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 clinical stage biopharmaceutical company advancing oral therapies that aid patients suffering with acute and chronic gastrointestinal (GI) complications stemming from post-operative digestive enzyme damage. Palisade Bio’s innovative lead asset, LB1148, which has been advanced to phase 3 clinical trials for the return of bowel function indication, is a protease inhibitor with the potential to both help restore bowel function and reduce abdominal adhesions following surgery.

The year ended December 31, 2021 was a transformative year for the Company. In April, the Company completed the merger of Seneca and Leading BioSciences. This milestone was followed just a few months later with what the Company believes was the most important clinical data in its history—the positive phase 2 clinical trial results of LB1148. This data demonstrated a statistically significant acceleration of the return of GI function by more than one day following GI surgery. These positive findings informed the Company’s decision to progress to phase 3 pivotal clinical studies for the return of bowel function following surgery. The Company is also continuing to build additional pipeline assets to treat the wide array of health complications caused by the inflammation and tissue damage produced by rogue digestive enzymes.

Clinical and Regulatory Overview

In July 2021, the Company released positive top-line phase 2 clinical trial results demonstrating that LB1148 accelerated the time to return of bowel function by 1.1 days in patients undergoing GI surgery. This data allowed the Company to achieve alignment with the FDA to proceed with phase 3 study of LB1148 for accelerating the return of bowel function in patients undergoing abdominal surgery.

A pooled-study analysis showed LB1148 was successful in reducing the risk of adhesions by 72% and reducing the extent and severity of adhesions by 92%. The Company’s phase 2 GI surgery study of LB1148 in the U.S. has been amended to deliver 70 or more patients that may have an adhesion assessment to further inform the Company’s development program to prevent post-surgical adhesions.

During 2021 the Company received FDA Fast Track designation for LB1148 for two indications (i) the treatment of postoperative gastrointestinal dysfunction associated with pediatric cardiovascular surgery, and (ii) the reduction of adhesions following abdominal and pelvic surgery.

Financial Overview

In August 2021, Yuma Regional Medical Center invested an additional $5.2 million in the Company.

Operating loss for the year ended December 31, 2021 was $41.9 million, of which $30.1 million was attributable to in-process research and development expense associated with the Merger. Also contributing to the operating loss, research and development expense and general and administrative expense for the year ended December 31, 2021 was $2.4 million and $9.3 million, respectively. Net cash used in operating activities was $14.8 million for the year ended December 31, 2021, of which $4.8 million of cash usage was attributable to changes in operating assets and liabilities.

COVID-19

The COVID-19 pandemic has resulted in quarantines, restrictions on travel and other business and economic disruptions, and had a negative impact on the Company's ability to conduct clinical trials of its lead drug candidate, LB1148. Supply chain constraints associated with the COVID-19 pandemic have impacted the availability of the components needed in the manufacture of LB1148 and, depending on the duration and extent of the pandemic or new strains, could impact the components and production capacity required for a commercial scale-up of LB1148. The Company believes it has sufficient supply or plans for supply to meet its clinical and nonclinical development needs through 2022. However, depending on the duration and impact of the ongoing COVID-19 pandemic on local and global supply chains, our suppliers could be adversely impacted, which may result in delays or disruptions in our current or future supply chain. The ongoing rollout of vaccines and a decreasing trend in new cases domestically is driving optimism for economic recovery, and specific to the Company's business operations, availability of clinical trial sites and patients to enroll in the ongoing clinical trials of LB1148. The Company will continue to actively evaluate the impact of the pandemic on its business operations and plans, including but not limited to the impact on access to capital, planned and ongoing clinical trials, cash management and its investment policies regarding cash as well as the long-term effects in the medical and drug development fields.

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 proposed therapies 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:

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salaries and employee-related costs, including stock-based compensation;

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laboratory and vendor expenses related to the execution of preclinical and clinical trials;

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expenses under agreements with third-party contract research organizations, investigative clinical trial sites that conduct research and development activities on the Company’s behalf, and consultants;

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costs related to develop and manufacture preclinical study and clinical trial material; and

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regulatory expenses.

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, 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.

The Company's cash research and development expenses were approximately $0.7 million in the fourth quarter of 2021. The Company expects research and development expenses to increase in 2022. In particular, the Company expects the costs associated with investigative clinical trial sites that conduct research and development activities on the Company's behalf to increase as the Company accepts new sites and new patients into its clinical trials. Similarly, the Company expects the laboratory and vendor expenses related to the execution of preclinical and clinical trials to increase in 2022, as well as costs related to the development and manufacture LB1148.

General and Administrative Expenses

General and administrative expenses consist primarily of salary and employee-related costs and benefits, professional fees for legal, intellectual property, consulting, investor and public relations, accounting and audit services, insurance costs, director's fees and stipends, and general corporate expenses. We expect our general and administrative expenses will continue to increase in the full year 2022 compared to those in 2021 of our accounting predecessor, LBS, as we: (i) incur a full year of post-Merger costs, including the additional audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements; director and officer insurance premiums; and investor relations costs, (ii) hire additional personnel to support the growth and operational strategy of the Company, and (iii) protect our intellectual property. The Company's cash general and administrative expenses were approximately $2.6 million in the fourth quarter of 2021.

Going Concern

The Company’s management has evaluated whether there is substantial doubt about the Company’s ability to continue as a going concern and has determined that substantial doubt existed as of the filing date of this 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 the second half of 2022 to continue at its expected level of operations; and (iii) if the Company fails to obtain the needed capital, it will be forced to delay, scale back, or eliminate some or all of its development activities or perhaps cease operations. In the opinion of management, these factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern as of the filing date of this 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, 2021 and 2020 (in thousands):

Year Ended December 31, Change

Operating expenses

In-process research and development 30,117 — 30,117 n/a

Other income (expense):

Gain on forgiveness of PPP loan 279 — 279 n/a

Loss on issuance of secured debt (686 ) (841 ) 155 (18 )%

Gain on change in fair value of warrant liability 23,033 38 22,995 n/a

Gain on change in fair value of share liability 91 — 91 n/a

Loss on issuance of LBS Series 1 Preferred Stock (1,881 ) — (1,881 ) n/a

Loss on issuance of warrants (3,247 ) — (3,247 ) n/a

Research and Development Expenses

The decrease in research and development expenses of approximately $0.7 million, or 22%, from $3.1 million for the year ended December 31, 2020 to $2.4 million for the year ended December 31, 2021 was primarily attributable to $0.7 million net decrease in clinical trial activities due to the onset of the COVID-19 pandemic in the first quarter of 2020, as well as a decrease in research and development activity in an effort to conserve liquidity going into the Merger. Higher trailing enrollment from the period immediately prior to the onset of COVID-19 led to higher research and development expenses in 2020 compared to 2021 as clinical trial activities for non-essential surgical procedures were virtually halted in the second half of 2020 and into 2021. The Company resumed its clinical trials in the first quarter of 2022. A $0.5 million decrease in research and development payroll and employee-related expenses in 2021, due primarily to a decrease in the permanent workforce with the halting of clinical trial activities, and lower share-based compensation expense, was offset by a $0.5 million increase in consultants and contract labor and an increase in manufacturing and storage costs in preparation for resumption of clinical trials in 2022.

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. See Note 3 in Part II, Item 8. "Financial Statement and Supplemental Data" of this Annual Report on Form 10-K, for further details regarding this expense.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2021 increased by $3.1 million, or 50%, from $6.2 million in the year ended December 31, 2020 to $9.3 million for the year ended December 31, 2021. The increase was primarily related to higher general and administrative expenses associated with operating as a public company, as compared to those of our accounting predecessor, LBS, including (i) a $1.1 million increase in accounting and legal costs associated with regulatory, compliance and governance fees required since the Merger, (ii) a $0.7 million increase in investor relations and shareholder services costs, (iii) a $0.7 million increase in insurance costs associated with being a public company, (iv) $0.4 million of costs associated with the winddown of Seneca-related operations after the Merger, and (v) a $0.3 million net increase in net payroll and employee related costs coinciding with the increased staffing needs after becoming a public company and expected staffing needs in line with the Company's strategy and operating plan. These increases in the year ended 2021 compared to 2020 were partially offset by a $0.1 million decrease in share-based compensation expense.

Other income (expense)

Other income, net increased by $16.3 million from an expense of $1.0 million for the year ended December 31, 2020 to income of $15.2 million for the year ended December 31, 2021. The increase was primarily due a reduction in the fair value of warrant liabilities of $23.0 million in 2021, a portion of which was due to an agreement entered into in July 2021 between the Company and Altium Growth Fund, L.P. (the "Investor") whereby the Investor agreed to waive certain provisions of the previous Security Purchase Agreement entered into between the parties (the "Waiver Agreement"), which resulted in a $3.9 million favorable change in the fair value of the underlying warrants. Also contributing to the increase for the year ended December 31, 2021 was a $0.3 million gain on the forgiveness of the Company’s PPP loan.

The gross increase in other income, net, for the year ended December 31, 2021 compared to 2020 was partially offset by (i) a $2.2 million increase in interest expense mostly due to the non-cash debt discount accretion related to the pre-Merger senior secured debt financing that was accelerated when this debt was converted to equity at the close of the Merger, (ii) a $1.9 million loss on the issuance of LBS Series 1 Preferred Stock due to fair value of the liability classified warrants being in excess of the equity proceeds, (iii) $3.2 million of costs associated with the issuance of warrants in the period, including a $1.7 million loss associated with the issuance of warrants as a condition of the Waiver Agreement, and (iv) a $0.1 million decrease in the loss recorded on the issuance of secured debt in connection with the discount given for the pre-Merger senior secured debt from a loss of $0.8 million on the senior secured debt issued in 2020 to a loss of $0.7 million on the senior secured debt issued in 2021.

Liquidity and Capital Resources

Financial Condition

Since the Company's inception, it has financed its operations through the sales of its securities, issuance of long-term debt, the exercise of investor warrants, and to a lesser degree 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 general political, economic conditions 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 its business, financial condition, and results of operations. In addition, pursuant to an agreement with the Investor, the Company's ability to conduct a primary offering of its securities is restricted prior to March 18, 2022.

Cash Flows

As of December 31, 2021 the Company had $10.5 million in cash, cash equivalents and restricted cash. The following table shows a summary of the Company's cash flows for the year ended December 31, 2021 and 2020 (in thousands):

Year Ended December 31,

Net cash used in operating activities $ (14,773 ) $ (4,768 )

Net cash used in investing activities $ (54 ) $ (6 )

Net cash provided by financing activities $ 24,609 $ 1,890

Net Cash Used in Operating Activities

Cash used in operating activities for the year ended December 31, 2021, reflects a $26.6 million loss for the year adjusted for $4.8 million of net cash outflows related to changes in operating assets and liabilities, and certain non-cash items including: (i) a $0.3 million gain on forgiveness of the Company's Paycheck Protection Program loan ("PPP loan"), (ii) $1.7 million in costs allocated to warrant issuances not associated with the Merger, (iii) a $1.9 million expense recognized for stock-based compensation, (iv) a $23.0 million gain recorded for the change in the fair market value of the warrant liabilities, of which $3.9 million resulted from the Waiver Agreement, (v) a $0.7 million loss on the issuance of the senior secured debt, and (vi) a $0.2 million lease expense recognized. Additionally, the following net non-cash expenses of $35.7 million were incurred in connection with the Merger transaction:

$30.1 million expense related to in-process research and development solely related to the Merger.

$2.2 million relating to the accelerated debt accretion as a result of the Merger

$1.9 million loss recorded in connection with the issuance of LBS Series 1 Preferred Stock

$1.6 million issuance cost allocated to the warrant liabilities incurred as a result of the transaction costs associated with the Merger.

$0.1 million non-cash benefit for transaction costs shared with Seneca.

Cash used in operating activities for the year ended December 31, 2020 includes a $10.3 million loss for the year adjusted for $2.4 million of net cash inflows related to changes in operating assets and liabilities, a $2.0 million non-cash expense recognized for stock-based compensation, and a $0.8 million non-cash loss on issuance of senior secured debt.

Net Cash Used in Investing Activities

For the year ended December 31, 2021, cash used investing activities consisted of $3.3 million in cash acquired in connection with the Merger that was offset by $3.3 million of cash used to pay for acquisition related costs in 2021. For the year ended December 31, 2020, net cash used in investing activities consisted of $6,000 of property and equipment purchases.

Net Cash Provided by Financing Activities

For the year ended December 31, 2021, cash provided by financing activities was $24.6 million, which was primarily generated as follows: (i) $19.9 million in net proceeds from the issuance of LBS Series 1 Preferred Stock, (ii) $5.2 million from the issuance of common stock and warrants, and (iii) $1.3 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.

For the year ended December 31, 2020, cash provided by financing activities was primarily attributable to $1.2 million from the issuance of common stock and warrants, and $0.8 million from the issuance of debt, partially offset by payments of debt and debt issuance costs of $0.1 million.

Future Liquidity and 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. During the year ended December 31, 2021, the Company repaid the outstanding principal and accrued interest on its outstanding unsecured promissory note and related party note using cash on hand. Also during the year ended December 31, 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.

The Company’s available cash as of the date of this filing will not be sufficient to fund its anticipated level of operations for the next 12 months and the Company will require additional financing by the second half of 2022 to continue at its expected level of operations. If the Company fails to obtain the needed capital, it will be forced to delay, scale back, or eliminate some or all of its development activities or perhaps cease operations.

Other than payments due under the facility lease of its corporate headquarters of approximately $0.1 million and the final insurance financing arrangements payments due of approximately $0.1 million and cash to fund its normal operations, as of December 31, 2021 the Company has no other significant contractual cash commitments required in 2022 or thereafter. The Company intends to enter into insurance financing arrangements when the associated insurance contracts renew in the second quarter of 2022. The Company has no off-balance sheet arrangements.

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 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 statement 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 orders, 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:

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investigative sites in connection with clinical studies;

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vendors in connection with preclinical development activities; and

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vendors related to the development, manufacturing, and distribution of clinical trial materials.

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.

Stock-based compensation

The Company issues stock-based awards to employees and non-employees, generally in the form of stock options. The Company accounts for its stock-based awards in accordance with Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") Topic 718, Compensation—Stock Compensation, or ASC 718. ASC 718 requires all stock-based payments to employees, including grants of employee stock options and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values. The Company's stock-based awards are subject to service-based vesting conditions only. The stock-based compensation expense recognized represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. The Company estimates the fair value of stock option awards using the Black-Scholes option pricing model and recognizes forfeitures as they occur. The Black-Scholes option pricing model requires the use of subjective assumptions, including (i) the risk-free interest rate, (ii) the expected volatility of the Company's common stock, (iii) the expected term of award, and (iv) the expected dividend yield. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require judgment to develop. The risk-free interest rates for periods within the expected life of the option are based on the yields of zero-coupon U.S. treasury securities. Due to the lack of an adequate history of a public market for the trading of the Company's common stock and a lack of adequate company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. For these analyses, the Company has selected companies with comparable characteristics to it, including enterprise value, risk profiles, and position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. The Company computes the historical volatility data using the daily close prices for the selected companies’ shares during the equivalent period of the

calculated expected term of its own stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its common stock price becomes available. The Company has estimated the expected term of its stock options using the “simplified” method, whereby the expected life equals the average of the vesting term and the original contractual term of the option. See Note 9 in Part II, Item 8. "Financial Statement and Supplemental Data" of this Annual Report on Form 10-K for additional information and specific assumptions used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the years ended December 31, 2021 and 2020. Stock-based compensation expense totaled approximately $1.9 million for the year ended December 31, 2021, and $2.0 million for the year ended December 31, 2020.

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

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

The Company accounts for its common stock warrants in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 815, the Company accounts for common stock warrants as liabilities if the warrant requires net cash settlement or gives the holder the option of net cash settlement or it fails the equity classification criteria. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement and the warrants meet the requirements to be classified as equity. Common stock warrants classified as liabilities are initially recorded at fair value and remeasured at fair value each balance sheet date with the offset adjustments recorded in change in fair value of warrant liability within the consolidated statements of operations. See Note 9 in Part II, Item 8. "Financial Statement and Supplemental Data" of this Annual Report on Form 10-K for additional information and specific assumptions used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the years ended December 31, 2021 and 2020. Common stock warrants classified as equity are initially measured at fair value on the grant date and are not subsequently remeasured.

See Note 5 in Part II, Item 8. "Financial Statement and Supplemental Data" 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, 2021 and 2020. As of December 31, 2021 and 2020, the Company's liability classified warrants had a fair value of $2.7 million and $1.8 million, respectively, and in the years ended December 31, 2021 and 2020, the Company recognized gains associated with the change in fair value of warrants of $23.0 million and less than $0.1 million, respectively.

Common Stock Fair Value

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

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

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

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.

Item 8. Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets as of December 31, 2021 and 2020 88

Notes to Consolidated Financial Statements 93

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors

Palisade Bio, Inc.

San Diego, California

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Palisade Bio, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years 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 2020, and the results of its operations and its cash flows for the years 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 audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

Our audits included performing procedures to assess the risks of material misstatement of the 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 financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit 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 consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter 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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Accounting for Complex Financial Instruments

As discussed in Notes 5, 6, 7 and 8, the Company entered into several transactions during the year that included the issuance of debt, equity and warrants. In February 2021, the Company issued the second tranche of senior secured promissory notes resulting in the issuance of $1.7 million in aggregate principal of senior secured promissory notes and warrants to acquire 94,096 shares of common stock (See Note 6). In conjunction with the merger, the Company entered into a securities agreement with an institutional investor to purchase 5,303,568 shares of LBS Series 1 Preferred Stock and warrants to acquire 4,995,893 shares of common stock (See Notes 5 and 7). During 2021, the Company modified the warrants discussed above as a result of a Waiver Agreement to waive the reset provision of the Senior Secured Promissory Note Warrants and the May 2021 warrants (See Note 5).

We identified the accounting for these financing transactions, including the evaluation for potential embedded derivatives and classification of the warrants as a critical audit matter. The application of the accounting guidance applicable to these transactions, including the evaluation for potential embedded derivatives, and the classification of the related warrants is complex, and therefore, applying such guidance to the contract terms is complex and requires significant judgement. Auditing these elements involved especially complex auditor judgment due to the nature of the terms of the financings and warrants and the effort required to address these matters, including the extent of specialized skills and knowledge needed.

The primary procedures we performed to address this critical audit matter included:

•

Inspecting the agreements associated with each transaction and evaluating the completeness and accuracy of the Company’s technical accounting analysis and application of the relevant accounting literature.

•

Utilizing personnel with specialized knowledge and skills in technical accounting to assist in assessing management’s analysis of the senior secured notes and warrants, merger financing and warrants and warrant modification, including the evaluation for potential embedded derivatives, and classification of the related warrants including: (i) evaluating the contracts to identify relevant terms that affect the recognition in the financial statements, and (ii) assessing the appropriateness of conclusions reached by management.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2017.

San Diego, California

March 17, 2022

Palisade Bio, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

December 31,

ASSETS

Current assets:

Accounts receivable — 59

Prepaid expenses and other current assets 1,879 124

Restricted cash 26 26

Deferred transaction costs — 1,817

Property and equipment, net 3 5

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

Accrued compensation and benefits 511 1,590

Current portion of lease liability 112 168

Current portion of debt 87 578

Current portion of related party debt, net — 469

Non-current portion of debt — 94

Lease liability, net of current portion — 112

Commitments and contingencies (Note 11)

Stockholders' equity (deficit):

Total stockholders' equity (deficit) 7,365 (16,602 )

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

Palisade Bio, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share amounts)

Year Ended December 31,

Operating expenses:

In-process research and development 30,117 —

Other income (expense):

Gain on forgiveness of PPP loan 279 —

Loss on issuance of secured debt (686 ) (841 )

Gain on change in fair value of warrant liability 23,033 38

Gain on change in fair value of share liability 91 —

Loss on issuance of LBS Series 1 Preferred Stock (1,881 ) —

Loss on issuance of warrants (3,247 ) —

Loss per common share:

Weighted average shares used in computing loss per common share:

Net loss attributable to common shares - basic $ (26,616 ) $ (10,322 )

Net loss attributable to common shares - diluted $ (31,735 ) $ (10,322 )

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

Palisade Bio, Inc.

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

(in thousands, except share amounts)

Shares Amount Shares Amount Shares Amount

Issuance of common stock to vendor — — — — 325 — 9 — 9

Issuance of common stock warrants related to promissory note — — — — — — 29 — 29

Stock-based compensation expense — — — — — — 2,014 — 2,014

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

Palisade Bio, Inc.

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

(in thousands, except share amounts)

Shares Amount Shares Amount Shares Amount

Issuance of common stock warrants related to promissory note — — — — — — 16 — 16

Issuance of LBS Series 1 Preferred shares — — 4,516,611 — — — — — —

Equity warrant put rights activated upon Merger — — — — — — (51 ) — (51 )

Expiration of put rights on equity classified warrants — — — — — — 26 — 26

Stock-based compensation expense — — — — — — 1,891 — 1,891

Conversion of share liability to common stock — — — — 12,500 1 32 — 33

Vesting of restricted stock units — — — — 8,817 — — — —

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

Palisade Bio, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Year Ended December 31,

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization 2 3

In-process research and development 30,117 —

Noncash transaction costs shared with Seneca (135 ) —

Gain on forgiveness of PPP loan (279 ) —

Accretion of debt discount and non-cash interest expense 2,339 202

Loss on issuance of LBS Series 1 Preferred Stock 1,881 —

Loss on issuance of secured debt 686 841

Loss on issuance of warrants 3,247 —

Change in fair value of warrant liabilities (23,033 ) (38 )

Change in fair value of share liability (91 ) —

Changes in operating assets and liabilities:

Trade and other receivables 84 (59 )

Prepaid and other assets (1,157 ) 89

Accounts payable and accrued liabilities (2,395 ) 1,006

Operating lease liabilities (168 ) (141 )

Net cash used in operating activities (14,773 ) (4,768 )

Cash flows from investing activities:

Cash acquired in connection with the Merger 3,279 —

Acquisition related costs paid (3,333 ) —

Purchases of property and equipment — (6 )

Net cash used in investing activities (54 ) (6 )

Cash flows from financing activities:

Payments on debt (1,433 ) (27 )

Proceeds from issuance of debt 1,250 379

Proceeds from the issuance of related party debt — 450

Proceeds from issuance of LBS Series 1 Preferred Stock 19,900 —

Proceeds from issuance of common stock and warrants 5,209 1,175

Redemption of warrants (99 ) —

Payment of equity issuance costs (67 ) —

Payment of debt issuance costs (151 ) (87 )

Net cash provided by financing activities 24,609 1,890

Cash, cash equivalents and restricted cash, beginning of period 739 3,623

Cash, cash equivalents and restricted cash, end of period $ 10,521 $ 739

Restricted cash 26 26

Total cash, cash equivalents and restricted cash $ 10,521 $ 739

Supplemental disclosure of cash flows:

Interest paid $ 64 $ 55

Supplemental disclosures of non-cash investing and financing activities:

Equity issuance costs included in accounts payable $ — $ 41

Transaction costs shared with Seneca $ 135 $ —

Acquisition costs related to stock issuance $ 1,184 $ —

Issuance of common stock to former Seneca stockholders $ 28,728 $ —

Conversion of LBS Series C Preferred stock into common stock $ 9,503 $ —

Net assets acquired in the Merger $ 2 $ —

Acquisition related vesting of RSU’s assumed in the Merger $ 41 $ —

Debt discount for issuance of warrants $ — $ 29

Issuance of common stock for the cashless exercise of warrants $ 1,689 $ —

Issuance of common stock for settlement of trade payable $ — $ 9

Debt issuance costs included in accounts payable $ — $ 61

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

PALISADE BIO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization, Business and Basis of Presentation

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 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 0.02719 shares of LBS common stock equivalents to one share of Seneca common stock equivalents (the “Exchange Ratio”). On April 27, 2021, in connection with the Merger, Seneca filed a certificate of amendment to its amended and restated certificate of incorporation to affect a 1-for-6 reverse stock split of its common stock (the "Reverse Stock Split"). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. The final Exchange Ratio incorporated the effect of this Reverse Stock Split, and all issued and outstanding common stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. All issued and outstanding shares of LBS common stock and shares of common stock underlying convertible preferred stock, options and warrants prior to the effective date of the Merger have been retroactively adjusted to reflect the Exchange Ratio for all periods presented herein these consolidated financial statements.

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 clinical-stage biopharmaceutical company advancing oral therapies that help patients with acute and chronic gastrointestinal complications stemming from post-operative digestive enzyme damage. The Company's initial focus is guarding against the disruption of gastrointestinal function (referred to as "ileus") following major surgery in order to speed recovery and reduce the time a patient stays in hospital. The Company's lead candidate, LB1148 is a protease inhibitor with the potential to both reduce abdominal adhesions and help restore bowel function following surgery.

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, 2021, the Company had an accumulated deficit of $94.6 million and cash and cash equivalents of $10.5 million. The Company expects to continue to incur operating losses and negative cash flows from operations into the foreseeable future. The successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure.

Historically, the Company has funded its operations primarily through a combination of debt and equity financings. Management anticipates continuing to raise additional capital from the sale of its securities or through agreements, such as potential partnering events of the Company’s existing technology. However, no assurance can be given as to whether the Company will achieve these objectives. Based on the Company’s current business plan, management believes that existing cash and cash equivalents will not be sufficient to fund the Company’s obligations for at least 12 months from the date of issuance of these consolidated financial statements. The Company’s ability to execute its operating plan depends on its ability to obtain additional funding through equity offerings, debt financings or potential licensing and collaboration arrangements. 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. However, the Company’s current working capital, anticipated operating expenses,

and net operating losses raise substantial doubt about its 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 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.

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. 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. Clinical trials of LB1148 have re-started in February 2022, although the Company continues to experience some delays or disruptions due to the COVID-19 pandemic, in particular with respect to activation of additional clinical trial sites and patient enrollment rates. In addition, supply chain constraints associated with the COVID-19 pandemic have impacted the availability of the components needed in the manufacture of LB1148. Depending on the duration and impact of the ongoing COVID-19 pandemic on local and global supply chains, the Company's suppliers could continue to be adversely impacted, which may result in delays or disruptions in the Company's current or future supply chain.

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 purpose (see Note 3). 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.

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 the valuation of derivative liabilities and stock-based compensation 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 one operating segment which consists of research and development activities.

Cash and Cash Equivalents

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

Restricted Cash

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

Deferred Transaction Costs

Deferred transaction costs consist of the legal, accounting and other direct and incremental costs incurred by the Company related to the acquisition of assets under the Merger Agreement. These costs represent legal, accounting and other direct costs related to the acquisition of assets under the Merger Agreement. As of December 31, 2020, deferred transaction costs related to the Merger were $1.8 million. For the year ended December 31, 2021, total transaction costs related to the Merger of $4.7 million were included in the total purchase price (see Note 3 for additional disclosure).

Concentration of Credit Risk

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

Property and Equipment, Net

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

Convertible Preferred Stock

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

The Company did not adjust the carrying values of the Series C Convertible Preferred Stock to its redemption value as of December 31, 2020 since a liquidation event was not probable.

In connection with the Merger, the Series C Convertible Preferred Stock converted to the Company's common stock.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, restricted cash, accounts payable, accrued liabilities, debt and derivative liabilities. The carrying amounts of financial instruments such as cash equivalents, restricted cash, accounts payable, and accrued liabilities approximate their related fair values due to the short-term nature of these instruments. The carrying value of the Company’s debt approximates its fair value due to the market rate of interest, which is based on level 2 inputs. The Company’s derivative financial instruments 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:

Level 1: observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions, which reflect those that a market participant would use.

Further information on the fair value of financial instruments can be found at Note 5, 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 Monte-Carlo simulations. 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 to be bifurcated and accounted for separately as a derivative financial instrument. Additionally, in connection with the issuance of financing instruments, the Company may issue freestanding options and warrants, including options or warrants to non-employees in exchange for consulting or other services performed.

The Company accounts for its common stock warrants in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 815, the Company accounts for common stock warrants as liabilities if the warrant requires net cash settlement or gives the holder the option of net cash settlement, or it fails the equity classification criteria. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement and the warrants meet the requirements to be classified as equity. Common stock warrants classified as liabilities are initially recorded at fair value on the grant date and remeasured at fair value each balance sheet date with the offset adjustments recorded in change in fair value of warrant liability

within the consolidated statements of operations. Common stock warrants classified as equity are initially measured at fair value on the grant date and are not subsequently remeasured.

Research and Development Costs

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

Clinical Trial Expenses

Expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to the Company’s contract arrangements. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to the Company’s service providers will temporarily exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients, site initiation and the completion of clinical milestones. The Company makes estimates of its accrued expenses as of each balance sheet date in its 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. Historically, the Company’s estimated accrued liabilities have materially approximated actual expense incurred. Clinical trial expenses are included in research and development expenses in the consolidated statements of operations.

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.

Debt Issuance Costs

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

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

Net Loss Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company’s Series C Convertible Preferred Stock, the Senior Secured Promissory Note Warrants, the May 2021 Warrants and the July 2021 Warrants (as defined at Note 5) contain non-forfeitable rights to dividends with the common stockholders, and therefore are considered to be participating securities. The Series C 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 an 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, 2021 and December 31, 2020 were calculated under the if-converted and treasury stock methods. Certain of the liability classified warrants were dilutive in the second quarter of 2021 resulting in a dilutive impact for the year ended December 31, 2021.

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,

Basic net loss per common share:

Net loss attributable to common shares - basic $ (26,616 ) $ (10,322 )

Basic net loss per common share $ (2.86 ) $ (3.72 )

Diluted net loss per common share:

Change in fair value of warrants (5,119 ) —

Net loss attributable to common shares - diluted $ (31,735 ) $ (10,322 )

Effect of potentially dilutive securities 38,170 —

Diluted net loss per common share $ (3.39 ) $ (3.72 )

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

Year Ended December 31,

Series C Convertible Preferred Stock — 317,420

Series A Convertible Preferred Stock 6,479 —

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

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04"). The accounting standard update is effective for fiscal years beginning after December 15, 2021. The Company early adopted this standard effective January 1, 2021 and evaluated all outstanding financial instruments that would fall under the scope of ASU 2021-04. The adoption of this standard did not have a significant impact on the on the Company's consolidated financial statement and related disclosures.

Recently Issued Accounting Pronouncements

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

In August 2020, FASB issued ASU No. 2020-06,Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) — Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher stockholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. This ASU may be applied on a full retrospective of modified retrospective basis. For smaller reporting companies, this ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption of the ASU is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is considering early adoption of this standard in 2022 and is currently evaluating the potential impact the adoption of this standard will have on its consolidated financial statements.

3. 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 (five of eight total members) of the combined company, (iii) LBS’s senior management holds all key positions in the senior management of the combined company and (iv) the only employees remaining in the combined company are that of LBS employees (all Seneca employees were terminated on the date of Merger). As a result, as of the closing date of the Merger, the net assets of the Company were recorded at their acquisition-date relative fair values in the accompanying consolidated financial statements of the Company and the reported operating results prior to the Merger are those of LBS.

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

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

In accordance with the Merger Agreement, 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 48 months of the Merger closing from the sale or licensing of all or any part of the intellectual property owned, licensed or controlled by the Seneca immediately prior to the closing of the Merger (the “Legacy Technology”) provided the sale or licensing of such Legacy Technology occurs on or before the 18-month anniversary of such closing (“Legacy Monetization”). The contingent value right (“CVR”) payment amount ("CVR Payment Amount") is calculated as 80% of the net proceeds received, subject to certain conditions, provided, however that (i) no CVR Payment is required in the event such amount is less than $0.3 million during the CVR term and (ii) no distribution of the CVR Payment is required to be made to the holders of the CVR if such distribution would be less than $0.5 million. Based on the information available at the time of the Merger, any contingent consideration associated with the CVR payment was deemed to have a remote possibility. As such, no consideration was recorded on the Company’s consolidated financial statements.

On December 16, 2020, the Company licensed certain patents and technologies, including a sublicense, of its NSI- 189 assets (“189 License”), along with a purchase option through December 16, 2023. On October 18, 2021, the Company agreed to amend the 189 License to allow the licensee to currently exercise its purchase option thereunder and agreed to credit the licensee for the initial $0.1 million previously paid in connection with the 189 License. On October 22, 2021, the licensee under the 189 License agreed to terms of an early exercise of the purchase option under the 189 License and entered into an Asset Transfer Agreement (“ATA”) for all of the NSI-189 assets, resulting in gross proceeds of $0.4 million. The ATA also provides for up to $4.5 million upon the occurrence of one or more of the following events: (i) the first dosing of the first patient in a Phase III Clinical Trial ("FPFD”) from a product derived from the NSI-189 assets, in which case the purchaser will pay the Company a one-time non-refundable milestone payment of $1.5 million; (ii) the first market approval of a product derived from the NSI-189 assets, in the United States or Europe, in which case the purchaser will pay the Company a one-time, non-refundable milestone payment of $3.0 million dollars; or (iii) the licensing or sale of the NSI-189 assets prior to FPFD, in which case Company is entitled to 20% of any consideration received by the purchaser.

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As discussed above, no distribution is required to be made to the holders of the CVR if such distribution would be less than $0.5 million. Accordingly, the gross proceeds from the sale of the NSI-189 assets, less any applicable transaction costs and expenses, have been deposited into the CVR escrow to be used to pay costs and expenses associated with the monetization of the Company’s other legacy asset, NSI-566, which such costs and expenses may include but not be limited to: financial advisory and consulting fees, legal fees, and any other fees associated with the monetization. The Company has engaged a financial advisor to assist in monetizing NSI-566, the Company's stem cell therapeutic. There can be no assurance that NSI-566 will ever be successfully monetized or that CVR holders will receive any distributions from the sale or licensing of the legacy assets.

Merger

The Merger was accounted for as a reverse 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. The following summarizes the purchase price paid in the Merger (in thousands, except share and per share amounts):

Purchase Price Consideration:

Multiplied by the fair value per share of Seneca's common stock (ii) $ 9.96

Total share value consideration 28,728

LBS transaction costs 4,670

Total purchase price $ 33,398

(i)

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

(ii)

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

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

Fair Value of Assets

Cash and cash equivalents $ 3,279

Accounts receivable 24

Prepaid and other current assets 1,270

Accounts payable and accrued expenses (927 )

Accrued compensation (165 )

Warrant liabilities, at fair value (200 )

In-process research and development (IPR&D) (i) 30,117

(i)

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

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4. Balance Sheet Details

Accrued liabilities consisted of the following (in thousands):

December 31,

Accrued accounts payable $ 195 $ 1,018

Accrued clinical trial costs 158 875

Accrued director stipends 110 759

Accrued other — 88

Prepaid expenses and other current assets consisted of the following (in thousands):

December 31,

Prepaid insurances $ 1,408 $ 31

Other receivables 150 —

Prepaid subscriptions and fees 215 35

Prepaid software licenses 78 —

Deferred financing costs — 41

Prepaid other 2 1

5. Fair Value Measurements

The Company has issued warrants that are accounted for as liabilities. Estimating fair values of derivative financial instruments requires the development of estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Because derivative financial instruments are initially and subsequently carried at fair values, the Company’s 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 Altium Growth Fund, LP (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 $5.0 million, in exchange for an aggregate purchase price of up to $3.75 million, representing an aggregate original issue discount of up to $1.25 million (the “Senior Secured Promissory Notes”), and (i) warrants (“Senior Secured Promissory Note Warrants”) to purchase shares of the Company’s common stock. 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 December 31, 2021, there is no principal or interest outstanding on the Senior Secured Promissory Notes.

As of December 31, 2020, the first tranche of the Senior Secured Promissory Note Warrant liability fair value of $1.8 million was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $17.71, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 87 percent, (iv) risk-free interest rate of one-half percent, (v) contractual terms of approximately six years, and (vi) a zero percent dividend rate.

The second tranche of the Senior Secured Promissory Notes and the Senior Secured Promissory Note Warrants were issued on February 1, 2021. The initial fair value of the second tranche of the Senior Secured Promissory Note Warrant liability of $1.8 million was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $17.71, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of

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approximately 88 percent, (iv) risk-free interest rate ofone-half percent, (v) contractual terms of approximately 5.8 years, and (vi) a zero percent dividend rate.

On May 20, 2021, pursuant to the terms of the Securities Purchase Agreement, the Company issued to the Investor warrants to purchase 4,995,893 shares of common stock at an exercise price of $4.70 per share (the “May 2021 Warrants”). In June 2021, pursuant to the reset provisions of the Securities Purchase Agreement, the number of shares of common stock underlying the May 2021 Warrants increased to 5,303,568 shares and the exercise price was reduced to $3.88 per share. At the date of issuance, the Company valued the May 2021 Warrants using a Monte-Carlo valuation model with a resulting fair value of $21.9 million.

The Senior Secured Promissory Note Warrants and the May 2021 Warrants do not meet the criteria for equity classification and are therefore revalued at fair value each reporting period.

On July 21, 2021, the Company and the Investor entered into an agreement to waive certain provisions of the previous Security Purchase Agreement (the "Waiver Agreement"). As part of the Waiver Agreement, the Investor agreed to waive the reset provisions of the Senior Secured Promissory Note Warrants and the May 2021 Warrants such that the number of shares and exercise price in effect immediately prior to the effective date of the Waiver Agreement shall no longer be subject to price-based resets. The waiver of the reset provision of the Senior Secured Promissory Note Warrants and the May 2021 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 $3.9 million, which was recognized in the gain on the change in the fair value of warrant liability at the consolidated statement of operations for the year ended December 31, 2021.

As of December 31, 2021, the fair value of the Senior Secured Promissory Note Warrants in the amount of $0.4 million was determined using a Black-Scholes valuation model that used the following assumptions: (i) a stock price of $1.30, (ii) an exercise price per share of $3.88, (iii) an estimated risk-free interest rate of approximately 1.20 percent, (iv) an estimated contractual term of 4.6 years, (v) volatility of 72.7%, and (vi) a zero percent dividend rate.

As of December 31, 2021, the fair value of the May 2021 Warrants in the amount of $1.7 million was determined using a Black-Scholes valuation model that used the follow assumptions: (i) a stock price of $1.30, (ii) an exercise price per share of $3.88, (iii) an estimated risk-free interest rate of 1.20 percent, (iv) an estimated contractual term of approximately 4.6 years, (v) volatility of 72.7%, and (vi) a zero percent dividend rate.

As consideration for the Waiver Agreement, the Company issued the Investor additional warrants to purchase 1,100,000 shares of the Company's Common Stock at an exercise price of $3.63 per share (the "July 2021 Warrants"). The initial fair value of the July 2021 Warrants was $1.7 million and is included in loss on issuance of warrants at the consolidated statements of operations. The initial fair value was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $3.58, (ii) certain key event dates such as expected capital financings, (iii) an expected re-levered volatility of 99.1 percent, (iv) an estimated risk-free interest rate of 0.82 percent, (v) an estimated contractual term of approximately 5.5 years, and (vi) a zero percent dividend rate.

The July 2021 Warrants are accounted for as liabilities and are included in non-current liabilities in the accompanying consolidated balance sheets. As of December 31, 2021, the fair value of the July 2021 Warrants in the amount of $0.5 million was determined using a Monte Carlo simulation model that considered: (i) a starting stock price of $1.36, (ii) certain key event dates such as expected capital financings, (iii) an expected re-levered volatility of 92.6 percent; (iv) an estimated risk-free rate of 1.27 percent, (v) estimated contractual terms of approximately 5.1 years, and (vi) a zero percent dividend rate.

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The following table summarizes the activity of the Company’s Level 3 warrant liabilities (in thousands):

Year Ended December 31,

Fair value at beginning of period $ 1,830 $ —

Initial fair value at the original issuance date 25,417 1,868

Equity classified warrant put feature activated 51 —

Change in fair value during the period (23,033 ) (38 )

Fair value of warrants exercised (1,689 ) —

Seneca liability classified warrants assumed 200 —

Expiration of equity classified warrant put feature (26 ) —

Settlement of derivative liabilities (99 ) —

Fair value at end of period $ 2,651 $ 1,830

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

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

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

6. Debt

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

December 31,

Financing agreements $ 87 $ 22

Unsecured promissory notes — 231

Related party note — 510

Senior secured debt — 1,677

Paycheck Protection Program loan — 279

Less: Unamortized debt discounts — (1,578 )

Less: current portion of debt (87 ) (1,047 )

Non-current portion of debt $ — $ 94

Financing Agreements

In June and October 2020, the Company entered into agreements to finance certain insurance policies at a stated interest rate of 8.35% and payable over ten months. In April and May 2021, the Company entered into additional agreements to finance additional insurance policies (“Additional Financing Agreements”). The Additional Financing Agreements have a stated interest of 3.57% and 6.67%, respectively, and are payable over a nine- and ten-month

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period, respectively. The agreements are secured by the associated insurance policies. As of December 31, 2021 and December 31, 2020, the aggregate remaining balance due under the financing agreements was $87,000 and $22,000, respectively. The remaining minimum debt payment associated with the insurance financing arrangements was paid in the first quarter of 2022 and concurrent with this final payment, the Company renewed the associated insurance policies.

Other than the final insurance financing arrangements payments due, as of December 31, 2021, the Company has no other minimum debt payments required in 2022 or thereafter.

Unsecured Promissory Notes

December 2019 Note

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

July 2020 Note

On July 9, 2020, the Company issued an unsecured promissory note for a principal sum of $125,000 with an original issue discount of 20 percent (the “July 2020 Note”). There were no issuance costs related to this transaction. Interest accrues on the unpaid principal amount at a rate equal to ten percent per annum, compounded annually. Principal and any accrued but unpaid interest under this note was due and payable upon demand of the holder at any time following the earlier to occur of (a) the date on which the Company received at least $1,250,000 in gross proceeds from the issuance of equity securities or securities convertible into or exercisable for equity securities or (b) the 120th day following the issuance date of the note. On November 6, 2020, the Company and the lender mutually agreed to extend the maturity date of the July 2020 Note for an additional 120 days, or through March 6, 2021. No other terms of the original agreement were amended. The Company paid all outstanding accrued interest, which approximated $4,000, in conjunction with the amendment and interest will continue to accrue at the original stated interest rate. On March 6, 2021, the maturity date was further extended to June 6, 2021. On May 25, 2021, the Company and the noteholder amended the note to (i) extend the maturity date of the note to November 15, 2021 and (ii) provide for six monthly payments of $21,445 starting June 15, 2021 in full amortization of the Note (the “July 2020 Note Amendment”). In consideration for the July 2020 Note Amendment, the Company issued warrants to the noteholder to purchase an aggregate of 3,000 shares of the Company's common stock at a purchase price of $6.00 per share. The Company accounted for the amendments as a modification. The incremental value of the warrants of $6,000 was recorded as a discount on the debt and is accreted to interest expense over the remaining term of the debt. As of December 31, 2020, the outstanding balance of the July 2020 Note, including accrued interest, was $126,000. The entire amount of principal and accrued interest on the July 2020 Note was repaid in November 2021.

October 2020 Note

On October 16, 2020, the Company issued an unsecured promissory note for a principal sum of $500,000 with an original issue discount of ten percent. Interest accrued on the unpaid principal amount at a rate equal to ten percent per annum, compounded annually. The note was due and payable 180 days from the issuance date, or April 14, 2021. On May 25, 2021, the Company and the noteholder amended the note to (i) extend the maturity date of the note to November 15, 2021 and (ii) provide for six monthly payments of $90,901 starting June 15, 2021 in full amortization of the Note (the “October 2020 Note Amendment”). As consideration for the October 2020 Note Amendment, the Company issued warrants to the noteholder to purchase an aggregate of 5,000 shares of the Company's common stock at a purchase price of $6.00 per share. This noteholder was considered a related party due to its equity investment in the Company (see Note 12). As of December 31, 2020, the outstanding balance of the October 2020 Note, including

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accrued interest, was $510,000. The entire amount of principal and accrued interest on the October 2020 Note was repaid in November 2021.

Senior Secured Promissory Notes

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

The Senior Secured Promissory Notes had a first closing on December 17, 2020 and a second closing on February 1, 2021. Each of the closings resulted in the issuance of $1.7 million in aggregate principal of Senior Secured Promissory Notes and Senior Secured Promissory Note Warrants to acquire 94,096 shares of common stock, with an exercise price of $17.71 per share. The third closing was at a date to be determined by the Company between March 16, 2021 and the closing of the Merger. The Company did not elect to draw down the third tranche. At issuance, the fair value of the first tranche of the Senior Secured Promissory Note Warrants exceeded the debt proceeds, resulting in a $0.8 million loss on issuance of debt. At issuance, the fair value of the second tranche of the Senior Secured Promissory Note Warrants exceeded the debt proceeds, resulting in a $0.7 million loss on issuance of debt. The debt was recognized at a zero-dollar carrying value and was being accreted to the principal amount of the debt, on a straight-line basis, through a charge to interest expense in the statement of operations. 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 December 31, 2021, there is no principal or interest outstanding on the Senior Secured Promissory Notes.

Paycheck Protection Program (“PPP”)

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

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

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

7. Stockholders’ Equity (Deficit)

Classes of Stock

As of December 31, 2021, the Company was authorized to issue 300,000,000 shares of $0.01 par value common stock and 7,000,000 shares of $0.01 par value Series A 4.5% Convertible Preferred Stock ("Series A Convertible Preferred Stock"). As of December 31, 2021, the Company's Series A Convertible Preferred Stock issued and outstanding in the amount of 200,000 shares is convertible into 6,479 shares of the Company's common stock.

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As of December 31, 2020, LBS was authorized to issue 6,797,500 shares of $0.01 par value common stock and 33,594,625 shares of $0.001 par value Series C Convertible Preferred Stock. In connection with the Merger, the issued and outstanding Series C Convertible Preferred Stock shares in the amount of 11,674,131 were converted to 317,420 shares of the Company's common stock.

LBS Series 1 Preferred Stock

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 $20.0 million in cash to fund the combined company following the Merger. In return, LBS issued to the Investor a total of 5,303,568 shares of LBS Series 1 Preferred Stock at $0.001 par value per share. The LBS Series 1 Preferred Stock converted to common stock upon the closing of the Merger.

The Company recorded $19.9 million in net proceeds associated with this financing. In addition, the Company issued to the Investor warrants to purchase common stock in the combined company (see Note 8). The fair value of these warrants exceeded the equity proceeds, resulting in a $1.9 million loss on the issuance of the LBS Series 1 Preferred Stock. The Company incurred offering costs of $1.6 million which were allocated to the warrants and included in loss on issuance of warrants at the consolidated statements of operations.

Common Stock

Each share of common stock entitles the holder thereof to one vote on each matter submitted to a vote at a meeting of stockholders.

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 1,509,896 shares of the Company’s common stock, par value $0.01 per share at a purchase price of $3.45 per share. The Company recorded $5.1 million in proceeds, net of equity issuance costs of $67,000, associated with the financing. In addition, the Company issued warrants to purchase common stock (see Note 8).

8. Common Stock Warrants

From time to time, the Company issues warrants to its investors, creditors and various other individuals. The Company’s outstanding common stock warrants that are classified as equity warrants are included as a component of stockholder’s equity (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 outstanding warrants have an exercise price ranging from $3.45 to $4,695.60 per share and generally expire between five and ten years after the date of issuance. The Company had common stock warrants exercisable and outstanding of 7,181,741 and 195,712, at December 31, 2021 and December 31, 2020, respectively.

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

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

Senior Secured Promissory Note Warrants

In connection with the issuance of the Senior Secured Promissory Notes, the Company issued Senior Secured Promissory Note Warrants to the Investor and identified an investor put right for future equity purchases in exchange for settlement of the Senior Secured Promissory Notes (see Note 5). The Senior Secured Promissory Note Warrants are immediately exercisable and expire five years from the date of registration of the warrants, or August 10, 2026.

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The Senior Secured Promissory Note Warrants did not meet the criteria for equity classification and therefore, the warrants are accounted for as liabilities. As of December 31, 2021, the Senior Secured Promissory Note Warrants were exercisable for 858,892 shares of the Company’s common stock at an exercise price of $3.88.

May 2021 Warrant

The May 2021 Warrants are immediately exercisable and will have a term of five years from the date all the shares underlying the May 2021 Warrant have been registered for resale. In the fourth quarter of 2021, the Investor converted 1,309,266 warrants into shares of the Company's common stock in a cashless exercise. The Company revalued the warrants to their fair value immediately prior to the exercise, resulting in a gain of $55,000, which is included in the change in fair value of warrant liabilities at the consolidated statements of income. As of December 31, 2021, the May 2021 Warrants were exercisable for 3,994,302 shares of the Company’s common stock at an exercise price of $3.88. On February 2, 2022 and March 15, 2022, the Investor converted another 2,700,000 warrants and 1,294,302 warrants, respectively, into shares of the Company's common stock in cashless exercises.

July 2021 Warrant

The July 2021 Warrants are exercisable beginning six months following registration and for five years thereafter. The Waiver Agreement resulted in a change in fair value of the original warrants that the Company has recognized in earnings as of the date of the Waiver Agreement together with any associated transaction costs. As of December 31, 2021, the July 2021 Warrants were exercisable for 1,100,000 shares of the Company’s common stock at an exercise price of $3.63.

August 2021 Warrant

On August 19, 2021, pursuant to the terms of a Security Purchase Agreement, the Company issued to Yuma, a related party, a warrant to purchase up to 377,474 shares of the Company's common stock at a price of $3.45 per share, subject to certain adjustments (the "August 2021 Warrants"). The August 2021 Warrants are immediately exercisable and will have a term of five years from the date all of the shares underlying the August 2021 Warrants were registered, or December 8, 2021. The August 2021 Warrants were equity classified.

The following table summarizes warrant activity for the year ended December 31, 2021:

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 Palisade options and became exercisable by the holder of such option in accordance with its terms, with (i) the number of shares of common stock subject to each option multiplied by the Exchange Ratio and (ii) the per share exercise price upon the exercise of each option divided by the Exchange Ratio. In connection with the closing of the Merger, no further awards will be made under the 2013 Plan.

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Seneca’s 2019 Equity Incentive Plan (the “2019 Plan”) was approved by Seneca’s stockholders on June 12, 2019. In April 2021, in connection with the Merger, all outstanding options under the 2019 Plan were cancelled and all outstanding restricted stock units were vested. The vested shares were settled for shares of the Company's common stock in the third quarter of 2021 (see below). In connection with the closing of the Merger, no further awards will be made under the 2019 Plan.

In April 2021, in connection with the closing of the Merger, the Company’s stockholders approved the Palisade Bio, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The maximum number of shares of the Company’s common stock available for issuance under the 2021 Plan will not exceed 1,502,583 shares. In addition, such aggregate number of shares of the Company's common stock shares available for issuance will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2022 and ending on (and including) January 1, 2031, in an amount equal to 4% of the total number of shares of the Company's common stock outstanding on December 31st of the preceding year; provided, however, that the board of directors may act prior to January 1st of a given year to provide that the increase for such year will be a lesser number of shares of common stock. The Company's plans allow for the issuance of both incentive stock options and non-statutory stock options.

Also in April 2021, the Company 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. The maximum number of shares of the Company’s common stock available for issuance under the 2021 ESPP will not exceed 115,583 shares. In addition, such aggregate number of shares of the Company's common stock shares available for issuance will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2022 and ending on (and including) January 1, 2031, in an amount equal to 1% of the total number of shares of the Company's common stock outstanding on December 31st of the preceding year; provided, however, that the board of directors may act prior to January 1st of a given year to provide that the increase for such year will be a lesser number of shares of common stock. As of December 31, 2021, there have been no shares issued under the ESPP.

In November 2021, the Company's compensation committee of the board of directors adopted the Palisade Bio, Inc. 2021 Inducement Award Plan (the "2021 Inducement Plan"). The 2021 Inducement Plan was adopted in order to grant share-based awards to individuals not previously employed by the Company, as an inducement to join the Company. Subject to certain changes in the capitalization of the Company, as provided in the 2021 Inducement Plan document, the aggregate number of shares of the Company's common stock that may be issued under the 2021 Inducement Plan will not exceed 750,000 shares of common stock.

Stock Options

The Company believes that stock options align the interests of its employees, consultants 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 of directors but generally not to exceed ten-years, and generally vest in equal proportions each quarter over three years. Vesting would 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. Stock awards are valued as of the measurement 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 plans allow for the issuance of both incentive stock options and non-statutory stock options.

On April 27, 2021, in connection with the closing of the Merger, the Company granted a total of 59,818 options to its CEO and CFO under the 2013 Plan. These grants vested immediately. On November 18, 2021, the Company granted a total of 671,756 options to employees under the 2021 Plan and granted a total of 150,000 options to recently hired employees under the 2021 Inducement Plan. Also on November 18, 2021, the Company granted a total of 338,380 options to the members of the Company's board of directors under 2021 Plan (the "Board Grants"). The Board Grants vest in equal proportions each quarter over a period of one year from the date of grant. Each option awarded entitles the participant to receive one share of the Company's stock upon exercise.

The fair value of options granted is estimated as of the grant date using the Black-Scholes option pricing model using the assumptions in the following table:

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December 31,

Weighted-average exercise price per share $ 3.08 $ 26.85

Weighted-average expected term (years) 5.63 8.18

Weighted-average risk-free interest rate 1.25 % 0.98 %

Weighted-average expected dividend yield — —

Weighted-average volatility 74.32 % 80.0 %

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

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

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

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

The following table summarizes stock option activity and related information under the 2013 Plan, the 2021 Plan and the 2021 Inducement Plan for the year ended December 31, 2021:

Exercised — — — —

Forfeited, expired or cancelled (89,868 ) 19.10 — —

The weighted-average grant date fair value of options granted during the years ended December 31, 2021 and December 31, 2020 was $1.68 per share and $20.23 per share, respectively. The fair value of the options vested during each the years ended December 31, 2021 and December 31, 2020 was $1.2 million and $2.1 million, respectively.

Share-Based Compensation Expense

Subsequent to the application of the Exchange Ratio, 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 "Underwater Options"). On November 18, 2021, the compensation committee of the Company's board of directors 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.

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The Company determined that the Repricing represented a modification of share-based awards under ASC 718. Accordingly, the Company recognized incremental compensation expense of $0.4 million for the year ended December 31, 2021. The additional unrecognized compensation expense of approximately $26,000 associated with the Repricing is expected to be recognized over the remaining vesting period of the modified options, or 1.1 years.

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

Year Ended December 31,

Research and development expense $ 440 $ 534

As of December 31, 2021, the unrecognized compensation cost related to outstanding options was $1.9 million which is expected to be recognized over a weighted-average period of approximately 2.08 years.

Restricted Stock Units

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

As of December 31, 2020, there were 4,817 RSUs outstanding under the 2019 Plan. The Company granted and additional 4,000 RSU’s under the 2019 Plan in the year ended December 31, 2021 with a weighted average grant date fair value of $10.14 per share. In connection with the closing of the Merger, these RSU’s became fully vested, and the Company recognized RSU vesting expense of approximately $41,000 during the year ended December 31, 2021.

During the year ended December 31, 2021, 8,817 RSUs under the 2019 Plan were converted to the Company's common stock. There were no outstanding RSUs as of December 31, 2021.

Officer Settlement Agreements

The Company’s former Chief Development Officer was terminated in February 2021. As part of the separation package, the Company’s board of directors agreed to (i) accelerate vesting by four months for the former employee’s outstanding options and (ii) allow seven years from the termination date for the former employee to exercise all vested options. The Company concluded the actions taken by the Company resulted in modification accounting for the stock options. The Company determined the incremental fair value of the modified stock options was $225,000, which was expensed to research and development expenses in the consolidated statements of operations during the year ended December 31, 2021.

10. Collaborations and License Agreements

Co-Development and Distribution Agreement with Newsoara

The Company has entered into a co-development and distribution agreement, as amended, (the “Co-Development Agreement”), with Newsoara Biopharma Co., Ltd. (“Newsoara”). Pursuant to the Co-Development Agreement, the Company granted Newsoara an exclusive co-development right under certain patents and know-how owned or controlled by the Company 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 Co-Development Agreement obligates Newsoara to initially use the Company as the exclusive supplier for all of Newsoara’s requirements for Licensed Products in the Territory.

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In consideration of the rights granted to Newsoara under the Co-Development Agreement, Newsoara paid the Company a one-time upfront fee of $1.0 million and a six-digit regulatory milestone payment in 2018. In addition, Newsoara is obligated to make (i) additional payments of 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. For the years ended December 31, 2021 and December 31, 2020, there were no milestone payments earned from Newsoara under the Co-Development Agreement.

License Agreements with the Regents of the University of California

The Company has entered into three license agreements, as amended, with the Regents of the University of California (“Regents”) for exclusive commercial rights to certain patents, technology and know-how. The technology is related to the Company’s products under development. The Regents are entitled to certain development and sales milestones.

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 $10,000 and is 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. The Company is 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, the Company is obligated to pay the Regents a percentage of non-royalty licensing revenue it receives from any sublicensees under the 2021 UC License.

In conjunction with the Co-Development and Distribution Agreement with Newsoara, the Company is obligated to pay the Regents royalties for its portion of the sublicense income equal to 30 percent of one-third of the upfront payment and milestone payment received. As of December 31, 2021 and December 31, 2020 a sublicensing payable of approximately $81,000 and $125,000, respectively, was included in accounts payable.

11. Commitments and Contingencies

Facility Lease

The Company leases office space for its corporate headquarters under a non-cancelable facility operating lease for 4,911 square feet located in Carlsbad, California.

In July 2019, the Company entered into a facility operating lease (the “July 2019 Headquarter Lease”) at this location. The initial contractual term is three years commencing on August 1, 2019 and expiring on July 31, 2022. The Company has the option to renew this 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. Therefore, the lease term is determined to be a total of three years commencing on August 1, 2019 and expiring on July 31, 2022. Commencing in August 2019, the Company is subject to contractual monthly lease payments of $16,000 for the first 12 months with 3 percent escalations at the first and second lease commencement anniversary. The Company incurred cost associated with the lease of $197,000 and $194,000 during the years ended December 31, 2021 and 2020, respectively.

The July 2019 Headquarter 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

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incurred. All fixed and variable lease payment amounts were recorded within general and administrative expenses on the statement of operations.

As of December 31, 2021 and 2020, the weighted-average remaining lease term on the July 2019 Headquarter Lease was 0.6 years and 1.6 years, respectively, and the weighted-average discount rate on the lease was 15% for both periods. As of December 31, 2021, the total remaining future minimum lease payments associated with the lease of $117,000, less imputed interest of $5,000, will be paid in 2022.

Office lease deferral of payments concession

On April 29, 2020, the Company entered into a rent deferral agreement with its landlord pursuant to the financial impacts of the COVID-19 pandemic on the Company. Under the terms of the arrangement, the Company would repay any deferred balance in equal installments prorated over six months beginning October 2020. As of December 31, 2020, the deferred balances under this arrangement totaled $87,000 and was included in accounts payable. The Company paid the entire deferred balance during the year ended December 31, 2021.

Accrued Employee Compensation

As of December 31, 2020, certain Company executives and employees voluntarily agreed to temporarily suspend a portion of their salary benefits and bonuses. As of December 31, 2020, $1.1 million was accrued related to these suspended salary benefits and bonuses, which were paid upon the closing of the Merger in the second quarter of 2021.

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, 2021 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

Unsecured Related Party Notes

Yuma is an equity investor in the Company and is considered a related party. As discussed in Note 6, on October 16, 2020, the Company entered into an unsecured promissory note of $500,000 with Yuma. This unsecured promissory note was amended in May 2021 to extend its maturity date to November 2021. The amendment to the unsecured promissory note was accounted for by the Company as a debt modification. As discussed in Note 8, on August 19, 2021, the Company issued the August 2021 Warrants to Yuma.

Director stipends

Unpaid cash stipends owed to the Company's directors for their annual board service are recorded on the Company’s consolidated balance sheets within accrued liabilities. These liabilities were $110,000 and $759,000 as of December 31, 2021, and December 31, 2020, respectively.

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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.

14. Income Taxes

The components of the provision for income taxes are as follows (in thousands):

Year Ended December 31,

Current:

Federal $ — $ —

PALI US Equity

PALI · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

PALI US Equity☆

PALI · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

PALI US Equity