subject to a number of diligence obligations relating to developmental, regulatory and commercialization milestones for the licensed products, as well as a minimum annual spend requirement in the low six-digit dollar range.
The 2020 UC License will expire upon the later of the expiration date of the longest-lived patent right licensed under the 2020 UC License. The Regents may terminate the 2020 UC License if: (i) a material breach by us is not cured within 60 days, (ii) we file a claim asserting the Regents licensed patent rights are invalid or unenforceable, or (iii) we file for bankruptcy or becomes insolvent. We also have the right to terminate the 2020 UC License at any time upon at least 90 days’ written notice.
2021 License Agreement with the Regents of the University of California
In July 2021, we entered into another license agreement with the Regents (the “2021 UC License”) to obtain exclusive rights to the cancer-related indications and uses that had been excluded under the 2020 UC License. Pursuant to the 2021 UC License Agreement, we have an exclusive, sublicensable, worldwide license under certain patent rights that now include cancer to make, use, sell, offer for sale and import products and practice methods covered by the claims of the licensed patent rights as directed to synthetic charge-changing substrates and methods for detecting protease activity in animal and human clinical samples. In conjunction with the 2020 UC License, we expect these licensed patent rights to further enhance pipeline activities, including those focused on identifying new drug targets and diagnostics.
Upon execution of the 2021 UC License, we paid a one-time license issue fee of $10,000 and are obligated to pay an annual license maintenance fee in the mid four-digit dollar range until such time that it is commercially selling a licensed product. We are also obligated to make: (i) payments up to approximately $1.9 million in the aggregate upon achievement of certain development, regulatory and commercial milestones and (ii) royalty payments in the low- to mid-single-digit percentage range on annual net sales of licensed products, subject to a minimum annual royalty in the low five-digit dollar range and adjustments to the royalty percentage in certain events. Further, we are obligated to pay the Regents a percentage of non-royalty licensing revenue we receive from any sublicensees under the 2021 UC License.
Under the 2021 UC License, we are subject to a number of diligence obligations relating to developmental, regulatory and commercialization milestones for the licensed products, as well as a minimum annual spend requirement in the low six-digit dollar range.
The 2021 UC License will expire upon the later of the expiration date of the longest-lived patent right licensed under the 2021 UC License. The Regents may terminate the 2021 UC License if: (i) a material breach by us is not cured within 60 days, (ii) we file a claim asserting the Regents licensed patent rights are invalid or unenforceable, or (iii) we file for bankruptcy or become insolvent. We also have the right to terminate the 2021 UC License at any time upon at least 90 days’ written notice.
Co-Development and Distribution Agreement with Newsoara
In February 2018, we entered into a co-development and distribution agreement with Newsoara, a joint venture established with Biolead Medical Technology Limited, as amended in November 2018 (the “Co-Development Agreement”). Pursuant to the Co-Development Agreement, we granted Newsoara an exclusive co-development right under certain patents and know-how owned or controlled by us to develop, use, sell, offer to sell, import, and otherwise commercialize licensed products (the “Licensed Products”) for any and all indications in the People’s Republic of China, including the regions of Hong Kong and Macao, but excluding Taiwan (the “Territory”). The Licensed Products only include LB1148. The Co-Development Agreement obligates Newsoara to initially use us as the exclusive supplier for all of Newsoara’s requirements for Licensed Products in the Territory.
Under the Co-Development Agreement, Newsoara is responsible for meeting certain regulatory milestones and is required to share with us the preclinical and clinical data it generates that pertains to the Licensed Products. The Company also obtained from Newsoara (i) an exclusive license under certain patents and know-how owned or controlled by Newsoara (“Newsoara Technology”) to make, have made, use, sell, offer to sell, import, and otherwise develop and commercialize Licensed Products in any and all indications outside of the Territory, and (ii) a non-exclusive license under the Newsoara Technology to make, have made, use, sell, offer to sell, and import Licensed Product inside the Territory to the extent necessary to comply with certain of our obligations under the Co-Development Agreement.
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In consideration of the rights granted to Newsoara under the Co-Development Agreement, Newsoara paid us a one-time upfront fee of $1.0 million in 2018. In addition, Newsoara is obligated to make (i) payments up to $6.75 million in the aggregate upon achievement of certain regulatory and commercial milestones, (ii) payments in the low six-digit range per licensed product upon achievement of a regulatory milestone and (iii) tiered royalty payments ranging from the mid-single-digit to low-double-digit percentage range on annual net sales of Licensed Products, subject to adjustment to the royalty percentage in certain events.
The Co-Development Agreement will expire upon the later of the expiration date of the last valid claim of any licensed patent covering the Licensed Products in the Territory. In addition, the Co-Development Agreement can be terminated (i) by either party for the other party’s material breach that remains uncured for a specified time period after written notice or for events related to the other party’s insolvency, (ii) by us if Newsoara challenges or attempts to interfere with any licensed patent rights and, (iii) by Newsoara for any reason upon specified prior written notice.
Trade Secrets and Confidentiality
We rely, in some circumstances, on trade secrets and other confidential information to protect our unpatented technology. However, trade secrets can be difficult to protect. We seek to protect our trade secrets and proprietary technology and processes, in part, by entering into non-disclosure and confidentiality agreements with our employees, consultants, collaborators, scientific advisors, suppliers, contractors and other third parties. In addition, we enter into employment agreements that require employees to assign to us any inventions, trade secrets or know-how that they develop while employed by us.
We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and our trade secrets and other proprietary information may be disclosed. We may not have adequate remedies for any breach and could lose our trade secrets and other proprietary information through such a breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting trade secrets, know-how and inventions.
Government Regulation and Product Approval
The FDA and other regulatory authorities at federal, state and local levels, as well as in foreign countries, extensively regulate, among other things, the research, development, testing, manufacture, quality control, import, export, safety, effectiveness, labeling, packaging, storage, distribution, record keeping, approval, advertising, promotion, marketing, post-approval monitoring and post-approval reporting of drugs and biologics such as those we are developing.
Small molecule drugs are subject to regulation under the Food, Drug, and Cosmetic Act (“FDCA”) and biological products are additionally subject to regulation under the Public Health Service Act (“PHSA”) and both are subject to additional federal, state, local and foreign statutes and regulations. We, along with third-party contractors, will be required to navigate the various preclinical, clinical and commercial approval requirements of the governing regulatory agencies of the countries in which we wish to conduct studies or seek approval or licensure of our product candidates.
U.S. Biopharmaceuticals Regulation
The process required by the FDA before drug and biologic product candidates may be marketed in the United States generally involves the following:
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Preclinical and Clinical Development
Prior to beginning the first clinical trial with a product candidate, we must submit an IND to the FDA. An IND is a request for authorization from the FDA to administer an investigational new drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol or protocols for preclinical studies and clinical trials. The IND also includes results of animal and in vitro studies assessing the toxicology, pharmacokinetics, pharmacology and pharmacodynamic characteristics of the product, chemistry, manufacturing and controls information, and any available human data or literature to support the use of the investigational product. An IND must become effective before human clinical trials may begin. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day period, raises safety concerns or questions about the proposed clinical trial. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or questions before the clinical trial can begin. Submission of an IND therefore may or may not result in FDA authorization to begin a clinical trial.
Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with GCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical study. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A separate submission to the existing IND must be made for each successive clinical trial conducted during product development and for any subsequent protocol amendments. Furthermore, an independent institutional review board for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial and its informed consent form before the clinical trial begins at that site, and must monitor the study until completed. Regulatory authorities, the institutional review board or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also include oversight by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board, which provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy.
For purposes of biopharmaceutical development, human clinical trials are typically conducted in three sequential phases that may overlap or be combined;
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In some cases, the FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved to gain more information about the product. These so-called Phase 4 studies may be made a condition to approval of the application. Concurrent with clinical trials, companies may complete additional animal studies and develop additional information about the characteristics of the product candidate, and must finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final product, or for biologics, the safety, purity and potency. Additionally, appropriate packaging must be selected and tested, and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.
During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical study investigators. The FDA or the sponsor or its data safety monitoring board may suspend a clinical study at any time on various grounds, including a finding that the research patients or patients are being exposed to an unacceptable health risk. Similarly, an institutional review board can suspend or terminate approval of a clinical study at its institution if the clinical study is not being conducted in accordance with the institutional review board’s requirements or if the biological product candidate has been associated with unexpected serious harm to patients. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries. Sponsors of clinical trials of FDA-regulated products are required to register and disclose certain clinical trial information, which is publicly available at www.clinicaltrials.gov.
NDA/BLA Submission and Review
Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development, nonclinical studies and clinical trials are submitted to the FDA as part of an NDA or BLA, as applicable, requesting approval to market the product for one or more indications. The application must include all relevant data available from pertinent preclinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls, and proposed labeling, among other things. The submission of an application requires payment of a substantial application user fee to the FDA, unless a waiver or exemption applies. The FDA has sixty days from the applicant’s submission to either issue a refusal to file letter or accept the application for filing, indicating that it is sufficiently complete to permit substantive review.
Once an NDA or BLA has been accepted for filing, the FDA’s goal is to review standard applications within 10 months after it accepts the application for filing, or, if the application qualifies for priority review, six months after the FDA accepts the application for filing. In both standard and priority reviews, the review process is often significantly extended by FDA requests for additional information or clarification. The FDA reviews an NDA to determine whether a drug is safe and effective for its intended use and a BLA to determine whether a biologic is safe, pure and potent. FDA also reviews whether the facility in which the product is manufactured, processed, packed or held meets standards designed to assure and preserve the product’s identity, safety, strength, quality, potency and purity. The FDA may convene an advisory committee to provide clinical insight on application review questions. Before approving an NDA or BLA, the FDA will typically inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an application, the FDA will typically inspect one or more clinical sites to assure compliance with GCPs. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request
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additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
After the FDA evaluates an application and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will be manufactured, the FDA may issue an approval letter or a Complete Response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A Complete Response letter will describe all of the deficiencies that the FDA has identified in the application, except that where the FDA determines that the data supporting the application are inadequate to support approval, the FDA may issue the Complete Response letter without first conducting required inspections, testing submitted product lots and/or reviewing proposed labeling. In issuing the Complete Response letter, the FDA may recommend actions that the applicant might take to place the application in condition for approval, including requests for additional information or clarification, which may include the potential requirement for additional clinical studies. The FDA may delay or refuse approval of an application if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.
If regulatory approval of a product is granted, such approval will be granted for particular indications and may entail limitations on the indicated uses for which such product may be marketed. For example, the FDA may approve the application with a risk evaluation and mitigation strategy (“REMS”), to ensure the benefits of the product outweigh its risks. A REMS is a safety strategy to manage a known or potential serious risk associated with a product and to enable patients to have continued access to such medicines by managing their safe use, and could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace. The FDA may require one or more Phase 4 post-market studies and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing studies.
Expedited Development and Review Programs
The FDA offers a number of expedited development and review programs for qualifying product candidates. The Fast Track program is intended to expedite or facilitate the process for reviewing new products that meet certain criteria. Specifically, new products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening disease or condition and demonstrate the potential to address unmet medical needs for the disease or condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a Fast Track product has opportunities for frequent interactions with the review team during product development and, once an NDA or BLA is submitted, the product may be eligible for priority review. A Fast Track product may also be eligible for rolling review, where the FDA may consider for review sections of the NDA or BLA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the application.
A product intended to treat a serious or life-threatening disease or condition may also be eligible for breakthrough therapy designation to expedite its development and review. A product can receive breakthrough therapy designation if preliminary clinical evidence indicates that the product, alone or in combination with one or more other drugs or biologics, may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of the Fast Track program features, as well as more intensive FDA interaction and guidance beginning as early as Phase 1 and an organizational commitment to expedite the development and review of the product, including involvement of senior managers.
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Any marketing application for a drug or biologic submitted to the FDA for approval, including a product with a Fast Track designation and/or breakthrough therapy designation, may be eligible for other types of FDA programs intended to expedite the FDA review and approval process, such as priority review and accelerated approval. A product is eligible for priority review if it has the potential to provide a significant improvement in the treatment, diagnosis or prevention of a serious disease or condition. Priority review designation means the FDA’s goal is to take action on the marketing application within six months of the 60-day filing date.
Additionally, products studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions may receive accelerated approval upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a condition of accelerated approval, the FDA will generally require the sponsor to perform adequate and well-controlled post-marketing clinical studies to verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.
Fast Track designation, breakthrough therapy designation and priority review do not change the standards for approval but may expedite the development or approval process. Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
Post-Approval Requirements
Any products manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, product sampling and distribution, and advertising and promotion of the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing user fee requirements, under which the FDA assesses an annual program fee for each product identified in an approved NDA or BLA. Biopharmaceutical manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with current good manufacturing practices ("cGMPs"), which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMPs and impose reporting requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMPs and other aspects of regulatory compliance.
The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:
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The FDA closely regulates the marketing, labeling, advertising and promotion of biopharmaceutical products. A company can make only those claims relating to safety and efficacy, purity and potency that are approved by the FDA and in accordance with the provisions of the approved label. However, companies may share truthful and not misleading information that is otherwise consistent with a product’s FDA approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available products for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-label use of their products.
The FDA also cannot approve an ANDA or 505(b)(2) application until all applicable non-patent exclusivities listed in the Orange Book for the branded reference drug have expired. For example, a pharmaceutical manufacturer may obtain five years of non-patent exclusivity upon NDA approval of a new chemical entity, or NCE, which is a drug containing an active moiety that has not been approved by FDA in any other NDA. An “active moiety” is defined as the molecule responsible for the drug substance’s physiological or pharmacologic action. During that five-year exclusivity period, the FDA cannot accept for filing (and therefore cannot approve) any ANDA seeking approval of a generic version of that drug or any 505(b)(2) NDA that relies on the FDA’s approval of the drug, provided that that the FDA may accept an ANDA four years into the NCE exclusivity period if the ANDA applicant also files a paragraph IV certification.
Drugs and biologics can also obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study.
Hatch-Waxman Amendments and Exclusivity
Section 505 of the FDCA describes three types of marketing applications that may be submitted to the FDA to request marketing authorization for a new drug. A Section 505(b)(1) NDA is an application that contains full reports of investigations of safety and efficacy. A 505(b)(2) NDA is an application that contains full reports of investigations of safety and efficacy but 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. This regulatory pathway enables the applicant to rely, in part, on the FDA’s prior findings of safety and efficacy for an existing product, or published literature, in support of its application. Section 505(j) establishes an abbreviated approval process for a generic version of approved drug products through the submission of an Abbreviated New Drug Application (“ANDA”). An ANDA provides for marketing of a generic drug product that has the same active ingredients, dosage form, strength, route of administration, labeling, performance characteristics and intended use, among other things, to a previously approved product. ANDAs are termed “abbreviated” because they are generally not required to include preclinical (animal) and clinical (human) data to establish safety and efficacy. Instead, generic applicants must scientifically demonstrate that their product is bioequivalent to, or performs in the same manner as, the innovator drug through in vitro, in vivo or other testing. The generic version must deliver the same amount of active ingredient(s) in the same amount of time as the innovator drug and can often be substituted by pharmacists under prescriptions written for the reference listed drug. In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant’s drug or a method of using the drug. Upon approval of a drug, each of the patents
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listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential competitors in support of approval of an ANDA or 505(b)(2) NDA.
Upon submission of an ANDA or a 505(b)(2) NDA, an applicant must certify to the FDA that (i) no patent information on the drug product that is the subject of the application has been submitted to the FDA; (ii) such patent has expired; (iii) the date on which such patent expires; or (iv) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted. Generally, the ANDA or 505(b)(2) NDA cannot be approved until all listed patents have expired, except where the ANDA or 505(b)(2) NDA applicant challenges a listed patent through the last type of certification, also known as a paragraph IV certification. If the applicant does not challenge the listed patents, or indicates that it is not seeking approval of a patented method of use, the ANDA or 505(b)(2) NDA application will not be approved until all of the listed patents claiming the referenced product have expired.
Federal and State Fraud and Abuse, Data Privacy and Security, and Transparency Laws and Regulations
In addition to FDA restrictions on marketing of pharmaceutical products, federal and state healthcare laws and regulations restrict business practices in the biopharmaceutical industry. These laws may impact, among other things, our current and future business operations, including our clinical research activities, and proposed sales, marketing and education programs and constrain the business or financial arrangements and relationships with healthcare providers and other parties through which we market, sell and distribute our products for which we obtain marketing approval. These laws include anti-kickback and false claims laws and regulations, data privacy and security, and transparency laws and regulations, including, without limitation, those laws described below.
The U.S. federal Anti-Kickback Statute prohibits any person or entity from, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. The U.S. federal Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated.
A person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the U.S. federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act or the civil monetary penalties laws.
Federal civil and criminal false claims laws, including the federal civil False Claims Act, which can be enforced by individuals through civil whistleblower and qui tam actions, and civil monetary penalties laws, prohibit any person or entity from, among other things, knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of products for unapproved, and thus non-reimbursable, uses.
The federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Also, many states have similar fraud and abuse
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statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their respective implementing regulations, impose specified requirements on certain types of individuals and entities relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities, which include certain healthcare providers, healthcare clearinghouses and health plans, that create, receive, maintain or transmit individually identifiable health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which are not pre-empted by HIPAA, differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services (“CMS”), information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors) other healthcare professionals (such as physician assistants and nurse practitioners), and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members.
We may also be subject to state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers, marketing expenditures or drug pricing, and state and local laws that require the registration of pharmaceutical sales representatives.
Because of the breadth of these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the federal and state laws described above or any other governmental regulations that apply to us, we may be subject to significant criminal, civil and administrative penalties including damages, fines, imprisonment, disgorgement, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm, diminished profits and future earnings, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, implementation of corporate compliance programs, reporting of payments or transfers of value to healthcare professionals, and additional data privacy and security requirements.
Coverage and Reimbursement
The future commercial success of our product candidates, if approved, will depend in part on the extent to which third-party payors, such as governmental payor programs at the federal and state levels, including Medicare and Medicaid, private health insurers and other third-party payors, provide coverage of and establish adequate reimbursement levels for our product candidates. Third-party payors generally decide which products they will pay for and establish reimbursement levels for those products. In particular, in the United States, no uniform policy for coverage and reimbursement exists. Private health insurers and other third-party payors often provide coverage and reimbursement for products based on the level at which the government, through the Medicare program, provides coverage and reimbursement for such products, but also on their own methods and approval process apart from Medicare determinations. Therefore, coverage and reimbursement can differ significantly from payor to payor.
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In the United States, the European Union (“EU”), and other potentially significant markets for our product candidates, government authorities and third-party payors are increasingly attempting to limit or regulate the price of products, particularly for new and innovative products, which often has resulted in average selling prices lower than they would otherwise be. Further, the increased emphasis on managed healthcare in the United States and on country and regional pricing and reimbursement controls in the EU will put additional pressure on product pricing, reimbursement and usage. These pressures can arise from rules and practices of managed care groups, judicial decisions and laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical coverage and reimbursement policies and pricing in general.
Third-party payors are increasingly imposing additional requirements and restrictions on coverage and limiting reimbursement levels for products. For example, federal and state governments reimburse products at varying rates generally below average wholesale price. These restrictions and limitations influence the purchase of products. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the FDA-approved products for a particular indication. Similarly, because certain of our product candidates are physician-administered, separate reimbursement for the product itself may or may not be available. Instead, the administering physician may only be reimbursed for providing the treatment or procedure in which our product is used. Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of products, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our product candidates, in addition to the costs required to obtain the FDA approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Adequate third-party payor reimbursement may not be available to enable us to realize an appropriate return on our investment in product development. Legislative proposals to reform healthcare or reduce costs under government insurance programs may result in lower reimbursement for our product candidates, if approved, or exclusion of our product candidates from coverage and reimbursement. The cost containment measures that third-party payors and providers are instituting and any healthcare reform could significantly reduce our revenue from the sale of any approved product candidates.
Healthcare Reform
The United States and some foreign jurisdictions are considering enacting or have enacted a number of additional legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our product candidates profitably, if approved. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts, which include major legislative initiatives to reduce the cost of care through changes in the healthcare system, including limits on the pricing, coverage, and reimbursement of pharmaceutical and biopharmaceutical products, especially under government-funded healthcare programs, and increased governmental control of drug pricing.
There have been several U.S. government initiatives over the past few years to fund and incentivize certain comparative effectiveness research, including creation of the Patient-Centered Outcomes Research Institute under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Affordable Care Act"). It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates.
The Affordable Care Act became law in March 2010 and substantially changed the way healthcare is financed by third-party payors, and significantly impacts the U.S. pharmaceutical industry. Among other measures that may have an impact on our business, the Affordable Care Act established an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents; a new Medicare Part D coverage gap discount program; and a new formula that increased the rebates a manufacturer must pay under the Medicaid Drug Rebate Program. Additionally, the Affordable Care Act extended manufacturers’ Medicaid rebate liability, expands eligibility criteria for Medicaid programs, and expanded entities eligible for discounts under the Public Health Service Act. At this time, we are unsure of the full impact that the Affordable Care Act will have on our business.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as efforts by the Trump administration to repeal or replace certain aspects of the Affordable Care Act. President Trump has signed Executive Orders and other directives designed to delay the implementation of certain
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Affordable Care Act provisions or otherwise circumvent requirements for health insurance mandated by the Affordable Care Act. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, several bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017 (“Tax Act”), includes a provision that repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” In addition, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the Affordable Care Act’s mandated medical device tax and “Cadillac” tax on high-cost employer-sponsored health coverage and, effective January 1, 2021, also eliminates the health insurer tax. The Bipartisan Budget Act of 2018 ("BBA") among other things, amended the Affordable Care Act, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” On June 17, 2021 the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the Affordable Care Act will remain in effect in its current form. Prior to the U.S. Supreme Court ruling, on January 28, 2021, President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the Affordable Care Act marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the Affordable Care Act. It is possible that the Affordable Care Act will be subject to judicial or Congressional challenges in the future. It is unclear how such challenges and the healthcare reform measures of the Biden Administration will impact the Affordable Care Act.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. In August 2011, the Budget Control Act of 2011, as amended, was signed into law which, among other things, included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which began in 2013 and, following passage of subsequent legislation, including the BBA and the Infrastructure Investment and Jobs Act, will continue through 2031 unless additional Congressional action is taken. However, COVID-19 Relief legislation suspended the 2% Medicare sequester from May 1, 2020 through March 31, 2022. Under current legislation, the actual reduction in Medicare payments with vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester. In January 2013, the American Taxpayer Relief Act of 2012 was enacted which, among other things, reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Further, there has been increasing legislative and enforcement interest in the United States with respect to drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the federal level, on July 24, 2020 and September 13, 2020, the Trump administration announced several executive orders related to prescription drug pricing that seek to implement several of the administration's proposals. As a result, the FDA concurrently released a final rule and guidance in September 2020 providing pathways for states to build and submit importation plans for drugs from Canada. In addition, on November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically advanced countries, effective January 1, 2021. As a result of litigation challenging the Most Favored Nation model, on December 27, 2021, CMS published a final rule that rescinds the Most Favored Nation model interim final rule. In July 2021, the Biden administration released an executive order, “Promoting Competition in the American Economy,” with multiple provisions aimed at prescription drugs. In response to Biden’s executive order, on September 9, 2021, the U.S. Department of Health and Human Services (“HHS”) released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing reform and sets out a variety of potential legislative policies that Congress could pursue as well as potential administrative actions HHS can take to advance these principles. No legislation or administrative actions have been finalized to implement these principles. It is unclear whether these or similar policy initiatives will be implemented in the future. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries
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and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine which drugs and suppliers will be included in their healthcare programs. Furthermore, there has been increased interest by third party payors and governmental authorities in reference pricing systems and publication of discounts and list prices. These measures could reduce future demand for our products or put pressure on our pricing. It is possible that additional governmental action is taken in response to the COVID-19 pandemic.
Foreign Regulation
In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our product candidates. Whether or not we obtain FDA approval for a drug, we would need to obtain the necessary approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the drug in those countries. The approval process varies from country to country and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.
Further, some countries outside of the United States, including the EU member states, Switzerland and the United Kingdom, have also adopted data protection laws and regulations, which impose significant compliance obligations. In the EU, the collection and use of personal health data is governed by the provisions of the General Data Protection Regulation (“GDPR”). The GDPR became effective on May 25, 2018, repealing its predecessor directive and increasing responsibility and liability of pharmaceutical companies in relation to the processing of personal data of EU subjects. The GDPR, together with the national legislation of the EU member states governing the processing of personal data, impose strict obligations and restrictions on the ability to process personal data, including health data from clinical trials and adverse event reporting. In particular, these obligations and restrictions concern potentially burdensome documentation requirements, granting certain rights to individuals to control how we collect, use, disclose, retain and process information about them, the information provided to the individuals, the transfer of personal data out of the EU, security breach notifications, and security and confidentiality of the personal data. The processing of sensitive personal data, such as physical health condition, may impose heightened compliance burdens under the GDPR and is a topic of active interest among foreign regulators. In addition, the GDPR provides for more robust regulatory enforcement and fines of up to €20 million or 4% of the annual global revenue of the noncompliant company, whichever is greater. Data protection authorities from the different EU member states may interpret the GDPR and national laws differently and impose additional requirements, which add to the complexity of processing personal data in the EU. Guidance on implementation and compliance practices are often updated or otherwise revised.
Subsidiaries
The Company has two wholly owned subsidiaries, Suzhou Neuralstem Biopharmaceutical Co., Ltd. ("Suzhou"), organized under the laws of the People’s Republic of China, and LBS. Suzhou was established by Seneca to sponsor the non-GDP Phase 2 clinical trial of NSI-566 that was conducted between 2013 and 2016 in Beijing, China. As of December 31, 2022, Suzhou has limited operations and exists for the sole purpose of conducting observational follow-up for a small group of remaining patients from the completed clinical trial, which it does through the engagement of a consultant. Suzhou has no employees or other operations. The Company's other subsidiary is Leading Biosciences, Inc. which is the operating entity through which we are developing of therapeutic products.
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Contingent Value Right
Immediately prior to the closing of the Merger, Seneca issued each share of its common stock held by Seneca stockholders of record, one contingent value right (“CVR”). The CVR entitled the holder (the “CVR Holder”) to receive, pro rata with the other CVR Holders, 80% of the net proceeds, if any and subject to certain minimum distribution limitations (“CVR Payment Amount”), received from the sale or licensing of the intellectual property owned, licensed or controlled by Seneca immediately prior to the closing of the Merger (the “Legacy Technology”); provided however that the CVR Holders are only entitled to receive such CVR Payment Amount if the sale or licensing of such Legacy Technology occurred on or before October 27, 2022 (“Legacy Monetization”). Pursuant to the terms of the CVR agreement (“CVR Agreement”), CVR Holders are only entitled to receive CVR Payment Amounts received within 48-months following the closing of the Merger. The CVR also provides that no distributions will be made to the CVR Holders in the event such distribution is less than $300,000.
As discussed below, with respect to the Legacy Technology, during the CVR Legacy Monetization period the Company entered into: (i) an asset transfer agreement (“ATA”) related to NSI-189, and (ii) a license related to NSI-532.IGF-1, (collectively, NSI-189 and NSI-532.IGF-1 are referred to as the “Monetized Assets”). Based upon the net consideration received from the Monetized Assets, and after deducting the costs and expenses required to maintain the Legacy Assets, including patent costs, the amount attributed to Monetized Assets is less than the minimum distribution amount of $300,000. Accordingly, if no additional consideration is received with respect to the Monetized Assets, the CVR Holders will not receive any distributions and the CVR will expire worthless. If the Company does receive additional consideration from the Monetized Assets, the costs associated with the administration of the CVR could result in the distributable amount being less than the minimum and accordingly, no distribution would be made.
NSI-189 – Exclusive License and Subsequent Exercise of Purchase Option
As previously disclosed, on December 16, 2020, Seneca exclusively licensed certain patents and technologies, including a sublicense covering a synthetic intermediate, of the Company's NSI-189 assets (“189 License”), along with a purchase option through December 16, 2023 (“Purchase Option”). On October 22, 2021, Alto Neuroscience agreed to terms of an early exercise of the Purchase Option under the 189 License and entered into an ATA. Alto Neuroscience is a U.S. based private biopharmaceutical company focused on precision-medicine for central nervous system disorders, including depression, using artificial intelligence-based brain biomarkers.
In connection with the ATA, the Company 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 the CVR Payment Amount would be less than $0.5 million or less than $0.3 million with respect to the final CVR Payment Amount. In accordance with the terms of the CVR Agreement, the net proceeds from the sale of the NSI-189 assets, less any applicable transaction costs and expenses, were deposited into the CVR escrow to be used to pay costs and expenses associated with the monetization of our other Legacy Technologies, which may include but are not limited to: financial advisory and consulting fees, legal fees, and any other fees associated with the monetization. There can be no assurance that CVR holders will receive CVR Payment Amounts from the sale of the NSI-189 assets.
NSI-532.IGF-1
On October 27, 2022, the Company entered an agreement to license NSI-532.IGF-1 to the Regents of the University of Michigan ("University of Michigan") for maintaining NSI-532.IGF-1 cell lines, continued development, maintaining patent protection, and seeking licensees. The Company received no upfront fees for the license. NSI-532.IGF-1 is a pre-clinical cell therapy being investigated as a potential therapy for prevention and treatment of Alzheimer’s disease. The University of Michigan shall bear 100% of the costs for patent filing, prosecution, maintenance, and enforcement of the patent rights. The Company will receive 50% of net revenues received by the University of Michigan from the licensing of patent rights through the last-to-expire patent in patent rights, unless otherwise earlier terminated, less all reasonable and actual out-of-pocket costs incurred in the litigation of patent rights. There can be no assurance that NSI-532.IGF-1 will ever be successfully monetized or that CVR holders will receive CVR Payment Amounts from the sale of the NSI-532.IGF-1 assets.
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NSI-566
In September of 2021, the Company engaged a financial advisor to undertake a process to formally market NSI-566. The financial advisor used both subscription databases and public databases to identify potential acquirers and/or licensees. During the process, 256 companies were identified as potential acquirers and were contacted. The outreach process included communication through multiple mediums included emailing multiple targeted people within a company, calls to such people within a company, introductions through referral sources to targeted people within a company, and online submissions. Outreach targets were contacted contact multiple times. Of the 256 companies contacted, 45 companies requested non-confidential slide decks. In total, 116 companies declined or were eliminated after multiple rounds of follow-up after sharing materials. Of the remaining companies, five entered into non-disclosure agreements and were granted access to the virtual data room. The Company's advisors and representatives had follow-up calls to discuss the confidential information with four of the five companies. None of the target companies submitted any offers. The CVR Representative did receive one unsolicited offer consisting of an upfront payment of $125,000 and a possible milestone payment of: (i) up to $6 million upon market approval in the U.S. or Europe or (ii) 30% of the consideration received by the purchaser upon the sale or licensing of NSI-566. In reviewing the proposal, the CVR Representative and its advisors considered the costs and expenses associated with such transfer, including legal and advisory fees as well as costs and expenses associated with the transfer of the Company’s wholly owned Chinese subsidiary that owns certain data which the CVR Representative concluded would be required to be transferred. After taking into account these costs and expenses, the CVR Representative provided a counter-offer requiring a $1.0 million upfront payment. The prospective acquirer did not respond. As the CVR Legacy Monetization period has ended, CVR Holders will not be entitled to the proceeds, if any, of the sale or licensing of NSI-566. As of the date of this Annual Report on Form 10-K, the Company has ceased marketing NSI-566 and has terminated the engagement with the advisor.
Human Capital Resources
Overview
As of December 31, 2022, we had 12 full-time employees and no part-time employees. Of these full-time employees, six employees are engaged in primarily research and development activities and five employees are primarily engaged in finance, corporate strategy and business development, human resources, and other general administrative functions. We engage a number of regular consultants to assist with our regulatory and clinical operations, and human resources and information technology functions, including our Chief Medical Officer, who joined the Company in November of 2022 as a part-time consultant. We have no collective bargaining agreements with our employees and we have not experienced any work stoppages. On September 9, 2022, the Company committed to a cost-reduction plan. This cost-reduction plan consisted of an approximately 20% reduction in the workforce to better align the Company’s resources with its clinical studies.
We consider our relations with our employees to be good. We are invested in the development of our employees, including performance management and mentorship programs. Subsequent to the Merger in 2021, we retained the majority of the legacy LBS employees and executive management team. Effective October 11, 2022, the Company's former Chief Executive Officer and member of the Company's Board resigned as both Chief Executive Officer and as a member of the Company's Board. On that date, the Company’s Chief Financial Officer, J.D. Finley, was appointed by the Company's Board to serve as the Company’s Chief Executive Officer (principal executive officer), on an interim basis. Mr. Finley continues to serve as the Company’s Chief Financial Officer and principal accounting officer. In January 2023, Mr. Finley was appointed as a member of the Company's Board. Also on October 11, 2022, the Company terminated the employment of its former Chief Medical Officer.
Compensation, Benefits, and Professional Development
Our compensation programs, including our equity incentive programs, are designed to align our employees' interests with the drivers of growth and stockholder returns by supporting achievement of our primary business goals. Our goal is to attract and retain employees whose talents, expertise, leadership, and contributions are expected to support and facilitate growth and drive long-term stockholder value. Consequently, we provide employee wages that we believe are competitive within our industry, and we regularly evaluate the effectiveness of our compensation and benefit programs against industry benchmarks. We seek to align our employees' interests with those of stockholders by linking
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annual changes in compensation to overall company performance, as well as each individual’s contribution to the results achieved. The emphasis on overall company performance is intended to align the employee’s financial interests with the interests of shareholders. We are also committed to providing comprehensive benefit options and it is our intention to offer benefits that will allow our employees and their families to live healthier and more secure lives. All employees are eligible for medical, dental, and vision insurance, paid and unpaid leaves, group life and personal accident insurance coverage as well as the option to participate in the Company's 401(k) plan and supplemental group life and short-term disability coverage.
Corporate Information
The registrant was originally incorporated in 2001 in the State of Delaware under the name Neuralstem, Inc. In October 2019, Neuralstem, Inc. changed its name to Seneca Biopharma, Inc. In April 2021, we effected the Merger, whereby LBS became a wholly owned subsidiary of Seneca. In April 2021, we changed our name from Seneca Biopharma, Inc. to Palisade Bio, Inc. Our principal executive offices are located at 7750 El Camino Real, Suite 2A, Carlsbad, California 92009, our telephone number is (858) 704-4900 and our website address is www.palisadebio.com.
The information on our website is not incorporated by reference in this annual report on Form 10-K or in any other filings we make with the Securities and Exchange Commission ("SEC"). We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on or through our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.
Item 1A. Risk Factors.
RISK FACTORS
You should consider carefully the risks described below, as well as the other information in this Annual Report on Form 10‑K, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the factors described as well as the other information in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” when evaluating our business. If any of the following risks occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
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 current business depends on the successful development, regulatory approval and commercialization of LB1148, as well as the Company's ability to secure sufficient capital to fund its business operations. The clinical and commercial success of LB1148 depends on a number of factors, including the following:
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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. Such delays may result in increased costs and the failure to complete such trial. Even if regulatory approvals are obtained, the Company may never be able to successfully commercialize LB1148. Accordingly, the Company cannot make assurances that it will ever be able to generate sufficient revenue through the sale of LB1148, or any other future product candidates, if approved, to internally fund its business.
There are no FDA-approved therapies for LB1148’s lead indication which makes it difficult to predict the timing, costs and regulatory approval path of LB1148.
The Company's lead indication for LB1148 is the reduction or elimination of postoperative intra-abdominal adhesions. While there are multiple medical devices approved for the reduction or elimination of postoperative intra-abdominal adhesions, there are no approved drugs for such indication. The regulatory approval process for novel product candidates such as LB1148 can be more uncertain, expensive, and take longer than for other, better known or extensively studied therapeutic approaches.
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The development and commercialization strategy for the Company’s lead 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 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 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, 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. Although it is not required to, the FDA may 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 U.S. 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 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 on the behalf of 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, there is no assurance it that the Company's 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.
The Company’s inability to identify, qualify, and enroll patients in its clinical trials on a timely basis could result in the completion of the trials being delayed.
Patient enrollment and trial completion are affected by numerous additional factors, including the:
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If the Company has difficulty enrolling a sufficient number of subjects 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. For example, the Company has recently paused enrollment in its Phase 3 study for return of bowel function. As a result, there can be no assurances that the Company will be able to complete that clinical trial, if it chooses to resume the study, on either a timely basis, or at all.
Clinical drug development is very expensive, time-consuming and uncertain.
Clinical development new drug 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, or other regulatory authorities, including state and local agencies and counterpart agencies in foreign countries, or institutional review boards ("IRB") at the Company's trial sites, may suspend, delay, require modifications to or terminate the Company’s clinical trials at any time.
The Company expects that its operations and clinical trials will require substantially more capital than it currently has, and the Company cannot guarantee when or if it will be able to secure such additional funding.
The Company has historically funded its operations, including its past and present clinical trials, through the sale of its securities. Based on the Company's existing cash resources and its current or future plan of operations, the Company may not have adequate capital to complete its current clinical trials or fund operations. Moreover, the Company cannot guarantee that its cash resources, even after giving effect to recent offerings, will be sufficient for it to complete enrolling patients in both clinical trials and provide for the Company's working capital needs. As a result, the Company may need to secure additional financing. If the Company is not able to obtain financing in the future or on acceptable terms, it may have to terminate or suspend one or both clinical trials early and/or curtail its operations.
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 of LB1148 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 prior preclinical and 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) 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, 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 studies. 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
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ingredient, a medical device, or an active ingredient. There is uncertainty about (1) whether regulatory agencies will classify LB1148 as a fixed-combination drug product and (2) consequential implications of, for example, FDA’s fixed-combination drug product regulation concerning the evaluation of each active drug component’s individual contribution to the overall treatment effect. The treatment of PEG and any regulatory requirements, if it is considered an active ingredient, may differ across regulatory authorities. If LB1148 is considered a fixed-combination drug product, then this may impact the design and overall number of required clinical trials as well as additional requirements for nonclinical studies. Even though we are proceeding with a clinical trial for LB1148 as a single active ingredient drug product, we may be required to conduct additional trials, which could include the use of a factorial design, and nonclinical studies if, for example, FDA (1) concludes that PEG is an active ingredient in LB1148 and (2) is unwilling to provide a waiver from meeting their fixed-combination drug product regulation/requirements. 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 intends to eventually seek regulatory approvals of LB1148 initially in the U.S. 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 to the FDA that the product candidate is safe and effective for use for the 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.
The Company’s product candidates may cause undesirable side effects 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. Any of these occurrences may have an adverse material effect on 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, including the FDA requiring the Company to recall the product, 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 U.S. Although the FDA or applicable foreign regulatory authority may accept data from clinical trials conducted outside the U.S. 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
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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 may 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 may rely on third-party 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 are expected to play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials. The Company expects to 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 whether or not 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 be costly and delay the regulatory approval process.
If any of the Company’s CROs or clinical trial sites terminate their involvement in one of the Company's clinical trials for any reason, the Company 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 patient follow-up information 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
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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. Reimbursement may impact the demand for, and the price of, any product for which the Company obtains marketing approval. 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.
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 LB1148, if approved, will depend significantly on attaining broad adoption and use of the drug by physicians and patients. 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:
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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, may 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. The inability of the Company’s products, if approved, to effectively compete with such products could adversely affect the Company’s results and operations.
Any adverse developments related to LB1148 that occur during the clinical trials being conducted by Newsoara could affect the Company’s ability to obtain regulatory approval or commercialize LB1148.
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 with respect to Newsoara’s clinical trials related 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 and delay our ability to seek marketing approval. If the Company receives FDA approval for LB1148 and a new and serious safety issue is identified in connection with Newsora’s clinical trials related to LB1148, the FDA and other regulatory authorities may withdraw their approval of the product or otherwise restrict the Company’s ability to market and sell LB1148. 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 and would adversely affect the Company’s prospects and business.
Risks Related to the Company’s Business
The Company has a very limited operating history and has never generated any revenues from product sales.
The Company is a 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 LB1148 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.
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The Company's common stock could be delisted from the Nasdaq Capital Market if the Company is unable to maintain compliance with Nasdaq's continued listing standards.
The Company's common stock is listed on the Nasdaq Capital Market. There are a number of continued listing requirements that the Company must satisfy in order to maintain its listing on The Nasdaq Capital Market, including the requirement to maintain a minimum bid price of at least $1.00 (the “Bid Price Rule”). Although the Company is currently in compliance with the Bid Price Rule, the Company has been unable to comply with this rule in the past and for periods in 2022 the Company's continued listing on the Nasdaq Capital Market required the grant of a grace period from Nasdaq and the implementation of a 1-for-50 reverse stock split. If the Company fails to comply with the Bid Price Rule in the future, or any of the other continued listing requirements, there can be no assurance that the Company will be able to regain compliance. The delisting of the Company's common stock would likely adversely affect the market liquidity and market price of the Company's common stock and the Company's ability to obtain financing for the continuation of the Company operations and/or result in the loss of confidence by investors.
If the Company is unable to successfully retain and integrate a new management team, the Company's business could be adversely impacted.
Effective October 11, 2022, the Company appointed its Chief Financial Officer, J.D. Finley, as its Interim Chief Executive Officer. Also effective October 11, 2022, Dr. Hallam and Dr. Dawson, the Company’s former CEO and CMO respectively, ceased providing services to the Company. On November 18, 2022 the Company announced the appointment of Herbert B. Slade, MD, FAAAAI as Chief Medical Officer of the Company. On February 8, 2023, the Company announced it had promoted Robert McRae to Chief Operating Officer. The Company's success depends largely on the development and execution of its business strategy by its senior management team. The Company currently has a limited executive team with limited experience of working together. Additionally, the loss of any members or key personnel would likely harm the Company's ability to implement its business strategy and respond to the rapidly changing market conditions in which it operates. There can be no assurance that the Company will be able to retain the current members of its management team. Moreover, there may be a limited number of persons with the requisite skills to serve in these positions, and the Company cannot assure you that it will be able to identify, employ or retain such qualified personnel on acceptable terms, if at all. The Company cannot assure you that management will succeed in working together as a team. In the event that the Company is unable to retain or integrate its management team, its business, prospects, and operations could be adversely impacted.
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 U.S. and in foreign countries, and such regulations differ from country to country and frequently are revised.
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Even after the Company achieves U.S. regulatory approval for a product candidate, if at all, the Company will be subject to continued regulatory review and compliance obligations. 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 U.S.) 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:
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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 U.S. 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. 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:
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Although the Company has product liability insurance coverage for its clinical trials, the 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 the Company 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.
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. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote such uses. 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.
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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 U.S., 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, 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. 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 products. If the Company does not accurately evaluate the commercial potential or target market for a product candidate, 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 to discontinue developing or commercializing any of its product candidates, or may choose to not commercialize product candidates in approved indications, at any time during development or after approval, which could adversely affect the Company and its operations.
At any time, the Company may decide to discontinue the development of, or temporarily pause the development of, any of its product candidates for a variety of reasons, including the appearance of new technologies that make its product candidates obsolete, competition from a competing product or changes in or failure to comply with applicable regulatory requirements. If the Company temporarily pauses or 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 which could have an adverse effect on the Company and its business.
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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, but are not limited to: 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 federal physician sunshine requirements under the Affordable Care Act; the Foreign Corrupt Practices Act as it applies to activities outside of the United States; 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, healthcare reform legislation has strengthened these laws. For example, the 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 significant 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 in-license, acquire, develop and market additional product candidates or approved products would impair its ability to grow its business.
The Company may 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 identifying, 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. 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 or licenses 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.
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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.
The Company may seek to avail itself of Fast Track designation, breakthrough designation, or priority review 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 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. 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.
Risks Related to the Company’s Dependence on Third Parties
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 cannot provide assurance that it will be able to establish or maintain third-party relationships in order to successfully develop and commercialize its product candidates.
The Company relies completely on third-party contractors to supply, manufacture and distribute clinical drug supplies for its 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
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continue to develop or commercialize its products and product candidate, which could adversely affect the Company and its business.
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.
The Company expects to continue to depend on third-party contract suppliers and manufacturers. The Company’s supply and manufacturing agreements 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 the Company's 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.
Risks Related to the Company’s Financial Operations
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 for a period of one year following the issuance of this report. 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 mid-2024 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. The Company’s future consolidated financial statements may include a similar qualification about its ability to continue as a going concern. The Company’s year-end and interim consolidated 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.
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.
Failure to remediate a material weakness in internal controls over financial reporting could result in material misstatements in the Company’s consolidated 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 quarter ended June 30, 2021, although management concluded that this material weakness has been remediated in the year ended December 31, 2022.
If the Company's remaining material weakness, which management concluded is still present as of December 31, 2022, is 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 consolidated financial statements and a failure to meet its reporting and financial obligations.
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Changing circumstances and market conditions, some of which may be beyond the Company's control, could impair our ability to access our existing cash and cash equivalents and investments and to timely pay key vendors and others.
Changing circumstances and market conditions, some of which may be beyond the Company's control, could impair its ability to access its existing cash and cash equivalents and investments and to timely pay key vendors and others. For example, on March 10, 2023, Silicon Valley Bank ("SVB") was placed into receivership with the Federal Deposit Insurance Corporation ("FDIC"), which resulted in all funds held at SVB being temporarily inaccessible by SVB’s customers. Although the Company does not have any funds at SVB, if other banks and financial institutions with whom the Company has banking relationships enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, the Company may be unable to access, and the Company may lose, some or all of its existing cash and cash equivalents to the extent those funds are not insured or otherwise protected by the FDIC. In addition, in such circumstances the Company might not be able to timely pay key vendors and others. The Company regularly maintain cash balances that are not insured or are in excess of the FDIC’s insurance limit. Any delay in the Company's ability to access its cash and cash equivalents (or the loss of some or all of such funds) or to timely pay key vendors and others could have a material adverse effect on the Company's operations and cause it to need to seek additional capital sooner than planned.
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.
If our information systems or data, or those of third parties upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse consequences.
In the ordinary course of our business, we may process, as defined above, proprietary, confidential, and sensitive data, including personal data (such as health-related patient data), intellectual property, and trade secrets (collectively, sensitive information). We may rely upon third-party service providers and technologies to operate critical business systems to process sensitive information in a variety of contexts, including, without limitation, third-party providers of cloud-based infrastructure, employee email, CROs, and other functions. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. We may share or receive sensitive information with or from third parties.
The risk of a security breach or disruption, particularly through cyber-attacks, cyber-intrusion, malicious internet-based activity, and online and offline fraud, are prevalent and have generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. These threats are becoming increasingly difficult to detect and come from a variety of sources, including traditional computer hackers, threat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors. Some actors now engage and are expected to continue to engage in cyber-attacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon which we rely may be vulnerable to a heightened risk of these
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attacks, including cyber-attacks that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our products.
We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, natural disasters, terrorism, war, and telecommunication and electrical failures. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity.
Furthermore, the COVID-19 pandemic and our remote workforce poses increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises.
Any of the previously identified or similar threats could cause a security breach or disruption. While the Company has not experienced any such security breach or other disruption to date, if such an event were to occur, it could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information and cause interruptions in the Company’s operations, including material disruptions of its development programs and business operations.
We may expend significant resources or modify our business activities (including our clinical trial activities) to try to protect against security breaches and disruptions. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and sensitive information. While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will be effective. We may be unable in the future to detect vulnerabilities in our information technology systems because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security breach or disruption has occurred. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems, our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities.
Applicable data privacy and security obligations may require us to notify relevant stakeholders of certain security breaches and disruptions. Such disclosures are costly, and the disclosure or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security breach or other disruption, or are perceived to have experienced such events, we may experience adverse consequences, including: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. In particular, since the Company sponsors clinical trials, any breach or disruption that compromises patient data and identities could generate significant reputational damage, which may affect trust in the Company and our ability to recruit for future clinical trials. Additionally, 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.
Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. Furthermore, we cannot be sure that our insurance coverage will be adequate or sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
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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. Although the Company has not suffered any material incidents to date, 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.
Risks Related to the Company’s Intellectual Property
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 U.S. 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.
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.
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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 U.S., 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 these trade secrets and/or unpatented know-how and maintain the exclusivity it previously held.
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.
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 United 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
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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 U.S. Patent and Trade Office ("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 agreements with respect to certain of its product candidates. These license agreements impose various diligence, milestone, royalty, insurance and other obligations on the Company. From time to time, the Company may be delayed in various diligence or other obligations upon it. For example, the Company has experienced delays in meeting certain regulatory milestones related to clinical studies under its license agreements with the Regents of the University of California ("Regents"). If the Company fails to comply with these obligations, Regents or the respective licensors may terminate the license. 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 and licensed 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 and licenses 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
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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.
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, the Company engages the services of consultants to assist us in the development of the Company's 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 the Company's competitors or potential competitors. The Company may be subject to claims that these employees and consultants or the Company has inadvertently or otherwise wrongfully used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Although the Company has 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 the Company is 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.
Other Risks Related to the Company
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 capital to fund its operations and conduct the costly and time-consuming clinical 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. For example, the Company recently paused enrollment in its Phase 3 study for return of bowel function, and as a result, the necessary costs and timing of the study are currently uncertain. Raising additional capital may be costly or difficult to obtain and could significantly dilute stockholders’ ownership interests or inhibit the Company’s ability to
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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 impact the rights of its common stockholders. Further, to the extent that the Company raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, its stockholders' ownership percentage 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 COVID-19 pandemic, or a similar pandemic, epidemic, or outbreak of an infectious disease, may materially and adversely affect the Company's business and the Company's financial results and could cause a disruption to the development of the Company's product candidates.
Public health crises, such as pandemics or similar outbreaks, could adversely impact the Company's business. The impact of the COVID-19 pandemic and the efforts to mitigate it, resulted in and will likely continue to result in disruptions to the global economy, as well as businesses and capital markets around the world. The Company experienced delays in its development activities as a result of the COVID-19 pandemic, primarily due to temporary and partial shutdowns at certain of the Company's CROs and trial sites that have since resumed operations, and due to governmental responses to the pandemic. Additionally, the emergence of new variants, which could prove resistant to existing vaccines, could again result in major disruptions to businesses and markets worldwide. The extent to which the COVID-19 pandemic will continue to impact the Company's operations or those of its consultants and collaborators, will depend on future developments, including the global macroeconomic effects of the virus.
Global, market and economic conditions, including inflation, may negatively impact the Company’s business, financial condition and share price.
Concerns over inflation, geopolitical issues, the U.S. financial markets, foreign exchange rates, capital and exchange controls, unstable global credit markets and financial conditions and the COVID-19 pandemic, have led to periods of significant economic instability, declines in consumer confidence and discretionary spending, diminished expectations for the global economy and expectations of slower global economic growth going forward, and increased unemployment rates. The Company’s general business strategy may be adversely affected by any such economic downturns, volatile business environments and continued unstable or unpredictable economic and market conditions. If these conditions continue to deteriorate or do not improve, it may make any necessary debt or equity financing more difficult to complete, more costly and more dilutive. In addition, there is a risk that one or more of our current or future service providers, manufacturers, suppliers and other partners could be negatively affected by difficult economic times, which could adversely affect the Company’s ability to attain our operating goals on schedule and on budget or meet our business and financial objectives.
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In addition, the Company faces several risks associated with international business and are subject to global events beyond its control, including war, public health crises, such as pandemics and epidemics, trade disputes, economic sanctions, trade wars and their collateral impacts and other international events. Any of these changes could have a material adverse effect on the Company’s reputation, business, financial condition or results of operations. There may be changes to the Company’s business if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest; and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. In February 2022, armed conflict escalated between Russia and Ukraine. The sanctions announced by the U.S. and other countries, following Russia’s invasion of Ukraine against Russia to date include restrictions on selling or importing goods, services or technology in or from affected regions and travel bans and asset freezes impacting connected individuals and political, military, business and financial organizations in Russia. The U.S. and other countries could impose wider sanctions and take other actions should the conflict further escalate. It is not possible to predict the broader consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, currency exchange rates and financial markets, all of which could impact the Company’s business, financial condition and results of operations.
The stock price of the Company may be highly volatile.
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.
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The Company takes 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 June 30, 2022, the last business day of the Company’s most recently completed second fiscal quarter, the public float of the Company is less than $250 million and therefore, the Company qualifies as a smaller reporting company under SEC rules. As a smaller reporting company, the Company is 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. The Company 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 its 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 biotechnology 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 its 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 U.S. federal and state net operating loss (“NOL”) carryforwards generated in taxable years beginning before January 1, 2018, may be carried forward to offset future taxable income, if any, until such unused NOLs expire. Under current U.S. federal income tax law, U.S. federal NOLs generated in taxable years beginning after December 31, 2017, can be carried forward indefinitely, but the deductibility of such U.S. federal NOLs in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. State NOL carryforward periods, expirations and limitations may differ from federal tax laws.
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In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, (the "Code"), and corresponding provisions of state law, if the Company undergoes (or has undergone) an “ownership change,” which is generally defined as a greater than 50-percentage-point cumulative change, by value, in its equity ownership over a three-year period, the Company's ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. Including the recently completed Merger, the Company has completed several equity offerings since its inception which may have resulted in an ownership change as defined by Sections 382 and 383 of the Code, or could result in an ownership change in the future. The Company has not completed a Code Section 382 and 383 analysis regarding the limitation of NOL and research and development credit carryforwards for all relevant tax years.
Accordingly, the Company's 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 and, the Company's ability to use 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 the Company's 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 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.
Changes in tax law could adversely affect the Company’s business.
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.
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, 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, which is responsible for appointing the members of management.
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.
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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 consolidated 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 consolidated financial statements and a failure to meet its reporting and financial obligations.
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 consolidated 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 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 280,000,000 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 with broad authority to determine voting, dividend, conversion, and other rights. As of March 8, 2023, the Company has outstanding, common stock or securities convertible into common stock, totaling 4,503,977 shares. As a result, the Company is authorized to issue up to an additional 275,496,023 shares of common stock or common stock equivalents under its certificate of incorporation as amended. Additionally, pursuant to the initial issuance of (i) 1,000,000 shares of Series A 4.5% Convertible Preferred Stock, of which 200,000 shares are outstanding and (ii) 1,460 shares of Series B Convertible Preferred Stock, of which no shares are outstanding, the Company is authorized to issue up to an additional 6,800,000 shares of preferred stock. 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.
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General Risk Factors
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.
Future sales of substantial amounts of our common stock, or the possibility that such sales could occur, could adversely affect the market price of our common stock.
Future sales in the public market of shares of our common stock, including shares issued upon exercise of our outstanding stock options, or the perception by the market that these sales could occur, could lower the market price of our common stock or make it difficult for us to raise additional capital.
Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our securities.
Stockholders may, from time to time, engage in proxy solicitations or advance stockholder proposals, or otherwise attempt to effect changes and assert influence on our Board and management. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of our Board could have an adverse effect on our operating results and financial condition. A proxy contest would require us to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by our Board and management, diverting their attention from the pursuit of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the composition of our Board or senior management team arising from a proxy contest could lead to the perception of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it more difficult to pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel and business partners, any of which could adversely affect our business and operating results. If individuals are ultimately elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders. We may choose to initiate, or may become subject to, litigation as a result of the proxy contest or matters arising from the proxy contest, which would serve as a further distraction to our Board and management and would require us to incur significant additional costs. In addition, actions such as those described above could cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Securities class action litigation could divert our management’s attention and harm our business and could subject us to significant liabilities.
The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the equity securities of life sciences and biotechnology companies. These broad market fluctuations may cause the market price of our ordinary shares to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology and biopharma companies have experienced significant stock price volatility in recent years. Even if we are successful in defending claims that may be brought in the future, such litigation could result in substantial costs and may be a distraction to our management and may lead to an unfavorable outcome that could adversely impact our financial condition and prospects.
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Item 1B. Unresolved Staff Comments.
None
Item 2. Properties.
The Company leases office space for its corporate headquarters under a non-cancelable facility operating lease for 2,747 square feet located in Carlsbad, California. The initial contractual term is for 39-months commencing on June 1, 2022 and expiring on August 31, 2025. The Company has the option to renew the lease for an additional 36-month period at the prevailing market rent upon completion of the initial lease term.
For additional information regarding our lease agreements, see Note 11 of the consolidated financial statements included in this Annual Report on Form 10-K.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings at this time. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe it is a party to any claim or litigation the outcome of which, if determined adversely to the Company, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company's common stock trades on the Nasdaq Capital Market under the symbol "PALI." On March 17, 2023, the last reported sale price for the Company's common stock on the Nasdaq Capital Market was $1.90 per share.
Holders
As of December 31, 2022, there were approximately 180 holders of record of the Company's common stock, which does not include stockholders who hold shares in street name or stockholders whose shares may be held in trust by other entities.
Dividend Policy
The Company has never declared or paid cash dividends on its common stock. The Company currently intends to retain all available funds and any future earnings for use in the operation of its business and does not anticipate paying any dividends on its common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of the Company's Board and will depend on, among other factors, the Company's financial condition, operating results, capital requirements, contractual restrictions, general business conditions and other factors that its Board may deem relevant.
Recent Sales of Unregistered Equity Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Reserved.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results, performance or achievements could differ materially from any future results, performance or achievements discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors.”
OVERVIEW
The Company is a biopharmaceutical company focused on developing therapeutics that protect the integrity of the intestinal barrier. The Company's lead therapeutic candidate, LB1148, is a novel oral liquid formulation of the well-characterized digestive enzyme inhibitor tranexamic acid (“TXA”) that is currently being developed for administration prior to surgeries that are at risk of disrupting the intestinal epithelial barrier. By inhibiting the activity of digestive proteases, the Company believes that LB1148 has the potential to reduce the formation of postoperative adhesions between intra-abdominal tissues and accelerate the time to the return of normal gastrointestinal ("GI") function.
Clinical and Regulatory Overview
Prevention of Postoperative Abdominal Adhesions: GI Surgery
Status of the U.S. Phase 2 Adhesions Study
Going forward, the Company will prioritize the advancement of its U.S. Phase 2 adhesions study, which, it believes, will maximize the value of its current product pipeline. Management and the Company’s board of directors (the “Board”) remain confident in its potential to support advancement to a U.S. Phase 3 study. As discussed below, the Company has decided to pause its U.S. Phase 3 study evaluating return of bowel function in adult patients undergoing gastrointestinal surgery. In pausing this U.S. Phase 3 study, the Company will narrow its focus to the continued advancement of its U.S. Phase 2 adhesions study.
On December 16, 2022, the Company announced that it had enrolled a total of 35 of the planned 70 patients in its Phase 2 study. Of the patients enrolled, as of March 2, 2023, 31 have completed their first surgery, and nine have completed a second surgery, which is a primary assessment endpoint for data under the current study protocol. The Company believes that the data collected to date is sufficient for its evaluation purposes, including an evaluation of its risk profile, and for such reason, the Company is voluntarily ceasing enrollment in the trial. Palisade expects to report topline data from the 35 patients in the second quarter of 2023.
The Company is currently planning a dose optimization study for all indications to determine if a different dosing protocol in healthy volunteers would enhance the risk profile of LB 1148 while simultaneously providing efficacy. It is anticipated that this study will generate pharmacokinetic and pharmacodynamic data across multiple doses in patients, with enrollment expected to commence in the second quarter of 2023.
Postoperative Return of Bowel Function: GI Surgery
In May 2022, the Company’s co-development partner in China received clearance from the Center for Drug Evaluation of the National Medical Products Administration of the People’s Republic of China to proceed with their Phase 3 clinical trial to evaluate LB1148 for accelerated return of bowel function in adult patients undergoing gastrointestinal surgery. In June 2022, based on data generated by this co-development partner in its earlier Phase 2 study, the Company initiated a Phase 3 clinical trial in the U.S. evaluating LB1148 to accelerate the return of bowel function in adult patients undergoing gastrointestinal surgery.
Status of the U.S. Phase 3 Return of Bowel Function Study
In late September of 2022, the Company's board of directors (the "Board"), in connection with a special clinical subcommittee it appointed, initiated a review of the Company’s operations, including its ongoing clinical programs. As part of the review, the Company engaged the services of independent third-party clinical development experts to assist in the review. In October of 2022, the review identified that in 2020, a former member of the Company’s
60
management received unblinded clinical data related to bowel function from a subset of patients in the Company’s ongoing U.S. Phase 2 study.
Upon discovery of this information, the special clinical subcommittee of the Board commenced a thorough review of the Company’s ongoing clinical programs. As a result of the review, the Company believes that the current U.S. Phase 3 study protocol requires additional standardization across sites and further clarification in the definition of endpoints to permit an adequate assessment of the efficacy of LB1148 to recover GI function. The Company does not believe that the favorable safety and tolerability profiles of LB1148 were impacted by these findings.
Given the foregoing, as well as the financial resources available to the Company at this time, the Company believes it is in its stakeholders’ best interests to pause enrollment in the U.S. Phase 3 study in order to determine next steps for the study.
Notwithstanding the pausing of the trial, the Company remains optimistic as to the efficacy of LB1148 for the return of bowel function based on its co-development partner’s Phase 2 data and their plan to continue its Phase 3 study in China.
Financial Overview
Financial Results
The Company's operating loss for the year ended December 31, 2022 was $15.7 million, which consisted of research and development expense and general and administrative expense of $6.5 million and $8.8 million, respectively, and restructuring costs of $0.4 million. Net cash used in operating activities was $13.4 million for the year ended December 31, 2022, of which $1.3 million of cash usage was attributable to changes in operating assets and liabilities.
Recent Financings and Warrant Exercises
In May 2022, the Company completed a registered direct equity offering for net proceeds of $1.4 million consisting of gross proceeds of $2.0 million less equity issuance costs of approximately $0.6 million. In August 2022, the Company completed an underwritten public equity offering for net proceeds of $11.5 million consisting of gross proceeds of $13.8 million, including the full exercise of the underwriter's overallotment offering, less equity issuance costs of approximately $2.3 million. Finally, on January 4, 2023, the Company completed a registered direct offering and concurrent private placement for net proceeds of approximately $2.1 million consisting of gross proceeds of $2.5 million less equity issuance costs of approximately $0.4 million.
As of December 31, 2022, holders of 1.4 million common stock purchase warrants issued pursuant to the Company’s August underwritten public offering (the "August Warrants") have exercised such warrants for gross cash proceeds of $3.68 million, $1.4 million of which was receivable to the Company as of December 31, 2022. Subsequent to December 31, 2022, an additional 0.5 million Series 1 Warrants and Series 2 Warrants have been exercised for additional gross cash proceeds of $1.2 million.
The Company intends to use the net proceeds from its recent equity financings for working capital and general corporate purposes, including the development of the Company’s lead product candidate LB1148. With the additional cash proceeds of $4.7 million received subsequent to year end as a result of the registered direct offering and concurrent private placement, which closed on January 4, 2023, and cash received from warrant exercises, combined with the Company's cash and cash equivalents balance of $12.4 million as of December 31, 2022, the Company believes it has sufficient cash to fund its operations and clinical programs beyond its U.S. Phase 2 adhesions study topline data readout expected in the second quarter of 2023, and into mid-2024.
61
Reverse Stock Split
On November 15, 2022, the Company effected a 1-for-50 reverse stock split of its issued and outstanding common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, each of the Company’s shareholders received one new share of common stock for every 50 shares such shareholder held immediately prior to the effective time of the Reverse Stock Split. The Reverse Stock Split affected all the Company’s issued and outstanding shares of common stock equally. The par value and authorized shares of the Company's common stock was not adjusted as a result of the Reverse Stock Split. The Reverse Split also affected the Company’s outstanding stock options, common stock warrants and other exercisable or convertible securities and resulted in the shares underlying such instruments being reduced and the exercise price being increased proportionately. Unless otherwise noted, all common stock shares, common stock per share data and shares of common stock underlying convertible preferred stock, stock options and common stock warrants included in these financial statements, including the exercise price of such equity instruments, as applicable, have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.
COVID-19
In April 2020, as a result of impacts and risks associated with the COVID-19 pandemic ("COVID-19"), the Company paused enrollment and program activities surrounding the Company’s clinical trials of its lead therapeutic candidate, LB1148, due primarily to slower enrollment. The Company's U.S Phase 2 clinical study for the prevention of postoperative abdominal adhesions re-started in February 2022, and in June 2022 the Company initiated its U.S Phase 3 clinical study for the return of bowel function. Notwithstanding, as described above, the Company paused enrollment in the U.S. Phase 3 clinical study for the return of bowel function pending the determination of next steps for the study. The Company cannot predict how legal and regulatory responses to ongoing concerns about COVID-19 or other major public health issues will impact the Company’s business, nor can it predict potential adverse impacts related to the availability of capital to fund the Company’s operations. Any of these factors, alone or in combination with others, could harm the Company’s business, results of operations, financial condition or liquidity. However, the magnitude, timing, and duration of any such potential financial impacts cannot be reasonably estimated at this time.
Refer to Note 1 in Part II, Item 8. "Financial Statement and Supplemental Data" of this Annual Report on Form 10-K for further discussion of COVID-19 and the impact it has had on the Company's business operations. For further discussion of the risks related to COVID-19, see Item 1A. "Risk Factors" in Part I of this Annual Report on Form 10-K.
FINANCIAL OVERVIEW
Amounts discussed herein related to the Company's financial condition and results of operations prior to the closing of the Merger are representative of LBS’s operations. The financial condition and results of operations 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.
Revenue
The Company generated no revenues from the sale of its products for any of the periods presented.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the clinical development of the Company's lead product candidate LB1148, which include:
62
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, clinical development, and regulatory activities. The Company 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. The Company primarily uses internal resources to conduct its research as well as for managing its preclinical development, process development, and clinical development activities.
General and Administrative Expenses
General and administrative expenses consist primarily of salary and employee-related costs and benefits, professional fees for legal, intellectual property, investor and public relations, accounting and audit services, insurance costs, director's fees and stipends, and general corporate expenses.
Going Concern
The Company’s management has disclosed in Note 1 to the consolidated financial statements included herein that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the filing date of this Annual Report on Form 10-K. 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 mid-2024 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 Annual Report on Form 10-K and for one year from the issuance of the consolidated financial statements.
Results of Operations
The following table summarizes our results of operations for the year ended December 31, 2022 and 2021 (in thousands):
|
|
Year Ended December 31, |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
$ |
6,547 |
|
|
$ |
2,430 |
|
|
$ |
4,117 |
|
|
|
169 |
% |
In-process research and development |
|
|
— |
|
|
|
30,117 |
|
|
|
(30,117 |
) |
|
n/a |
|
|
General and administrative |
|
|
8,764 |
|
|
|
9,307 |
|
|
|
(543 |
) |
|
|
(6 |
)% |
Restructuring costs |
|
|
410 |
|
|
|
— |
|
|
|
410 |
|
|
n/a |
|
|
Total operating expenses |
|
|
15,721 |
|
|
|
41,854 |
|
|
|
(26,133 |
) |
|
|
(62 |
)% |
Loss from operations |
|
|
(15,721 |
) |
|
|
(41,854 |
) |
|
|
26,133 |
|
|
|
(62 |
)% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gain on forgiveness of PPP loan |
|
|
— |
|
|
|
279 |
|
|
|
(279 |
) |
|
n/a |
|
|
Loss on issuance of secured debt |
|
|
— |
|
|
|
(686 |
) |
|
|
686 |
|
|
n/a |
|
|
Gain on change in fair value of warrant liability |
|
|
2,426 |
|
|
|
23,033 |
|
|
|
(20,607 |
) |
|
|
(89 |
)% |
Gain on change in fair value of share liability |
|
|
— |
|
|
|
91 |
|
|
|
(91 |
) |
|
n/a |
|
|
Interest expense |
|
|
(13 |
) |
|
|
(2,398 |
) |
|
|
2,385 |
|
|
|
(99 |
)% |
Other income |
|
|
158 |
|
|
|
47 |
|
|
|
111 |
|
|
|
236 |
% |
Loss on issuance of Leading Biosciences, Inc. Series 1 Preferred Stock |
|
|
— |
|
|
|
(1,881 |
) |
|
|
1,881 |
|
|
n/a |
|
|
Loss on issuance of warrants |
|
|
(1,110 |
) |
|
|
(3,247 |
) |
|
|
2,137 |
|
|
|
(66 |
)% |
Total other income, net |
|
|
1,461 |
|
|
|
15,238 |
|
|
|
(13,777 |
) |
|
|
90 |
% |
Net loss |
|
$ |
(14,260 |
) |
|
$ |
(26,616 |
) |
|
$ |
12,356 |
|
|
|
(46 |
)% |
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Research and Development Expenses
The increase in research and development expenses of approximately $4.1 million, or 169%, from $2.4 million for the year ended December 31, 2021 to $6.5 million for the year ended December 31, 2022 is attributable to the Company's increased clinical trial activities as a result the resuming of patient enrollment in the Company's phase 2 clinical study of the prevention of postoperative abdominal adhesions and the initiation of enrollment in its phase 3 clinical study of the accelerated return of bowel function following gastrointestinal ("GI") surgery. Both of these studies, which had been virtually halted in early 2021, began clinical activities again at the end of 2021. The phase 2 clinical study of the prevention of postoperative abdominal adhesions began enrolling patients again in the second quarter of 2022 and the phase 3 clinical study of the accelerated return of bowel function following GI surgery began enrolling patients early in the third quarter of 2022. Accordingly, the majority of the increase in clinical operations expenses for the year ended December 31, 2022 compared to 2021 is the result of increased investigator site activations, clinical vendor charges, and consultant and contract labor charges, which increased by $1.1 million, $0.4 million and $0.3 million, respectively, compared to last year. Regulatory costs were higher by $0.2 million compared to last year concurrent with the Company receiving phase 3 clearance for its postoperative return of bowel function study. Also contributing to the year-over-year increase was higher drug manufacturing-related costs of $0.8 million for the year ended December 31, 2022 compared to 2021, primarily due to the scale up, and process and analytical method optimization associated with the production and packaging of LB1148. Net research and development employee-related costs increased by $1.6 million for the year ended December 31, 2022 compared to 2021 in line with the increased headcount to support the ramp up in clinical activities, which were offset by a $0.3 decrease in stock-based compensation expense for the year ended December 31, 2022 compared to 2021.
As previously disclosed, in the fourth quarter of 2022 the Company paused its Phase 3 study and is now directing its clinical focus to the continued advancement of its U.S. Phase 2 adhesions study.
In-Process Research and Development
For the year ended December 31, 2021, the Company recognized an in-process research and development expense of $30.1 million associated with the Merger. There was no such expense for the year ended December 31, 2022.
General and Administrative Expenses
General and administrative expenses decreased by approximately $0.5 million, or 6%, from $9.3 million for the year ended December 31, 2021 to $8.8 million for the year ended December 31, 2022, primarily as a result of a year-over-year decrease in stock-based compensation expense of $0.6 million. The decrease in stock-based compensation expense in 2022 compared to 2021 was due to (i) a $0.4 million incremental expense recognized in the fourth quarter of 2021 due to the modification of certain outstanding stock options and (ii) approximately $0.2 million of expense recognized in the second quarter of 2021 related to stock options granted to executive management as a result of the successful completion of the Merger; neither of which recurred in 2022.
Increased general and administrative expenses associated with operating as a public company for the full twelve-month period, as compared to the 8-month post-Merger period that the Company's accounting predecessor, LBS, was public, included (i) insurance costs associated with being a public company, which were $0.4 million higher for the year ended December 31, 2022 compared to 2021, (ii) professional fees and investor relations fees, which were higher by $0.1 million for the year ended December 31, 2022 compared to 2021, and (iii) shareholder services costs which were higher by $0.1 million for the year ended December 31, 2022 compared to 2021. These increases were largely offset by cost-saving opportunities implemented by the Company in the third and fourth quarters of 2022, including those associated with the cost-reduction plan announced on September 9, 2022, which are expected to continue in 2023.
Restructuring Expenses
The Company has recognized restructuring costs of $0.4 million for the year ended December 31, 2022, consisting of severance and benefits payments pursuant to employment agreements and the execution of severance and release agreements with employees terminated under a cost-reduction plan announced on September 9, 2022. There were no
64
restructuring costs or related liabilities recognized for the year ended December 31, 2021. The Company does not expect to incur any other significant costs associated with the cost reduction-plan announced on September 9, 2022.
Other income (expense)
Other income, net decreased by $13.8 million, or 90%, to $1.5 million for the year ended December 31, 2022 from $15.2 million for the year ended December 31, 2021. The year ended December 31, 2021 included net other expenses of $2.2 million for which there were no comparable expenses in the year ended December 31, 2022, including: (i) a $1.9 million loss recognized on the issuance of LBS Series 1 Preferred Stock, (ii) a $0.7 million non-cash loss recorded on the issuance of secured debt in connection with the discount given for the pre-Merger senior secured debt, (iii) a $0.3 million gain on the forgiveness of the Company's Paycheck Protection Program ("PPP") loan, and (iv) a $0.1 million gain on the change in the fair value of a share liability owed to a former Seneca shareholder.
The year ended December 31, 2022 includes a $2.4 million non-cash gain associated with the revaluation of liability-classified warrants in the period, which was partially offset by a $1.1 million non-cash loss on the issuance of warrants. On January 31, 2022 (the "Effective Date"), the Company entered into an agreement to irrevocably waive any adjustment to the exercise price of the certain warrants held by an investor from and after the Effective Date for the Company's issuances of equity or equity-linked securities at a price below the exercise price of the related warrants (the "January 2022 Waiver Agreement"). As consideration for this waiver, pursuant to the January 2022 Waiver Agreement, the Company issued the investor 45,000 warrants (the "January 2022 Warrants"). The $1.1 million non-cash loss on the issuance of the January 2022 Warrants represents the fair value of the warrants on the date of issuance, January 31, 2022. The year ended December 31, 2021 includes a $23.0 million non-cash gain associated with the revaluation of liability-classified warrants in the period, $3.9 million of which is attributable to a gain resulting from the modification of certain liability-classified warrants, partially offset by $3.2 million of costs associated with on the issuance of warrants in 2021.
The remainder of the net decrease in other income (expense), net, is due to lower interest expense for the year ended December 31, 2022 as the prior year period included a $1.6 million non-cash interest charge associated with a debt discount on pre-Merger debt, and increased interest expense of $0.8 million due to a higher debt balance outstanding during the year. Other income was approximately $0.1 million higher in 2022 as a result of higher interest rates on the Company's short-term investments of cash on hand, which were higher in 2022 due to the Company's increased financing activities.
Liquidity and Capital Resources
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 common stock warrants, and to a lesser degree grants and research contracts as well as the licensing of its intellectual property to third parties. Refer to the paragraph under the heading "Going Concern" in the Financial Overview section above for management's assessment of the Company’s ability to continue as a going concern.
Sources of Liquidity
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 may receive 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 (i) general political or economic conditions, (ii) inflation, (iii) rising interest rates, (iv) ongoing supply chain disruptions, (v) the ongoing conflict in the Ukraine, (vi) limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry, (vii) or a resurgence of COVID-19, COVID-19 variants, 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 on its business, financial condition, and results of operations.
65
Recent Financings
May 2022 Registered Direct Offering
On May 6, 2022, the Company entered into securities purchase agreements with certain investors pursuant to which it agreed to sell and issue, in a registered direct offering (the “May 2022 Registered Direct Offering”), an aggregate of 72,935 shares of its common stock, par value $0.01 per share, at a purchase price of $27.50 per share (all amounts adjusted for Reverse Stock Split) and, in a concurrent private placement, also agreed to sell and issue to such purchasers warrants (the “May 2022 Purchase Warrants”) to purchase up to 72,935 shares of common stock.
In connection with the May 2022 Registered Direct Offering and concurrent private placement transaction, the Company engaged a placement agent. The Company issued placement agent warrants (“May 2022 Placement Agent Warrants”) to purchase an aggregate of 4,376 shares of its common stock. The May 2022 Placement Agent Warrants and the May 2022 Purchase Warrants are referred to collectively as the May 2022 Warrants.
The net cash proceeds from the May 2022 Registered Direct Offering of $1.4 million consisted of gross cash proceeds of $2.0 million less equity issuance costs of approximately $0.6 million.
August 2022 Public Offering
On August 16, 2022, the Company closed on a registered public offering pursuant to which the Company agreed to issue and sell (i) 987,200 shares of the Company's common stock, par value $0.01 per share, (ii) 1,460 shares of Series B Convertible Preferred Stock, of which each share is convertible into 80 shares of the Company's common stock, (iii) 1,104,000 Series 1 warrants with a term of one year from the date of issuance (“Series 1 Warrant”) to purchase one share of the Company's common stock, and (iv) 1,104,000 Series 2 warrants with a term of five years from the date of issuance (“Series 2 Warrant”) to purchase one share of the Company's common stock (the "August 2022 Public Offering"). The warrants became exercisable beginning on the date of stockholder approval of the exercisability of the warrants, which was received on October 6, 2022. Gross proceeds from the August 2022 Public Offering, including the full exercise of the underwriter overallotment option, were $13.8 million and net proceeds were approximately $11.5 million after deducting equity issuance costs of $2.3 million, which includes the underwriter discount, professional fees, and the fair value of the warrants issued to the underwriter of the August 2022 Public Offering, Ladenburg Thalmann & Co. Inc. (the "Underwriter"). All shares of the Series B Convertible Preferred Stock have been converted into shares of the Company's common stock as of December 31, 2022.
January 2023 Registered Direct Offering and Private Placement
On January 4, 2023, the Company announced that it had closed on a previously announced agreement with certain institutional and accredited investors pursuant to which it agreed to sell and issue, in a registered direct offering (the “Registered Offering”), an aggregate of (i) 476,842 shares of the Company's common stock, par value $0.01 per share, at a purchase price per share of $2.375, and (ii) 37,000 pre-funded warrants to purchase shares of the Company's common stock at a purchase price of $2.3749, with such warrants having an exercise price of $0.0001 per share and a perpetual term. Additionally, in a concurrent private placement, the Company also agreed to sell and issue to such purchasers, an aggregate of (i) 538,789 pre-funded warrants to purchase shares of the Company's common stock at an exercise price of $0.0001 per share, and a perpetual term; and (ii) 1,052,631 warrants to purchase shares of the Company's common stock at an exercise price of $2.375 per share and a term of five (5) years (collectively, the “January 2023 Offering”). All of the warrants are immediately exercisable from their date of issuance.
Pursuant to a placement agency agreement dated as of December 30, 2022, the Company engaged Ladenburg Thalmann & Co. Inc. (the “Placement Agent”), to act as the exclusive placement agent in connection with the Registered Offering and concurrent private placement transaction. The Company issued warrants to the Placement Agent to purchase an aggregate of 63,158 shares of the Company's common stock (the "Placement Agent Warrants"). The Placement Agent Warrants have an exercise price of $2.9688 per share and a term of five (5) years. The Placement Agent Warrants are immediately exercisable from issuance.
Gross proceeds from the January 2023 Offering were $2.5 million and net proceeds are expected to be approximately $2.1 million after deducting equity issuance costs of approximately $0.4 million.
66
Warrant Exercises
As of December 31, 2022, holders of 1.4 million Series 1 and Series 2 common stock purchase warrants issued pursuant to the August 2022 Public Offering have exercised such warrants for gross cash proceeds of $3.68 million, $1.4 million of which was receivable to the Company as of December 31, 2022. Subsequent to December 31, 2022, an additional 0.5 million Series 1 and Series 2 common stock warrants have been exercised for additional gross cash proceeds of $1.2 million.
The Company intends to use the net proceeds from its recent equity financings for working capital and general corporate purposes, including the development of the Company’s lead product candidate LB1148. With the additional cash proceeds of $4.7 million received subsequent to year end as a result of the January 2023 Offering, and cash received from Series 1 and Series 2 warrant exercises, combined with the Company's cash and cash equivalents balance of $12.4 million as of December 31, 2022, the Company believes it has sufficient cash to fund its operations and clinical programs beyond its U.S. Phase 2 adhesions study topline data readout expected in the second quarter of 2023, and into mid-2024.
Cash Flows
As of December 31, 2022, the Company had $12.4 million in cash, cash equivalents and restricted cash. The following table shows a summary of the Company's cash flows for the years ended December 31, 2022 and 2021 (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net cash used in operating activities |
|
$ |
(13,360 |
) |
|
$ |
(14,773 |
) |
Net cash used in investing activities |
|
$ |
(10 |
) |
|
$ |
(54 |
) |
Net cash provided by financing activities |
|
$ |
15,258 |
|
|
$ |
24,609 |
|
Net Cash Used in Operating Activities
Cash used in operating activities of $13.4 million for the year ended December 31, 2022 reflects a $14.3 million net loss adjusted for $1.3 million of net cash inflows related to changes in operating assets and liabilities, and certain non-cash items including: (i) a $1.1 million loss recognized from the issuance of the January 2022 Warrants, (ii) a $2.4 million gain recognized for the change in the fair market value of the warrant liabilities in the period, and (iii) a $1.0 million non-cash expense recognized for stock-based compensation.
Cash used in operating activities of $14.8 million for the year ended December 31, 2021 includes a $26.6 million net loss adjusted for $4.8 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 the PPP loan, (ii) $1.7 million in costs allocated to the warrant issuances not related to the Merger, (iii) $1.9 million non-cash expense for stock-based compensation, (iv) $23.0 million gain recorded for the change in the fair market value of the warrant liabilities in the period, of which $3.9 million resulted from the modification of certain liability-classified warrants, (v) $0.1 million gain recorded for the change in the fair market value of the share liability, and (vi) $0.7 million loss on the issuance of the senior secured debt. Additionally, the year ended December 31, 2021 includes net non-cash expenses of $35.7 million, which were incurred directly in connection with the Merger.
Net Cash Used in Investing Activities
For the year ended December 31, 2022, cash used in investing activities consisted of approximately $10,000 used to purchase property and equipment, primarily leasehold improvements. For the year ended December 31, 2021, cash used in 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 2021.
Net Cash Provided by Financing Activities
For the year ended December 31, 2022, cash provided by financing activities of $15.3 million was attributable to cash proceeds of $1.8 million from the May 2022 Registered Direct Offering and $12.6 million from the August 2022 Public Offering and cash proceeds from the redemption of Series 1 and Series 2 warrants, partially offset by payments
67
of equity issuance costs of $0.6 million during the year and payments made on the Company's insurance financing arrangements of $0.8 million during the year.
For the year ended December 31, 2021, cash provided by financing activities of $24.6 million consisted of $19.9 million in net proceeds from the issuance of LBS Series 1 Preferred Stock, $5.2 million in net proceeds from the issuance of common stock and warrants, and $1.3 million in proceeds from the issuance of senior secured debt. These increases were partially offset by payments on debt of $1.4 million, redemption of warrants of $0.1 million, payment of debt issuance costs of $0.2 million and payment of equity issuance costs of $0.1 million.
Contractual Obligations
Office Lease
On May 12, 2022, the Company entered into a new, non-cancelable facility operating lease (the "Corporate Office Lease") of office space for its corporate headquarters, replacing its existing corporate headquarters lease that expired on July 31, 2022. The Corporate Office Lease is for 2,747 square feet of an office building in Carlsbad, California. The initial contractual term is for 39-months commencing on June 1, 2022 and expiring on August 31, 2025. The Company has the option to renew the Corporate Office Lease for an additional 36-month period at the prevailing market rent upon completion of the initial lease term. The Company has determined it is not reasonably certain that it will exercise this renewal option.
Commencing on June 1, 2022, the Company is subject to contractual monthly lease payments of $10,850, plus certain utilities, for the first 12 months with 3 percent escalations at the first, second and third lease commencement anniversaries. As of December 31, 2022, the total remaining future minimum lease payments associated with the Corporate Office Lease of approximately $316,000, less imputed interest of $46,000, will be paid over the remaining lease term of approximately 2.7 years.
Insurance Financing Arrangements
Consistent with past practice, on May 9, 2022 and May 24, 2022, the Company entered into agreements to finance certain insurance policies which renewed in April 2022 and May 2022. The financing arrangements entered into on May 9, 2022 and May 24, 2022 have stated interest rates of 3.82% and 6.92%, respectively, and are payable over a 9-month period and 10-month period, respectively, with the first payment commencing May 27, 2022. The insurance financing arrangements are secured by the associated insurance policies. As of December 31, 2022, the aggregate remaining balance under the Company's insurance financing arrangements was $88,000.
Other than the final insurance financing arrangements payments due, as of December 31, 2022, the Company has no other minimum debt payments required in 2023 or thereafter.
Future Liquidity Needs
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 operating needs 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 mid-2024 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.
Critical Accounting Policies and Estimates
The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments, and assumptions that impact the reported amounts of assets and liabilities and the 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 historical experience, known trends, events and various other factors that it believes are reasonable under the
68
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. In making estimates and judgments, management employs critical accounting policies.
The Company's significant accounting policies used in the preparation of the consolidated financial statements are described in more detail in Note 2 in Part II, Item 8. "Financial Statement and Supplemental Data" of this Annual Report on Form 10-K. 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:
Accrued research and development expenses
The Company is 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. This process involves reviewing open contracts and purchase requisitions, communicating with Company personnel and consultants to identify services that have been performed on the Company's behalf, and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company's service providers invoice the Company monthly in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date based on facts and circumstances known to it at that time.
The financial terms of the Company's contracts with CROs, clinical sites, manufacturers, vendors and consultants are subject to negotiation and 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. The Company reflects research and development expenses associated with its clinical trial activities by matching those expenses with the period in which the Company estimates services and efforts are expended. The Company accounts for research and development expenses according to the progress of the underlying study as measured by the timing of various aspects of the study or related activities, such as the successful enrollment of subjects and the completion of clinical study milestones. 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 and adjusts accordingly. There may be instances in which payments made to the Company's vendors will exceed the level of services provided and result in a prepayment of the clinical expense.
Other examples of estimated accrued research and development expenses include fees paid to:
Although the Company does not expect its estimates to be materially different from amounts actually incurred, if the Company's estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in the Company reporting amounts that are too high or too low in any particular period.
Derivative Financial Instruments
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 the Monte-Carlo simulation model when a variety of future events and outcomes is required to be factored into the valuation based on the terms of the underlying derivative instrument. Derivative instruments are valued at inception, upon events such as an exercise of the underlying financial instrument, and at subsequent reporting periods. 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
69
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.
The Company accounts for its common stock warrants in accordance with ASC 480, Distinguishing Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 480 and 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 on the grant date and remeasured at fair value at each balance sheet date with the offsetting adjustments recorded in change in fair value of warrant liability within the consolidated statements of operations. If the terms of a common stock warrant previously classified as a liability are amended and pursuant to such amendment meet the requirements to be classified as equity, the common stock warrants are reclassified to equity at the fair value on the date of the amendment and are not subsequently remeasured. Common stock warrants classified as equity are recorded on a relative fair value basis when they are issued with other equity classified financial instruments.
See Note 6 in the consolidated financial statements of this Annual Report on Form 10-K for additional information and specific assumptions used in applying the Black-Scholes option pricing model and the Monte Carlo simulation valuation model to determine the estimated fair value of the Company's liability-classified warrants issued in the years ended December 31, 2022 and 2021. As of December 31, 2022 and 2021, the Company's liability-classified warrants had a fair value of $0.1 million and $2.7 million, respectively, and in the years ended December 31, 2022 and 2021, the Company recognized gains associated with the change in fair value of warrants of $2.4 million and $23.0 million, respectively. The significant decrease in the fair value of the Company's liability-classified warrants from December 31, 2021 to December 31, 2022 was the result of the $2.4 million decrease in the fair value of the outstanding warrants, due primarily to a significant decrease in the market price of Company's common stock over the period, and a $1.3 million decrease due to the fair value of warrants exercised in the period, partially offset by the initial fair value of liability-classified warrants issued during the year.
Recently Adopted Accounting Pronouncements
See Note 2 to the consolidated financial statements included elsewhere in this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide the information required by this Item.
70
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Palisade Bio, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Palisade Bio, Inc. (the “Company”) as of December 31, 2022, and the related consolidated statement of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
72
Accounting for Complex Financial Instruments
As described in Notes 7 and 8 to the consolidated financial statements, the Company executed several transactions during the year that included the issuance of convertible preferred stock and warrants.
We identified the accounting for these complex financial instruments as a critical audit matter. This includes both the evaluation of the various features as potential embedded derivatives and the determination of the respective fair value of the instruments and embedded features. The application of the accounting guidance applicable to the transactions is complex, and therefore, applying such guidance to the contract terms is complex and requires significant management judgement. Auditing these elements involved especially complex auditor judgement due to the nature of the terms of these instruments, and the effort required to address these matters, including the extent of specialized skills and knowledge required.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others:
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since 2022.
Tewksbury, Massachusetts
March 22, 2023
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Palisade Bio, Inc.
Carlsbad, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Palisade Bio, Inc. (the “Company”) as of December 31, 2021, the related consolidated statements of operations, statements of convertible preferred stock and stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements.”) In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
74
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/
We served as the Company's auditor from 2017 to 2022.
March 17, 2022, except for the immaterial revision to previously issued financial statements as described in Note 3 and the impact of the reverse stock split on the 2021 financial statements as described in Note 2, as to which date is March 22, 2023
75
Palisade Bio, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
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December 31, |
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2022 |
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2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Prepaid expenses and other current assets |
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Total current assets |
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Restricted cash |
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Property and equipment, net |
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Right-of-use asset |
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Other noncurrent assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Accrued compensation and benefits |
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Current portion of lease liability |
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Debt |
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Total current liabilities |
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Warrant liability |
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Lease liability, net of current portion |
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Total liabilities |
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Stockholders' equity: |
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Series A Convertible Preferred Stock, |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
) |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
76
Palisade Bio, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
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Year Ended December 31, |
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2022 |
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2021 |
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Operating expenses: |
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Research and development |
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$ |
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$ |
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In-process research and development |
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General and administrative |
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Restructuring costs (Note 11) |
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Total operating expenses |
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Loss from operations |
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( |
) |
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( |
) |
Other income (expense): |
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Gain on forgiveness of PPP loan |
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Loss on issuance of secured debt |
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( |
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Gain on change in fair value of warrant liability |
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Gain on change in fair value of share liability |
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Interest expense |
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( |
) |
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( |
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Other income |
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Loss on issuance of Leading Biosciences, Inc. Series 1 Preferred Stock |
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( |
) |
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Loss on issuance of warrants |
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( |
) |
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( |
) |
Total other income, net |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Loss per common share*: |
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Basic |
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$ |
( |
) |
|
$ |
( |
) |
Diluted |
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$ |
( |
) |
|
$ |
( |
) |
Weighted average shares used in computing loss per common share: |
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Basic |
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Diluted |
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Net loss attributable to common shares - basic |
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$ |
( |
) |
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$ |
( |
) |
Net loss attributable to common shares - diluted |
|
$ |
( |
) |
|
$ |
( |
) |
(*) Basic and diluted loss per common share for the year ended December 31, 2021 adjusted to reflect the 1-for-50 reverse stock split effected on November 16, 2022.
The accompanying notes are an integral part of these consolidated financial statements.
77
Palisade Bio, Inc.
Consolidated Statements Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share amounts)
|
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Year Ended December 31, 2022 |
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Series B Convertible |
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Preferred Stock |
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Common Stock |
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Additional |
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Accumulated |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares* |
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Amount* |
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|||||||||
Balance, December 31, 2021 |
|
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— |
|
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$ |
— |
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|
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$ |
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$ |
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$ |
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$ |
( |
) |
|
$ |
|
||||||
Net loss |
|
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— |
|
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— |
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|
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— |
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|
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— |
|
|
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— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
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— |
|
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|
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|
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— |
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||
Issuance of common stock upon warrant exercises |
|
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— |
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— |
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|
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— |
|
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— |
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|
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|
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|
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— |
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||||
Issuance of common stock and warrants in May 2022 Registered Direct Offering, net of issuance costs of $ |
|
|
— |
|
|
|
— |
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|
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— |
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— |
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|
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|
|
|
|
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|
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— |
|
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||||
Issuance of Class A Units and Class B Units in August 2022 Public Offering, net of issuance costs of $ |
|
|
|
|
|
— |
|
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|
|
— |
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— |
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|
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|
|
|
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|
|
— |
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|
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|
|||||
Issuance of common stock upon conversion of Series B Convertible Preferred Stock |
|
|
( |
) |
|
|
— |
|
|
|
|
— |
|
|
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— |
|
|
|
|
|
|
|
|
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( |
) |
|
|
— |
|
|
|
— |
|
||
Reverse stock split fractional share settlement |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Adjustment to record the impact of exercise price reset on outstanding warrants related to down round provisions |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
Balance, December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||||||
(*) Adjusted to reflect the 1-for-50 reverse stock split effected on November 16, 2022.
The accompanying notes are an integral part of these consolidated financial statements.
78
Palisade Bio, Inc.
Consolidated Statements Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share amounts)
|
|
Year Ended December 31, 2021 |
|
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|
|
Series C Convertible |
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated |
|
|
Total |
|
||||||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
|
Shares |
|
|
Amount |
|
|
Shares* |
|
|
Amount* |
|
|
|
|
|
|
|
|
|
|
|||||||||
Balance, December 31, 2020 |
|
|
|
|
$ |
|
|
|
|
— |
|
|
$ |
— |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Issuance of common stock to vendor |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
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|
|||
Issuance of common stock warrants related to promissory note |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Issuance of Leading Biosciences, Inc. Series 1 Preferred shares upon conversion of senior secured debt |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Issuance of Leading Biosciences, Inc. Series 1 Preferred shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Conversion of Leading Biosciences, Inc. Series 1 Preferred stock to common shares upon Merger |
|
|
— |
|
|
|
— |
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
||
Conversion of Leading Biosciences, Inc. Series C Convertible Preferred shares to common shares upon Merger |
|
|
( |
) |
|
|
( |
) |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Issuance of common shares to former shareholders of Seneca upon Merger |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||
Acquisition of Seneca Series A Convertible Preferred Stock upon Merger |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Equity warrant put rights activated upon Merger |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Expiration of put rights on equity classified warrants |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Issuance of common stock upon warrant exercises |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Issuance of common stock and warrants in private placement, net of issuance costs of $ |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Conversion of share liability to common stock |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Conversion of restricted stock units to common stock |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance, December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||||||
(*) Adjusted to reflect the 1-for-50 reverse stock split effected on November 16, 2022.
The accompanying notes are an integral part of these consolidated financial statements.
79
Palisade Bio, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
|
|
|||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
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|
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|
||
Depreciation and amortization |
|
|
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|
||
In-process research and development |
|
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|
||
Noncash transaction costs shared with Seneca |
|
|
|
|
|
( |
) |
|
Noncash lease expense |
|
|
|
|
|
|
||
Gain on forgiveness of PPP loan |
|
|
|
|
|
( |
) |
|
Accretion of debt discount and non-cash interest expense |
|
|
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|
||
Loss on issuance of LBS Series 1 Preferred Stock |
|
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|
||
Loss on issuance of secured debt |
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|
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|
||
Loss on issuance of warrants |
|
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|
|
|
||
Change in fair value of warrant liabilities |
|
|
( |
) |
|
|
( |
) |
Change in fair value of share liability |
|
|
|
|
|
( |
) |
|
Stock-based compensation |
|
|
|
|
|
|
||
Other |
|
|
( |
) |
|
|
( |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Other receivables |
|
|
|
|
|
|
||
Prepaid and other assets and other noncurrent assets |
|
|
|
|
|
( |
) |
|
Accounts payable and accrued liabilities |
|
|
|
|
|
( |
) |
|
Accrued compensation |
|
|
( |
) |
|
|
( |
) |
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from investing activities: |
|
|
|
|
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|
||
Cash acquired in connection with the Merger |
|
|
|
|
|
|
||
Acquisition related costs paid |
|
|
|
|
|
( |
) |
|
Purchases of property and equipment |
|
|
( |
) |
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Payments on debt |
|
|
( |
) |
|
|
( |
) |
Proceeds from issuance of debt |
|
|
|
|
|
|
||
Proceeds from issuance of Leading Biosciences, Inc. Series 1 Preferred Stock |
|
|
|
|
|
|
||
Proceeds from issuance of common stock and warrants |
|
|
|
|
|
|
||
Proceeds (payments) from the redemption of warrants |
|
|
|
|
|
( |
) |
|
Payment of equity issuance costs |
|
|
( |
) |
|
|
( |
) |
Payment of debt issuance costs |
|
|
|
|
|
( |
) |
|
Net cash provided by financing activities |
|
|
|
|
|
|
||
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
Reconciliation of cash, cash equivalents and restricted cash to the balance sheets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
||
Total cash, cash equivalents and restricted cash |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these consolidated financial statements.
80
Palisade Bio, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
Right-of-use assets obtained in exchange for lease liabilities |
|
$ |
|
|
$ |
|
||
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Equity issuance costs included in accounts payable and accrued liabilities |
|
$ |
|
|
$ |
|
||
Non cash impact of exercise price reset on outstanding warrants related to down round provisions |
|
$ |
|
|
$ |
|
||
Issuance of common stock for the cashless exercise of warrants |
|
$ |
|
|
$ |
|
||
Fair value of warrants issued to placement agent |
|
$ |
|
|
$ |
|
||
Fair value of warrants issued to underwriter agent |
|
$ |
|
|
$ |
|
||
Issuance of common stock upon conversion of Series B Convertible Preferred Stock |
|
$ |
|
|
$ |
|
||
Insurance financing arrangements included in prepaid and other assets and other noncurrent assets |
|
$ |
|
|
$ |
|
||
Cash receivable for exercises of warrants included in prepaid and other current assets |
|
$ |
|
|
$ |
|
||
Transaction costs shared with Seneca |
|
$ |
|
|
$ |
|
||
Acquisition costs related to stock issuance |
|
$ |
|
|
$ |
|
||
Issuance of common stock to former Seneca stockholders |
|
$ |
|
|
$ |
|
||
Conversion of LBS Series C Convertible Preferred stock into common stock |
|
$ |
|
|
$ |
|
||
Net assets acquired in the Merger |
|
$ |
|
|
$ |
|
||
Acquisition related vesting of RSU’s assumed in the Merger |
|
$ |
|
|
$ |
|
||
Acquisition related fair value change in warrant liability assumed in the Merger |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these consolidated financial statements.
81
Palisade Bio, Inc.
Notes To Consolidated Financial Statements
1. Organization and Business
The Merger
On April 27, 2021, Leading Biosciences, Inc. (“LBS”) became a wholly owned subsidiary of Seneca Biopharma Inc. (“Seneca”) in accordance with the terms of the agreement and plan of merger and reorganization, dated as of December 16, 2020, (the “Merger Agreement”) by and among Seneca, Townsgate Acquisition Sub 1, Inc., a wholly owned subsidiary of Seneca (“Merger Sub”), and LBS, pursuant to which Merger Sub merged with and into LBS, with LBS surviving as a wholly owned subsidiary of Seneca (the “Merger”). Concurrent with the closing of the Merger, LBS outstanding common stock, common stock warrants and stock options for the purchase of LBS common stock were exchanged for Seneca common stock, Seneca common stock warrants, and options for the purchase of Seneca common stock, at a ratio of
Unless the context otherwise requires, references to the “Company,” “Palisade,” “Palisade Bio,” “we,” “our” or “us” in this report refer to Palisade Bio, Inc. and its subsidiaries. In addition, references to “Seneca” or “LBS” refer to these entities prior to the completion of the Merger.
Description of Business
The Company is a biopharmaceutical company focused on developing therapeutics that protect the integrity of the intestinal barrier. The Company's lead therapeutic candidate, LB1148, is a novel oral liquid formulation of the well-characterized digestive enzyme inhibitor tranexamic acid (“TXA”) that is currently being developed for administration prior to surgeries that are at risk of disrupting the intestinal epithelial barrier. By inhibiting the activity of digestive proteases, the Company believes that LB1148 has the potential to reduce the formation of postoperative adhesions between intra-abdominal tissues and accelerate the time to the return of normal gastrointestinal ("GI") function.
Liquidity and Going Concern
The Company has a limited operating history, and the sales and income potential of the Company’s business and market are unproven. The Company has experienced operating losses and negative cash flows from operations since its inception. At December 31, 2022, the Company had an accumulated deficit of $
Based on the Company’s current working capital, anticipated operating expenses, and anticipated net operating losses, there is substantial doubt about the Company's ability to continue as a going concern for a period of one year following the date that these consolidated financial statements are issued. The consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments for the recovery and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
82
Historically, the Company has funded its operations primarily through a combination of debt and equity financings. The Company plans to continue to fund its operations through cash and cash equivalents on hand, as well as through future equity offerings, debt financings, other third-party funding, and potential licensing or collaboration arrangements. Refer to Note 7, Stockholders' Equity (Deficit) and Note 15, Subsequent Events, for discussion of the recent financings undertaken by the Company. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to the Company. Even if the Company raises additional capital, it may also be required to modify, delay or abandon some of its plans which could have a material adverse effect on the Company’s business, operating results and financial condition and the Company’s ability to achieve its intended business objectives. Any of these actions could materially harm the Company’s business, results of operations and future prospects.
COVID-19
In April 2020, as a result of impacts and risks associated with the COVID-19 pandemic ("COVID-19"), the Company paused enrollment and program activities surrounding the Company’s clinical trials of its lead therapeutic candidate, LB1148, due primarily to slower enrollment. The Company's U.S. Phase 2 clinical study for the prevention of postoperative abdominal adhesions re-started in February 2022, and in June 2022 the Company initiated its U.S. Phase 3 clinical study for the return of bowel function. Notwithstanding, in the fourth quarter of 2022 the Company paused enrollment in the U.S Phase 3 clinical study for the return of bowel function upon determining that the study's protocol requires additional standardization across sites and further clarification in the definition of endpoints to permit an adequate assessment of the efficacy of LB1148 to recover GI function. The Company is currently assessing the next steps for the study. The Company cannot predict how legal and regulatory responses to ongoing concerns about COVID-19 or other major public health issues will impact the Company’s business, nor can it predict potential adverse impacts related to the availability of capital to fund the Company’s operations. Any of these factors, alone or in combination with others, could harm the Company’s business, results of operations, financial condition or liquidity. However, the magnitude, timing, and duration of any such potential financial impacts cannot be reasonably estimated at this time.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Dollar amounts contained in these consolidated financial statements are in whole numbers, unless otherwise indicated.
The accompanying consolidated financial statements prior to the closing of the Merger are representative of LBS’s operations as LBS was determined to be the accounting acquirer for financial reporting purposes. The 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 the Company's consolidated financial statements and all intercompany activity and transactions, if any, have been eliminated.
83
Reverse Stock Split
On November 15, 2022, the Company effected a 1-for-50 reverse stock split of its issued and outstanding common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, each of the Company’s shareholders received one new share of common stock for every 50 shares such shareholder held immediately prior to the effective time of the Reverse Stock Split. The Reverse Stock Split affected all the Company’s issued and outstanding shares of common stock equally. The par value and authorized shares of the Company's common stock was not adjusted as a result of the Reverse Stock Split. The Reverse Split also affected the Company’s outstanding stock options, common stock warrants and other exercisable or convertible securities and resulted in the shares underlying such instruments being reduced and the exercise price being increased proportionately. Unless otherwise noted, all common stock shares, common stock per share data and shares of common stock underlying convertible preferred stock, stock options and common stock warrants included in these financial statements, including the exercise price of such equity instruments, as applicable, have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments, and assumptions that impact the reported amounts of assets and liabilities and the 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 most significant estimates in the Company’s consolidated financial statements relate to clinical trial accruals and its derivative financial instruments. 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
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 December 31, 2022 and December 31, 2021, the Company held restricted cash of $
Deferred equity issuance costs consist of the legal, accounting and other direct and incremental costs incurred by the Company related to its equity offerings (refer to Note 15, Subsequent Events) or shelf registration statements. As of December 31, 2022, deferred equity issuance costs of $
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
84
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.
Convertible Preferred Stock
The Company’s Series C Convertible Preferred Stock has been classified as temporary equity, in accordance with authoritative guidance of Accounting Standard Codification ("ASC") 480-10-S99 for the classification and measurement of potentially redeemable securities, as the Series C Convertible Preferred Stock are redeemable for cash or other assets upon the occurrence of an event that is not solely within the Company’s control, including the liquidation, sale or transfer of control of the Company.
In connection with the Merger, the Series C Convertible Preferred Stock converted to the Company's common stock.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, restricted cash, other current receivables, accounts payable, accrued liabilities, debt and liability-classified warrants. The carrying amounts of financial instruments such as cash equivalents, restricted cash, other current receivables, 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 debt approximates its fair value due to the market rate of interest, which is based on level 2 inputs. The Company’s liability-classified warrants are carried at fair value based on level 3 inputs as defined below. None of the Company’s non-financial assets or liabilities are recorded at fair value on a nonrecurring basis.
The Company follows ASC 820, 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.
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:
Further information on the fair value of the Company's liability-classified financial warrants can be found at Note 6, Fair Value Measurements.
Derivative Financial Instruments
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 the Monte-Carlo simulation model. Derivative instruments are valued at inception, upon events such as an exercise of the underlying financial instrument, and at subsequent reporting periods. The classification of derivative instruments, including whether such instruments should be recorded as liabilities, is re-assessed at the end of each reporting period.
85
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.
The Company accounts for its common stock warrants in accordance with ASC 480, Distinguishing Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 480 and 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 on the grant date and remeasured at fair value at each balance sheet date with the offsetting adjustments recorded in change in fair value of warrant liability within the consolidated statements of operations. If the terms of a common stock warrant previously classified as a liability are amended and pursuant to such amendment meet the requirements to be classified as equity, the common stock warrants are reclassified to equity at the fair value on the date of the amendment and are not subsequently remeasured. Common stock warrants classified as equity are recorded on a relative fair value basis when they are issued with other equity classified financial instruments.
Leases
In accordance with ASC 842, Leases, the Company assesses contracts for lease arrangements at inception. Operating right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date equal to the present value of future lease payments using the implicit, if readily available, or incremental borrowing rate based on the information readily available at the commencement date. ROU assets include any lease payments as of commencement and initial direct costs but exclude any lease incentives. Lease and non-lease components are generally accounted for separately and the Company recognizes operating lease expense straight-line over the term of the lease.
Research and Development Costs
Research and development expenses consist primarily of salaries and benefits 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 consolidated 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. As of December 31, 2022 and December 31, 2021, the Company has accrued for $
86
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 in the 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 consolidated 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
Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company's Series B Convertible Preferred Stock and certain of the Company's outstanding warrants contain non-forfeitable rights to dividends with the common stockholders, and therefore are considered to be participating securities. The Series B 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. When in a net income position, diluted earnings per share is computed using the more dilutive of the two-class method or the if-converted and treasury stock methods.
As the Company was in a net loss position for both periods, basic and diluted loss per share for the years ended December 31, 2022 and December 31, 2021 were calculated under the if-converted and treasury stock methods. Accordingly, in computing the net loss attributable to basic and diluted common shares for the year ended December 31, 2022, the Company has deducted the value of the effect of the down round feature on equity classified warrants that was triggered in the period as it was determined to be anti-dilutive. Basic and diluted earnings per share during the three months ended September 30, 2021 were calculated under the two-class method, as the Company was in a net income position for that period. Certain of the liability-classified warrants were dilutive in the three months ended September 30, 2021 resulting in a dilutive impact for the year ended December 31, 2021.
87
The following table presents the calculation of weighted average shares used to calculate basic and diluted loss per share (in thousands, except share and per share amounts):
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Basic net loss per common share: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustment to record the impact of exercise price reset on outstanding warrants related to down round provisions |
|
|
( |
) |
|
|
|
|
Net loss attributable to common shares - basic |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted average shares used in calculating basic loss per share |
|
|
|
|
|
|
||
Basic net loss per common share |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Diluted net loss per common share: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Change in fair value of warrants |
|
|
|
|
|
( |
) |
|
Adjustment to record the impact of exercise price reset on outstanding warrants related to down round provisions |
|
|
( |
) |
|
|
|
|
Net loss attributable to common shares - diluted |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted-average shares outstanding |
|
|
|
|
|
|
||
Effect of potentially dilutive securities |
|
|
|
|
|
|
||
Weighted average shares used in calculating diluted loss per share |
|
|
|
|
|
|
||
Diluted net loss per common share |
|
$ |
( |
) |
|
$ |
( |
) |
The following potentially dilutive securities were excluded from the calculation of diluted loss per share because their effects would be anti-dilutive:
|
|
December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Stock options |
|
|
|
|
|
|
||
Warrants for common stock |
|
|
|
|
|
|
||
Series A Convertible Preferred Stock |
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
||
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 loss was the same as its reported net loss for all periods presented.
Recently Adopted Accounting Pronouncements
In August 2020, FASB issued Accounting Standards Update ("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 early adopted this standard on January 1, 2022 and determined that it had no impact on the accounting for its liability-classified warrants as of the date of adoption.
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
88
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 adopted this standard as of January 1, 2023 and expects it will not have a material impact on its consolidated financial statements and related disclosures for the three months ending March 31, 2023.
3. Revision of Previously Issued Financial Statements for Correction of Immaterial Errors
In connection with the preparation of the Company's condensed consolidated financial statements required to be included in the Quarterly Report on Form 10-Q as of and for the nine months ended September 30, 2022, which the Company filed with the SEC on November 14, 2022, management identified a classification error, between current assets (prepaid expenses and other current assets) and noncurrent assets (other noncurrent assets), in the Company's historical financial statements, resulting in a conclusion that for comparability purposes a correction should be made to the Company's consolidated financial statements as of December 31, 2021. The Company has revised its balance sheet as of the year ended December 31, 2021 accordingly and included such revisions herein. Based on an analysis of quantitative and qualitative factors, the Company concluded this error was not material to its consolidated financial position as of December 31, 2021 and had no impact on the Company’s results of operations, including net (loss) earnings per share or cash flows as presented in the Company’s previously issued financial statements. As a result, amendment of such reports is not required.
The adjustment to “prepaid expenses and other current assets” and “other noncurrent assets” within the Company’s consolidated balance sheet as of the year ended December 31, 2021 are as follows:
|
|
December 31, 2021 |
|
|||||||||
|
|
As Reported |
|
|
Adjustment |
|
|
As Adjusted |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
ASSETS |
|
|
|
|
|
|
|
|
|
|||
Current assets: |
|
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Prepaid expenses and other current assets |
|
|
|
|
|
( |
) |
|
|
|
||
Total current assets |
|
|
|
|
|
( |
) |
|
|
|
||
Restricted cash |
|
|
|
|
|
|
|
|
|
|||
Right-of-use asset |
|
|
|
|
|
|
|
|
|
|||
Other noncurrent assets |
|
|
|
|
|
|
|
|
|
|||
Property and equipment, net |
|
|
|
|
|
|
|
|
|
|||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
4. Merger between Seneca and LBS
On December 16, 2020, Seneca and LBS entered into a Merger Agreement. Pursuant to the Merger Agreement, on April 27, 2021, Merger Sub merged with and into LBS with LBS surviving as a wholly owned subsidiary of Seneca.
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 (
89
accompanying 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
In accordance with the Merger Agreement, the Company entered into a Contingent Value Rights Agreement (“CVR Agreement”) related to the monetization of the Company’s legacy assets that were being developed prior to the Merger. Under the terms of the CVR Agreement, Seneca shareholders who held shares immediately prior to the effective date of the Merger retain the right to receive a portion of proceeds received within
As previously disclosed, on December 16, 2020, Seneca exclusively licensed certain patents and technologies, including a sublicense covering a synthetic intermediate, of the Company's NSI-189 assets (“189 License”), along with a purchase option through December 16, 2023 (“Purchase Option”). On October 22, 2021, Alto Neuroscience agreed to terms of an early exercise of the Purchase Option under the 189 License and entered into an Asset Transfer Agreement (“ATA”). Alto Neuroscience is a U.S. based private biopharmaceutical company focused on precision-medicine for central nervous system disorders, including depression, using artificial intelligence-based brain biomarkers.
In connection with the ATA, the Company received gross proceeds of $
On October 27, 2022, the Company entered an agreement to license NSI-532.IGF-1 to the Regents of the University of Michigan ("University of Michigan") for maintaining NSI-532.IGF-1 cell lines, continued development, maintaining patent protection, and seeking licensees. The Company received no upfront fees for the license. NSI-532.IGF-1 is a preclinical cell therapy being investigated as a potential therapy for prevention and treatment of Alzheimer’s disease. The University of Michigan shall bear
90
Merger
The Merger was accounted for as an asset acquisition pursuant to Accounting Standards Codification ("ASC") 805, 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 consolidated statements of operations for the year ended December 31, 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.
Purchase Price Consideration: |
|
|
|
|
Number of shares of the combined company issued to Seneca's stockholders (i) |
|
|
|
|
Multiplied by the fair value per share of Seneca's common stock (ii) |
|
$ |
|
|
Total share value consideration |
|
|
|
|
LBS transaction costs |
|
|
|
|
Total purchase price |
|
$ |
|
|
The allocation of the purchase price is as follows (in thousands):
|
|
Fair Value of Assets |
|
|
Cash and cash equivalents |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Prepaid and other current assets |
|
|
|
|
Accounts payable and accrued expenses |
|
|
( |
) |
Accrued compensation |
|
|
( |
) |
Warrant liabilities, at fair value |
|
|
( |
) |
In-process research and development (IPR&D) (i) |
|
|
|
|
Purchase price |
|
$ |
|
|
91
5. Balance Sheet Details
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Prepaid insurance |
|
$ |
|
|
$ |
|
||
Other receivables |
|
|
|
|
|
|
||
Prepaid subscriptions and fees |
|
|
|
|
|
|
||
Prepaid software licenses |
|
|
|
|
|
|
||
Deferred equity issuance costs |
|
|
|
|
|
|
||
Prepaid other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Other receivables as of December 31, 2022 includes a $
Accrued liabilities consisted of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Accrued accounts payable |
|
$ |
|
|
$ |
|
||
Accrued clinical trial costs |
|
|
|
|
|
|
||
Accrued director stipends |
|
|
|
|
|
|
||
Accrued severance and benefits (Note 11) |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Other noncurrent assets consisted of the following (in thousands):
|
|
December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Prepaid insurance, less current portion |
|
$ |
|
|
$ |
|
||
Other noncurrent assets |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
6. Fair Value Measurements
The Company has issued warrants that are accounted for as liabilities based upon the guidance of ASC 480 and ASC 815. Estimating fair values of liability-classified 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 liability-classified financial instruments are initially and subsequently carried at fair value, the Company’s financial results 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 consolidated statement of operations.
In connection with the transactions contemplated by the Merger, on December 16, 2020, the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with an investor (the “Investor”) pursuant to which, among other things, the Company agreed to issue (i) senior secured promissory notes in the aggregate principal amount of up to $
92
purchase shares of the Company’s common stock (“Senior Secured Promissory Note Warrants”) were issued. At the date of issuance, the Company valued the Senior Secured Promissory Note Warrants using a Monte-Carlo valuation model with a resulting fair value of $
In connection with the Merger, on April 27, 2021, the outstanding principal and interest on both tranches of the Senior Secured Promissory Notes were cancelled for shares of Series 1 Preferred Stock of the Company. As of both December 31, 2022 and 2021, there is no principal or interest outstanding on the Senior Secured Promissory Notes.
On May 20, 2021, pursuant to the terms of the Securities Purchase Agreement, the Company issued to the Investor warrants to purchase shares of common stock (the “May 2021 Warrants”). All of the outstanding May 2021 Warrants were exercised in the fourth quarter of 2021 and the first quarter of 2022 in exchange for
On July 21, 2021, the Company and the Investor entered into an agreement to waive certain provisions of the previous Security Purchase Agreement (the "July 2021 Waiver Agreement"). As part of the July 2021 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 July 2021 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 Warrants 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 $
As consideration for the July 2021 Waiver Agreement, the Company issued the Investor additional warrants to purchase shares of the Company's common stock (the "July 2021 Warrants"). The initial fair value of the July 2021 Warrants was $
On January 31, 2022, the Company and the Investor entered into an agreement to irrevocably waive any adjustment to the exercise price of the Senior Secured Promissory Note Warrants and the May 2021 Warrants held by the Investor from and after January 31, 2022 for the Company's issuances of equity or equity-linked securities at a price below the exercise price of the warrants (the "January 2022 Waiver Agreement"). The waiver of any adjustments to the exercise price of the Senior Secured Promissory Note Warrants and the May 2021 Warrants is considered a modification to those warrants. The modification was determined to have no impact on the valuation of the warrants.
As consideration for the foregoing, pursuant to the January 2022 Waiver Agreement, the Company issued the Investor an additional warrants to purchase shares of the Company’s common stock (the “January 2022 Warrants”). The initial fair value of the January 2022 Warrants was determined to be $
As of December 31, 2022, the fair value of the Senior Secured Promissory Note Warrants outstanding was determined using a Black-Scholes option pricing model to be insignificant.
93
As of December 31, 2022, the fair value of the July 2021 Warrants in the amount of $
As of December 31, 2022, the fair value of the January 2022 Warrants in the amount of $
The following table summarizes the activity of the Company’s Level 3 warrant liabilities which are fair valued on a recurring basis (in thousands):
|
|
Year Ended December 31, |
|
|||||
Warrant Liabilities |
|
2022 |
|
|
2021 |
|
||
Fair value at beginning of period |
|
$ |
|
|
$ |
|
||
Initial fair value at the original issuance date |
|
|
|
|
|
|
||
Equity classified warrant put feature activated |
|
|
|
|
|
|
||
|
|
( |
) |
|
|
( |
) |
|
Fair value of liability classified warrants exercised |
|
|
( |
) |
|
|
( |
) |
Seneca liability classified warrants assumed |
|
|
|
|
|
|
||
Expiration of equity classified warrant put feature |
|
|
|
|
|
( |
) |
|
Settlement of liability-classified warrants |
|
|
|
|
|
( |
) |
|
Fair value at end of period |
|
$ |
|
|
$ |
|
||
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 December 31, 2022. 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 these warrants during the quarter ended June 30, 2021. The put right became inactive in July 2021 and the remaining warrants had an insignificant value as of December 31, 2022, which was determined using a Black-Scholes option pricing model.
In connection with the May 2022 Registered Direct Offering (see Note 7, Stockholders' Equity (Deficit)), the Company issued warrants to purchase shares of its common stock to certain investors and the placement agent. All of these warrants were classified as equity as of the date of issuance of May 10, 2022.
In connection with the August 2022 Public Offering (see Note 7, Stockholders' Equity (Deficit)), the Company issued warrants to purchase shares of its common stock to certain investors and the underwriter of the offering. All of these warrants were classified as equity as of the date of issuance of August 16, 2022.
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 consolidated statements of operations.
7. Stockholders’ Equity (Deficit)
Classes of Stock
Prior to the completion of the Merger, LBS was authorized to issue
94
In connection with signing the Merger Agreement, LBS, Seneca and the Investor entered into a securities purchase agreement, pursuant to which, among other things, the Investor agreed to convert its outstanding senior secured debt and invest up to $
The Company recorded $
Common Stock
As of December 31, 2021, the Company was authorized to issue
On November 15, 2022, the Company effected the Reverse Stock Split. Accordingly, each of the Company’s shareholders received one new share of the Company's common stock for every
As a result of the Reverse Stock Split, the number of issued and outstanding shares of the Company's common stock was adjusted from
Preferred Stock
As of December 31, 2022 and December 31, 2021, the Company was authorized to issue
In connection with the August 2022 Public Offering (see below), the Company's Board designated
95
and measurement of potentially redeemable securities. As of December 31, 2022, all of the shares of the Series B Convertible Preferred stock issued in connection with the August 2022 Public Offering (see below) have been converted into shares of the Company's common stock and there were no shares of the Series B Convertible Preferred Stock issued or outstanding.
Yuma Private Equity
On August 19, 2021, the Company entered into a Private Securities Purchase Agreement with Yuma Regional Medical Center (“Yuma”), a related party, pursuant to which Yuma purchased
May 2022 Registered Direct Offering
On May 6, 2022, the Company entered into securities purchase agreements with certain investors pursuant to which it agreed to sell and issue, in a registered direct offering (the “May 2022 Registered Direct Offering”), an aggregate of
In connection with the May 2022 Registered Direct Offering and concurrent private placement transaction, the Company engaged a placement agent. The Company issued placement agent warrants (“May 2022 Placement Agent Warrants”) to purchase an aggregate of
The net proceeds from the May 2022 Registered Direct Offering of $
The shares of common stock (but not the warrants or the shares of common stock underlying such warrants) offered in the Registered Offering were offered and sold by the Company pursuant to a "shelf" registration statement on Form S-3, including a base prospectus, previously filed with and declared effective by the SEC on April 26, 2022. The May 2022 Warrants and shares of common stock underlying such warrants were later registered for resale on a separate registration statement on Form S-1.
August 2022 Public Offering
On August 16, 2022, the Company closed on a registered public offering pursuant to which the Company agreed to issue and sell (i)
96
8. Common Stock Warrants
The Company’s outstanding common stock warrants that are classified as equity warrants are included as a component of stockholder’s equity (deficit) at the date of grant at the relative fair value at that grant date. Common stock warrants accounted for as liabilities in accordance with the authoritative accounting guidance are included in non-current liabilities. The Company had common stock warrants exercisable and outstanding of
Liability-Classified Warrants
The Company accounts for certain of its warrants as liability-classified in accordance with ASC 480 and ASC 815, including primarily the Senior Secured Promissory Note Warrants, the July 2021 Warrants and the January 2021 Warrants. The May 2021 Warrants issued during the year ended December 31, 2021, which had been liability- classified, were fully exercised in the in the fourth quarter of 2021 and the first quarter of 2022 for
January 2022 Warrants
As consideration for the January 2022 Waiver Agreement (see Note 6), the Company issued the January 2022 Warrants. The January 2022 Warrants expire five and a half years from the date of issuance, or July 31, 2027. As of December 31, 2022, the January 2022 Warrants outstanding were exercisable for
July 2021 Warrants
As consideration for the July 2021 Waiver Agreement (see note 6), the Company issued the July 2021 Warrants. The July 2021 Warrants expire five years from the date of registration of the warrants, or August 19, 2026. As of December 31, 2022, the July 2021 Warrants outstanding were exercisable for
Senior Secured Promissory Note Warrants
The Senior Secured Promissory Note Warrants expire
Equity-Classified Warrants
The Company accounts for the majority of its warrants as equity-classified in accordance with ASC 480 and ASC 815. Equity-classified warrants are recorded in equity based on their relative fair value on the date of issuance.
97
August 2022 Public Offering Warrants
In connection with the August 2022 Public Offering, on August 16, 2022 the Company issued Series 1 Warrants exercisable for
In addition, the exercise price of the Series 1 Warrants and Series 2 Warrants can be further adjusted in the event of issuances of the Company's common stock at a price lower than the exercise price of the Series 1 Warrants and Series 2 Warrants then in effect (the “Down Round Feature”). During the year ended December 31, 2022, the Down Round Feature was triggered due to the December 30, 2022 announcement of an agreement to issue common stock of the Company (see Note 15, Subsequent Events). As a result of the triggering of the Down Round Feature, the exercise price of any outstanding Series 1 Warrants or Series 2 Warrants was adjusted down to $
The Company calculated the value of the effect of Down Round Feature measured as the difference between the Series 1 Warrant and Series 2 Warrant fair value, using a Monte Carlo valuation model, immediately before and immediately after the Down Round Feature was triggered using the original exercise price and the new exercise price. The difference in fair value of the effect of the Down Round Feature of $
During the year ended December 31, 2022, the Company received proceeds of $
May 2022 Registered Direct Offering Warrants
In connection with the May 2022 Registered Direct Offering, on May 10, 2022 the Company issued the May 2022 Purchase Warrants to purchase
98
The following table summarizes all warrant activity for the year ended December 31, 2022:
|
|
Number of |
|
|
Weighted |
|
|
Weighted |
|
|||
Warrants outstanding, December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
|
|||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
||
Forfeited, expired or cancelled |
|
|
( |
) |
|
|
|
|
|
— |
|
|
Warrants outstanding, December 31, 2022 |
|
|
|
|
|
|
|
|
|
|||
9. Equity Incentive Plans
In 2013, LBS adopted the 2013 Employee, Director, and Consultant Equity Incentive Plan, (as amended and restated, 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 an option to purchase common stock of the Company and became exercisable by the holder of such option in accordance with its terms. In connection with the closing of the Merger,
In April 2021, in connection with the closing of the Merger, the Company’s stockholders approved the Palisade Bio, Inc. 2021 Equity Incentive Plan (the “2021 EIP Plan”). As of December 31, 2022, there were
Also in April 2021, the Company's stockholders approved the Palisade Bio, Inc. 2021 Employee Stock Purchase Plan (the "2021 ESPP"). The 2021 ESPP was adopted in order to provide eligible employees of the Company an opportunity to purchase shares of the Company's common stock. As of December 31, 2022, there were
In November 2021, the Company's compensation committee of the Board adopted the Palisade Bio, Inc. 2021 Inducement Award Plan (the "2021 Inducement Plan"). The 2021 Inducement Plan was adopted in order to grant equity-based awards to individuals not previously employed by the Company, as an inducement to join the Company. As of December 31, 2022, there were
Stock Options
The Company believes that stock options align the interests of its employees and directors with the interests of its stockholders. Stock option awards are generally granted with an exercise price equal to the market price of Company’s stock at the date the grants are awarded, a term as determined by the Company's Board but generally not to exceed ten-years, and generally vest in equal proportions each quarter over three years. Vesting could be accelerated in the event of retirement, disability, or death of a participant, or change in control of the Company, as defined in the individual stock option agreements or employment agreements. Stock-based awards are valued as of the measurement
99
date, which is the grant date, and are generally amortized on a straight-line basis over the requisite vesting period for all awards. The Company's equity incentive plans allow for the issuance of both incentive stock options and non-statutory stock options.
The fair value of options granted during the year ended December 31, 2022 is estimated as of the grant date using the Black-Scholes option pricing model using the assumptions in the following table:
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Weighted-average exercise price per share |
|
$ |
|
|
$ |
|
||
Weighted-average expected term (years) |
|
|
|
|
|
|
||
Weighted-average risk-free interest rate |
|
|
% |
|
|
% |
||
Weighted-average expected dividend yield |
|
|
|
|
|
|
||
Weighted-average volatility |
|
|
% |
|
|
% |
||
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.
The following table summarizes stock option activity and related information under the 2013 Plan, the 2021 EIP Plan and the 2021 Inducement Plan for the year ended December 31, 2022:
|
|
Number of |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
||||
Outstanding at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|||
Exercised |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Forfeited, expired or cancelled |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
Outstanding at December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested and expected to vest at December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercisable at December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
The weighted-average grant date fair value of options granted during the years ended December 31, 2022 and December 31, 2021 was $
Share-Based Compensation Expense
In 2021, the Company determined that the outstanding stock options under the 2013 Plan had an exercise price per share that was significantly higher than the current fair market value of the Company's common stock (the
100
"Underwater Options"). On November 18, 2021, the compensation committee of the Company's Board resolved that it was in the best interests of the Company and its stockholders to amend the Underwater Options for five key employees to reduce the exercise price per share to the closing per share price of the Company’s common stock on November 18, 2021 (the “Repricing”). In accordance with the 2013 Plan requirements, the holders of the Underwater Options identified under the Repricing consented to the modification of their affected awards. All the other terms of the Underwater Options other than the exercise price remained the same, including the number of shares granted, vesting schedule and expiration date.
The Company determined that the Repricing represented a modification of share-based awards under ASC 718. Accordingly, the Company recognized incremental compensation expense of $
The Company’s former Chief Development Officer was terminated in February 2021. As part of the separation package, the Company’s Board agreed to (i) accelerate vesting by
The allocation of stock-based compensation for all stock awards is as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
|
|
|||||
Research and development expense |
|
$ |
|
|
$ |
|
||
General and administrative |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
As of December 31, 2022, the unrecognized compensation cost related to outstanding options was $
10. Collaborations and License Agreements
Co-Development and Distribution Agreement with Newsoara
LBS has entered into a co-development and distribution agreement with Newsoara Biopharma Co., Ltd. (“Newsoara”), a joint venture established with Biolead Medical Technology Limited, as amended, (the “Co-Development Agreement”). Pursuant to the Co-Development Agreement (and subsequent assignment agreement), LBS granted or licensed Newsoara an exclusive right under certain patents to develop, use, sell, offer to sell, import, and otherwise commercialize licensed products (the “Licensed Products”) for any and all indications in the People’s Republic of China, including the regions of Hong Kong and Macao, but excluding Taiwan (the “Territory”). The Licensed Products only include the Company's lead drug candidate, LB1148. The right includes the right to grant sublicenses to third parties, subject to LBS’ written consent, provided that both parties agreed that Newsoara would be permitted to use a certain partner for development purposes. The Co-Development Agreement obligates Newsoara to initially use LBS as the exclusive supplier for all of Newsoara’s requirements for Licensed Products in the Territory. During the term of the Co-Development Agreement, Newsoara may request to manufacture the Licensed Product in the Territory, subject to satisfying certain conditions to LBS' reasonable satisfaction. LBS is obligated to approve Newsoara manufacturing rights without undue refusal or delay.
In consideration of the rights granted to Newsoara under the Co-Development Agreement, Newsoara paid LBS a one-time upfront fee of $
101
to the royalty percentage in certain events. For the years ended December 31, 2022 and December 31, 2021, there were
License Agreements with the Regents of the University of California
The Company has entered into
The most recent license agreement with the Regents was entered into in July 2021 (the “2021 UC License”) to obtain exclusive rights to the cancer-related indications and uses that had been excluded under the one of the preceding licenses with Regents. Pursuant to the 2021 UC License Agreement, the Company has an exclusive, sublicensable, worldwide license under certain patent rights that now include cancer to make, use, sell, offer for sale and import products and practice methods covered by the claims of the licensed patent rights as directed to synthetic charge-changing substrates and methods for detecting protease activity in animal and human clinical samples.
Upon execution of the 2021 UC License, the Company paid a one-time license issue fee of $
In conjunction with the Co-Development and Distribution Agreement with Newsoara, the Company is obligated to pay the Regents a portion of the sublicense income equal to
11. Commitments and Contingencies
Corporate Office Lease
On May 12, 2022, the Company entered into a new, non-cancelable facility operating lease (the "Corporate Office Lease") of office space for its corporate headquarters, replacing its existing corporate headquarters lease that expired on July 31, 2022. The Corporate Office Lease is for
Commencing on June 1, 2022, the Company is subject to contractual monthly lease payments of $
The Corporate Office Lease is also subject to additional variable charges for common area maintenance, insurance, taxes and other operating costs. This additional variable rent expense is not estimable at lease inception. Therefore, it is excluded from the Company’s straight-line expense calculation at lease inception and is expensed as incurred.
As of December 31, 2022, the Company recognized an operating right-of-use asset related to the Corporate Office Lease in the amount of $
102
Lease of $
Maturities of the Company's operating lease liabilities as of December 31, 2022 are as follows (in thousands):
Year ending December 31, |
|
|
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Total operating lease payments |
|
|
|
|
Less: imputed interest |
|
|
( |
) |
Total operating lease obligations |
|
$ |
|
|
The Company recognized operating lease expense associated with its Corporate Office Lease and its predecessor corporate headquarters lease of approximately $
Insurance Financing Arrangements
Consistent with past practice, on May 9, 2022 and May 24, 2022, the Company entered into agreements to finance certain insurance policies which renewed in April 2022 and May 2022. The financing arrangements entered into on May 9, 2022 and May 24, 2022 have stated interest rate of
Other than the final insurance financing arrangements payments due, as of December 31, 2022, the Company has no other minimum debt payments required in 2023 or thereafter.
Restructuring Costs
In order to better utilize the Company’s resources on the implementation of its refocused clinical programs and corporate strategy, on September 9, 2022 the Company committed to a cost-reduction plan. This cost-reduction plan consisted of an approximately
Associated with the reduction in workforce, the Company has recognized restructuring costs of $
The Company does not expect to incur any other significant costs associated with the cost reduction-plan announced on September 9, 2022.
103
Legal Proceedings
From time to time, the Company may be involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. Management believes there are no claims or actions pending against the Company through December 31, 2022 which will have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position, or results of operations. Litigation, however, is subject to inherent uncertainties, and an adverse result in such matters may arise from time to time that may harm the Company’s business.
Indemnification
In accordance with the Company’s amended and restated memorandum and articles of association, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving in such capacity. There have been no claims to date, and the Company has a directors and officers liability insurance policy that may enable it to recover a portion of any amounts paid for future claims.
12. Related Party Transactions
Yuma Regional Medical Center
Yuma Regional Medical Center ("Yuma") is an equity investor in the Company and is considered a related party. As October 16, 2020, the Company entered into an unsecured promissory note for a principal sum of $
Director stipends
Unpaid cash stipends owed to the Company's directors for their annual service on the Board are recorded on the Company’s consolidated balance sheets within accrued liabilities. These liabilities were $
Separation agreement with former Chief Executive Officer
On October 11, 2022, the Company entered into a separation agreement with its former Chief Executive Officer whereby the parties agreed to a mutual release of claims. Subsequent to paying an aggregate of $
13. Employee Benefits
Subsequent to the Merger, the Company continues to participate in a defined contribution 401(k) plan adopted by LBS effective June 20, 2016. All employees are eligible to participate in the plan beginning on the first day of employment. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation. No matching contributions have been made by the Company since the adoption of the 401(k) plan.
104
14. Income Taxes
The Company has no current or deferred income taxes as of December 31, 2022 and December 31, 2021.
Income taxes vary from the statutory federal income tax rate applied to loss before income taxes as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Statutory federal income tax rate of 21 percent applied to loss before income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
State taxes - net of federal benefit |
|
|
( |
) |
|
|
( |
) |
Meals and entertainment |
|
|
|
|
|
|
||
Warrants |
|
|
( |
) |
|
|
( |
) |
Stock-based compensation |
|
|
|
|
|
|
||
IPR&D |
|
|
|
|
|
|
||
Interest expense |
|
|
|
|
|
|
||
Other non-deductible expenses |
|
|
|
|
|
|
||
Expiration of tax attributes |
|
|
|
|
|
|
||
Change in tax rate |
|
|
( |
) |
|
|
( |
) |
Valuation allowance |
|
|
|
|
|
|
||
Others |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Deferred income tax assets and liabilities arising from differences between accounting for financial statement purposes and tax purposes, less valuation reserves at year end are as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Accrued expenses |
|
$ |
|
|
$ |
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Charitable contributions carryforward |
|
|
|
|
|
|
||
Lease accounting |
|
|
|
|
|
|
||
Net operating loss carryforwards |
|
|
|
|
|
|
||
Stock compensation |
|
|
|
|
|
|
||
Capitalized research and development costs |
|
|
|
|
|
|
||
Total deferred tax assets |
|
|
|
|
|
|
||
Deferred tax liabilities: |
|
|
|
|
|
|
||
Right-of-use asset |
|
|
|
|
|
|
||
Prepaid expense |
|
|
|
|
|
|
||
Total deferred tax liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Net deferred tax asset |
|
|
|
|
|
|
||
Valuation allowance |
|
|
( |
) |
|
|
( |
) |
Net deferred taxes |
|
$ |
|
|
$ |
|
||
Deferred tax assets and liabilities are recognized for temporary differences and unused tax losses to the extent that realization of the related tax benefits is more-likely-than-not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods when the deferred tax assets become deductible. After considering the history of operating losses and uncertainty regarding its ability to generate positive pre-tax income in 2023 and beyond, the Company has concluded that it is not-more-likely-than-not that its deferred tax assets will be realized, and therefore maintains a full valuation allowance on all deferred tax assets.
105
As of December 31, 2022, the Company had federal net operating loss ("NOL") carryforwards of approximately $
Pursuant to the provisions of the Internal Revenue Code ("IRC"), the Company’s NOL and tax credit carryforwards and certain other attributes are subject to review and possible adjustment by the Internal Revenue Service ("IRS") and state tax authorities. NOL and tax credit carryforwards may be subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the IRC, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Including the recently completed Merger, the Company has completed several equity offerings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the IRC, or could result in a change in control in the future. The Company has not completed an IRC Section 382 and 383 analysis for all relevant tax years regarding the limitation of net operating losses. The NOL deferred tax asset does reflect the limitation resulting from the Merger; however, there could be further limitations due to prior changes in control. Due to the existence of a full valuation allowance, however, changes in the NOLs included as deferred tax assets on the Company’s consolidated balance sheets would have no impact on the Company's effective tax rate.
The Company files income tax returns in the U.S. federal jurisdiction and various states. Because of the NOLs, the Company is subject to U.S. federal examinations for tax years 2004 and forward, and for examinations from state taxing authorities for tax years 2008 and forward.
The Company accounts for taxation under ASC 740, which clarifies the accounting for uncertain tax positions. ASC 740 requires that the Company recognize the impact of a tax position in its consolidated financial statements if the position is more-likely-than-not to be sustained upon examination based on the technical merits of the position. The Company did
ASC 740 requires the Company to accrue interest and penalties where there is an underpayment of taxes based on the Company's best estimate of the amount to ultimately be paid. The Company identified no unrecorded material uncertain tax positions as of December 31, 2022 and 2021, consequently no interest or penalties have been accrued by the Company in either period. The Company does not anticipate a significant change to its unrecognized tax benefits within the next 12 months.
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the "TCJA"). The TCJA contains certain provisions that went into effect on January 1, 2022, including a provision impacting Section 174 of the IRC whereby for tax years beginning on or after January 1, 2022, taxpayers are required to capitalize and amortize rather than deduct research and development expenses. Section 174 research and development expenses must be amortized over five years for research performed in the U.S. and 15 years for research performed outside the U.S., beginning with the midpoint in the year in which the expenses were incurred. Further, software development costs were specifically included in the definition of a Section 174 expenditure, and therefore must be capitalized and amortized over five (or 15 years). Finally, if a research project is abandoned or disposed of, the taxpayer cannot recover costs earlier than the end of the required amortization period. Beginning in 2022, the Company capitalized and amortized its research and development expenses pursuant to Section 174. Due to the Company’s prior and current year losses and its full valuation allowance, the change pursuant to Section 174 did not have a material impact to the Company's tax provision or cash flows.
The Inflation Reduction Act (“IRA”) was enacted in the U.S. on August 16, 2022, containing revenue-raising provisions which include a book-income alternative minimum tax and an excise tax on stock buybacks, among other provisions. Based on the thresholds detailed in the IRA and a review of the Company’s transactions during the year, these changes do not have an impact on the Company’s income tax provision for the year ended December 31, 2022.
106
15. Subsequent Events
January 2023 Registered Direct Offering and Private Placement
On January 4, 2023, the Company announced that it had closed on a previously announced agreement with certain institutional and accredited investors pursuant to which it agreed to sell and issue, in a registered direct offering (the “Registered Offering”), an aggregate of (i)
Pursuant to a placement agency agreement dated as of December 30, 2022, the Company engaged Ladenburg Thalmann & Co. Inc. (the “Placement Agent”), to act as the exclusive placement agent in connection with the Registered Offering and concurrent private placement transaction. The Company issued warrants to the Placement Agent to purchase an aggregate of
Gross proceeds from the January 2023 Offering were $
Series 1 and Series 2 Warrant Exercises
As of December 31, 2022, holders of
107
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based upon the evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, 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.
However, our management, including our Interim Chief Executive Officer and our Chief Financial Officer, have concluded that, notwithstanding the identified material weakness in our internal control over financial reporting, the consolidated financial statements in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Material Weakness in Internal Control over Financial Reporting and Fair Value Calculations
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis.
During the quarter ended June 30, 2021, the company identified a material weakness in our internal controls over financial reporting 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. This material weakness contributed to a material weakness in our control activities based on the criteria set forth in the 2013 Framework. 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 consolidated financial statements and a failure to meet its reporting and financial obligations.
As described below, management has begun designing the plan and executing the remediation actions to address the material weakness and further actions are ongoing as of December 31, 2022. The material weakness continues to be present as of December 31, 2022.
108
Management had identified an additional material weakness in its internal control over the fair value calculation of options granted during the quarter 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. During the year ended December 31, 2022, the Company implemented additional control activities to remediate the material weakness in its internal control over the fair value calculation of options granted, which were tested for operating effectiveness in the year ended December 31, 2022 and determined to be in place and operating effectively. The Company has concluded that this material weakness has been fully remediated.
Remediation Efforts related to the Material Weakness
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 have been or are in the process of being implemented, are intended to address the identified material weaknesses.
The Company believes that the implementation of the above steps will allow it to make progress on addressing a number of the deficient controls within its internal control environment, which will help facilitate the remediation of the material weakness identified above. As the Company continues to evaluate and work to improve its internal control over financial reporting, it will take additional measures to address control deficiencies, or it may modify certain of the remediation measures described above. However, the Company requires additional time to complete the design and implementation of its remediation plans and demonstrate the operating effectiveness of our remediation efforts. The material weakness 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.
Changes in Internal Control Over Financial Reporting
Other than in connection with implementing a plan to remediate the material weakness described above, there were no changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
109
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
110
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive proxy statement for our 2023 Annual Meeting of Stockholders, or the Proxy Statement, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included in the Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is to be included in the Proxy Statement in the sections entitled “Directors, Executive Officers and Corporate Governance,” “Election of Directors,” and “Delinquent Section 16(a) Reports.”
Such information will be included in the Proxy Statement and is incorporated herein by reference.
Code of Ethics
We have adopted the Palisade Bio, Inc. Code of Business Conduct and Ethics, or Ethics Code, that applies to all of our officers, directors and employees. The Ethics Code is available on our website at www.palisadebio.com on the “Governance Documents” page of the section titled “Company.” If we make any substantive amendments to the Ethics Code or grant any waiver from a provision of the Ethics Code to any executive officer or director, we intend to promptly disclose the nature of the amendment or waiver as required by applicable laws. To satisfy our disclosure requirements, we may post any waivers of or amendments to the Ethics Code on our website in lieu of filing such waivers or amendments on a Form 8-K.
Item 11. Executive Compensation.
The information required by this item will be contained in the Proxy Statement under the caption “Executive Compensation” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be contained in the Proxy Statement under the caption “Beneficial Ownership of Shares of Common Stock" and is incorporated herein by reference.
The information required by this item will be contained in the Proxy Statement under the caption “Certain Relationships and Related Party Transactions” and “Directors, Executive Officers and Corporate Governance” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Our independent registered public accounting firm is Baker Tilly USA LLP, Tewksbury, MA, PCAOB ID #23.
The information required by this item is to be included in our Proxy Statement under the caption “Principal Accounting Fees and Services" and is incorporated herein by reference.
111
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements.
The consolidated financial statements and supplementary data required by this item are set forth under Item 8 above.
(a)(2) Financial Statement Schedules.
All schedules have been omitted because they are not required or because the required information is given in the consolidated financial statements or notes thereto.
(a)(3) Exhibits.
The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report on Form 10-K.
112
Exhibit Index
Exhibit Number |
|
Description of document |
2.1† |
|
|
3.1 |
|
|
3.2 |
|
|
3.3 |
|
|
3.4 |
|
|
3.5 |
|
|
4.1 |
|
|
4.2 |
|
|
4.3 |
|
|
4.4 |
|
|
4.5 |
|
|
4.6 |
|
|
4.7 |
|
|
4.8 |
|
|
4.9 |
|
|
4.10 |
|
|
4.11 |
|
|
4.12 |
|
|
4.13 |
|
113
4.14 |
|
|
4.15 |
|
|
4.16 |
|
|
4.17 |
|
|
4.18 |
|
|
4.19 |
|
|
4.20 |
|
|
4.21† |
|
|
4.22 |
|
|
4.23 |
|
|
4.24 |
|
|
4.25 |
|
|
4.26 |
|
|
4.27 |
|
|
4.28 |
|
|
4.29 |
|
|
4.30 |
|
|
4.31 |
|
|
4.32 |
|
|
4.33 |
|
|
4.34 |
|
114
4.35 |
|
|
4.36 |
|
|
4.37 |
|
|
4.38 |
|
|
10.1# |
|
|
10.2# |
|
|
10.3# |
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10.4# |
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10.5# |
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10.6# |
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10.7 |
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10.8 |
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10.9† |
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10.10† |
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10.11 |
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10.12 |
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115
10.13† |
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10.14+ |
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10.15+ |
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10.16+ |
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10.17+ |
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10.18+ |
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10.19+ |
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10.20+ |
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10.21+ |
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10.22+ |
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10.23*+ |
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10.24+ |
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10.25+ |
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10.26+ |
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10.27† |
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10.28 |
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10.29 |
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116
10.30 |
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10.31+ |
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10.32 |
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10.33 |
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10.34 |
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10.35*+ |
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10.36*+ |
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Form of Consulting Agreement dated April 7, 2023 by and between Dr. Herbert Slade and the Company. |
16.1 |
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16.2 |
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19.1* |
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21.1* |
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23.1* |
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Consent of BDO USA LLP, Independent Registered Public Accounting Firm. |
23.2* |
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Consent of Baker Tilly USA LLP, Independent Registered Public Accounting Firm |
24.1* |
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31.1* |
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31.2* |
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32.1** |
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101.INS* |
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Inline XBRL Instance Document-the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema. |
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase. |
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase. |
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase. |
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase. |
104* |
|
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101). |
* Filed herewith
** Furnished herewith.
+ Indicates management contract or compensatory plan.
# Certain portions of this exhibit (indicated by “[***]”) have been omitted as we have determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to us if publicly disclosed.
117
† Schedules and exhibits to the Agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.
Item 16. Form 10-K Summary
None.
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
PALISADE BIO, INC. |
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Date: March 22, 2023 |
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By: |
/s/ J.D. Finley |
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J.D. Finley |
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Interim Chief Executive Officer, Chief Financial Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints J.D. Finley, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name |
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Title |
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Date |
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/s/ J.D. Finley |
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Interim Chief Executive Officer, Chief Financial Officer and Director |
|
March 22, 2023 |
J.D. Finley |
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(Principal Executive and Financial Officer) |
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/s/ James R. Neal |
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Chairman of the Board of Directors |
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March 22, 2023 |
James R. Neal |
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/s/ Cristina Csimma, Pharm.D. |
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Director |
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March 22, 2023 |
Cristina Csimma, Pharm.D. |
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/s/ Stephanie Diaz |
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Director |
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March 22, 2023 |
Stephanie Diaz |
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/s/ Mary Ann Gray, Ph.D |
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Director |
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March 22, 2023 |
Mary Ann Gray, Ph.D |
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/s/ Robert J. Trenschel, D.O. |
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Director |
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March 22, 2023 |
Robert J. Trenschel, D.O. |
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/s/ Binxian Wei |
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Director |
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March 22, 2023 |
Binxian Wei |
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/s/ Donald A. Williams |
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Director |
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March 22, 2023 |
Donald A. Williams |
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119