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

You should read the following discussion and analysis of financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results, performance or achievements could differ materially from any future results, performance or achievements discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors.”

OVERVIEW

The Company is a biopharmaceutical company focused on developing therapeutics that protect the integrity of the intestinal barrier. The Company's lead therapeutic candidate, LB1148, is a novel oral liquid formulation of the well-characterized digestive enzyme inhibitor tranexamic acid (“TXA”) that is currently being developed for administration prior to surgeries that are at risk of disrupting the intestinal epithelial barrier. By inhibiting the activity of digestive proteases, the Company believes that LB1148 has the potential to reduce the formation of postoperative adhesions between intra-abdominal tissues and accelerate the time to the return of normal gastrointestinal ("GI") function.

Clinical and Regulatory Overview

Prevention of Postoperative Abdominal Adhesions: GI Surgery

Status of the U.S. Phase 2 Adhesions Study

Going forward, the Company will prioritize the advancement of its U.S. Phase 2 adhesions study, which, it believes, will maximize the value of its current product pipeline. Management and the Company’s board of directors (the “Board”) remain confident in its potential to support advancement to a U.S. Phase 3 study. As discussed below, the Company has decided to pause its U.S. Phase 3 study evaluating return of bowel function in adult patients undergoing gastrointestinal surgery. In pausing this U.S. Phase 3 study, the Company will narrow its focus to the continued advancement of its U.S. Phase 2 adhesions study.

On December 16, 2022, the Company announced that it had enrolled a total of 35 of the planned 70 patients in its Phase 2 study. Of the patients enrolled, as of March 2, 2023, 31 have completed their first surgery, and nine have completed a second surgery, which is a primary assessment endpoint for data under the current study protocol. The Company believes that the data collected to date is sufficient for its evaluation purposes, including an evaluation of its risk profile, and for such reason, the Company is voluntarily ceasing enrollment in the trial. Palisade expects to report topline data from the 35 patients in the second quarter of 2023.

The Company is currently planning a dose optimization study for all indications to determine if a different dosing protocol in healthy volunteers would enhance the risk profile of LB 1148 while simultaneously providing efficacy. It is anticipated that this study will generate pharmacokinetic and pharmacodynamic data across multiple doses in patients, with enrollment expected to commence in the second quarter of 2023.

Postoperative Return of Bowel Function: GI Surgery

In May 2022, the Company’s co-development partner in China received clearance from the Center for Drug Evaluation of the National Medical Products Administration of the People’s Republic of China to proceed with their Phase 3 clinical trial to evaluate LB1148 for accelerated return of bowel function in adult patients undergoing gastrointestinal surgery. In June 2022, based on data generated by this co-development partner in its earlier Phase 2 study, the Company initiated a Phase 3 clinical trial in the U.S. evaluating LB1148 to accelerate the return of bowel function in adult patients undergoing gastrointestinal surgery.

Status of the U.S. Phase 3 Return of Bowel Function Study

In late September of 2022, the Company's board of directors (the "Board"), in connection with a special clinical subcommittee it appointed, initiated a review of the Company’s operations, including its ongoing clinical programs. As part of the review, the Company engaged the services of independent third-party clinical development experts to assist in the review. In October of 2022, the review identified that in 2020, a former member of the Company’s

management received unblinded clinical data related to bowel function from a subset of patients in the Company’s ongoing U.S. Phase 2 study.

Upon discovery of this information, the special clinical subcommittee of the Board commenced a thorough review of the Company’s ongoing clinical programs. As a result of the review, the Company believes that the current U.S. Phase 3 study protocol requires additional standardization across sites and further clarification in the definition of endpoints to permit an adequate assessment of the efficacy of LB1148 to recover GI function. The Company does not believe that the favorable safety and tolerability profiles of LB1148 were impacted by these findings.

Given the foregoing, as well as the financial resources available to the Company at this time, the Company believes it is in its stakeholders’ best interests to pause enrollment in the U.S. Phase 3 study in order to determine next steps for the study.

Notwithstanding the pausing of the trial, the Company remains optimistic as to the efficacy of LB1148 for the return of bowel function based on its co-development partner’s Phase 2 data and their plan to continue its Phase 3 study in China.

Financial Overview

Financial Results

The Company's operating loss for the year ended December 31, 2022 was $15.7 million, which consisted of research and development expense and general and administrative expense of $6.5 million and $8.8 million, respectively, and restructuring costs of $0.4 million. Net cash used in operating activities was $13.4 million for the year ended December 31, 2022, of which $1.3 million of cash usage was attributable to changes in operating assets and liabilities.

Recent Financings and Warrant Exercises

In May 2022, the Company completed a registered direct equity offering for net proceeds of $1.4 million consisting of gross proceeds of $2.0 million less equity issuance costs of approximately $0.6 million. In August 2022, the Company completed an underwritten public equity offering for net proceeds of $11.5 million consisting of gross proceeds of $13.8 million, including the full exercise of the underwriter's overallotment offering, less equity issuance costs of approximately $2.3 million. Finally, on January 4, 2023, the Company completed a registered direct offering and concurrent private placement for net proceeds of approximately $2.1 million consisting of gross proceeds of $2.5 million less equity issuance costs of approximately $0.4 million.

As of December 31, 2022, holders of 1.4 million common stock purchase warrants issued pursuant to the Company’s August underwritten public offering (the "August Warrants") have exercised such warrants for gross cash proceeds of $3.68 million, $1.4 million of which was receivable to the Company as of December 31, 2022. Subsequent to December 31, 2022, an additional 0.5 million Series 1 Warrants and Series 2 Warrants have been exercised for additional gross cash proceeds of $1.2 million.

The Company intends to use the net proceeds from its recent equity financings for working capital and general corporate purposes, including the development of the Company’s lead product candidate LB1148. With the additional cash proceeds of $4.7 million received subsequent to year end as a result of the registered direct offering and concurrent private placement, which closed on January 4, 2023, and cash received from warrant exercises, combined with the Company's cash and cash equivalents balance of $12.4 million as of December 31, 2022, the Company believes it has sufficient cash to fund its operations and clinical programs beyond its U.S. Phase 2 adhesions study topline data readout expected in the second quarter of 2023, and into mid-2024.

Reverse Stock Split

On November 15, 2022, the Company effected a 1-for-50 reverse stock split of its issued and outstanding common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, each of the Company’s shareholders received one new share of common stock for every 50 shares such shareholder held immediately prior to the effective time of the Reverse Stock Split. The Reverse Stock Split affected all the Company’s issued and outstanding shares of common stock equally. The par value and authorized shares of the Company's common stock was not adjusted as a result of the Reverse Stock Split. The Reverse Split also affected the Company’s outstanding stock options, common stock warrants and other exercisable or convertible securities and resulted in the shares underlying such instruments being reduced and the exercise price being increased proportionately. Unless otherwise noted, all common stock shares, common stock per share data and shares of common stock underlying convertible preferred stock, stock options and common stock warrants included in these financial statements, including the exercise price of such equity instruments, as applicable, have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

COVID-19

In April 2020, as a result of impacts and risks associated with the COVID-19 pandemic ("COVID-19"), the Company paused enrollment and program activities surrounding the Company’s clinical trials of its lead therapeutic candidate, LB1148, due primarily to slower enrollment. The Company's U.S Phase 2 clinical study for the prevention of postoperative abdominal adhesions re-started in February 2022, and in June 2022 the Company initiated its U.S Phase 3 clinical study for the return of bowel function. Notwithstanding, as described above, the Company paused enrollment in the U.S. Phase 3 clinical study for the return of bowel function pending the determination of next steps for the study. The Company cannot predict how legal and regulatory responses to ongoing concerns about COVID-19 or other major public health issues will impact the Company’s business, nor can it predict potential adverse impacts related to the availability of capital to fund the Company’s operations. Any of these factors, alone or in combination with others, could harm the Company’s business, results of operations, financial condition or liquidity. However, the magnitude, timing, and duration of any such potential financial impacts cannot be reasonably estimated at this time.

Refer to Note 1 in Part II, Item 8. "Financial Statement and Supplemental Data" of this Annual Report on Form 10-K for further discussion of COVID-19 and the impact it has had on the Company's business operations. For further discussion of the risks related to COVID-19, see Item 1A. "Risk Factors" in Part I of this Annual Report on Form 10-K.

FINANCIAL OVERVIEW

Amounts discussed herein related to the Company's financial condition and results of operations prior to the closing of the Merger are representative of LBS’s operations. The financial condition and results of operations subsequent to the closing of the Merger include the accounts of the Company and its wholly owned subsidiaries, Leading Biosciences, Inc. and Suzhou Neuralstem Biopharmaceutical Co., Ltd.

Revenue

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

Research and Development Expenses

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

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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, Contract Research Organizations ("CROs"), clinical site, contract manufacturing organizations (“CMOs”) and research laboratories in connection with its preclinical development, process development, manufacturing, clinical development, and regulatory activities. The Company does not allocate employee costs and costs associated with its discovery efforts, laboratory supplies and facilities, including other indirect costs, to specific product candidates because these costs are deployed across multiple programs and, as such, are not separately classified. The Company primarily uses internal resources to conduct its research as well as for managing its preclinical development, process development, and clinical development activities.

General and Administrative Expenses

General and administrative expenses consist primarily of salary and employee-related costs and benefits, professional fees for legal, intellectual property, investor and public relations, accounting and audit services, insurance costs, director's fees and stipends, and general corporate expenses.

Going Concern

The Company’s management has disclosed in Note 1 to the consolidated financial statements included herein that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the filing date of this Annual Report on Form 10-K. This determination was based on the following factors: (i) the Company’s available cash as of the date of this filing will not be sufficient to fund its anticipated level of operations for the next 12 months; (ii) the Company will require additional financing by mid-2024 to continue at its expected level of operations; and (iii) if the Company fails to obtain the needed capital, it will be forced to delay, scale back, or eliminate some or all of its development activities or perhaps cease operations. In the opinion of management, these factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern as of the filing date of this Annual Report on Form 10-K and for one year from the issuance of the consolidated financial statements.

Results of Operations

The following table summarizes our results of operations for the year ended December 31, 2022 and 2021 (in thousands):

Year Ended December 31, Change

Operating expenses

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

Restructuring costs 410 — 410 n/a

Other income (expense):

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

Loss on issuance of secured debt — (686 ) 686 n/a

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

Research and Development Expenses

The increase in research and development expenses of approximately $4.1 million, or 169%, from $2.4 million for the year ended December 31, 2021 to $6.5 million for the year ended December 31, 2022 is attributable to the Company's increased clinical trial activities as a result the resuming of patient enrollment in the Company's phase 2 clinical study of the prevention of postoperative abdominal adhesions and the initiation of enrollment in its phase 3 clinical study of the accelerated return of bowel function following gastrointestinal ("GI") surgery. Both of these studies, which had been virtually halted in early 2021, began clinical activities again at the end of 2021. The phase 2 clinical study of the prevention of postoperative abdominal adhesions began enrolling patients again in the second quarter of 2022 and the phase 3 clinical study of the accelerated return of bowel function following GI surgery began enrolling patients early in the third quarter of 2022. Accordingly, the majority of the increase in clinical operations expenses for the year ended December 31, 2022 compared to 2021 is the result of increased investigator site activations, clinical vendor charges, and consultant and contract labor charges, which increased by $1.1 million, $0.4 million and $0.3 million, respectively, compared to last year. Regulatory costs were higher by $0.2 million compared to last year concurrent with the Company receiving phase 3 clearance for its postoperative return of bowel function study. Also contributing to the year-over-year increase was higher drug manufacturing-related costs of $0.8 million for the year ended December 31, 2022 compared to 2021, primarily due to the scale up, and process and analytical method optimization associated with the production and packaging of LB1148. Net research and development employee-related costs increased by $1.6 million for the year ended December 31, 2022 compared to 2021 in line with the increased headcount to support the ramp up in clinical activities, which were offset by a $0.3 decrease in stock-based compensation expense for the year ended December 31, 2022 compared to 2021.

As previously disclosed, in the fourth quarter of 2022 the Company paused its Phase 3 study and is now directing its clinical focus to the continued advancement of its U.S. Phase 2 adhesions study.

In-Process Research and Development

For the year ended December 31, 2021, the Company recognized an in-process research and development expense of $30.1 million associated with the Merger. There was no such expense for the year ended December 31, 2022.

General and Administrative Expenses

General and administrative expenses decreased by approximately $0.5 million, or 6%, from $9.3 million for the year ended December 31, 2021 to $8.8 million for the year ended December 31, 2022, primarily as a result of a year-over-year decrease in stock-based compensation expense of $0.6 million. The decrease in stock-based compensation expense in 2022 compared to 2021 was due to (i) a $0.4 million incremental expense recognized in the fourth quarter of 2021 due to the modification of certain outstanding stock options and (ii) approximately $0.2 million of expense recognized in the second quarter of 2021 related to stock options granted to executive management as a result of the successful completion of the Merger; neither of which recurred in 2022.

Increased general and administrative expenses associated with operating as a public company for the full twelve-month period, as compared to the 8-month post-Merger period that the Company's accounting predecessor, LBS, was public, included (i) insurance costs associated with being a public company, which were $0.4 million higher for the year ended December 31, 2022 compared to 2021, (ii) professional fees and investor relations fees, which were higher by $0.1 million for the year ended December 31, 2022 compared to 2021, and (iii) shareholder services costs which were higher by $0.1 million for the year ended December 31, 2022 compared to 2021. These increases were largely offset by cost-saving opportunities implemented by the Company in the third and fourth quarters of 2022, including those associated with the cost-reduction plan announced on September 9, 2022, which are expected to continue in 2023.

Restructuring Expenses

The Company has recognized restructuring costs of $0.4 million for the year ended December 31, 2022, consisting of severance and benefits payments pursuant to employment agreements and the execution of severance and release agreements with employees terminated under a cost-reduction plan announced on September 9, 2022. There were no

restructuring costs or related liabilities recognized for the year ended December 31, 2021. The Company does not expect to incur any other significant costs associated with the cost reduction-plan announced on September 9, 2022.

Other income (expense)

Other income, net decreased by $13.8 million, or 90%, to $1.5 million for the year ended December 31, 2022 from $15.2 million for the year ended December 31, 2021. The year ended December 31, 2021 included net other expenses of $2.2 million for which there were no comparable expenses in the year ended December 31, 2022, including: (i) a $1.9 million loss recognized on the issuance of LBS Series 1 Preferred Stock, (ii) a $0.7 million non-cash loss recorded on the issuance of secured debt in connection with the discount given for the pre-Merger senior secured debt, (iii) a $0.3 million gain on the forgiveness of the Company's Paycheck Protection Program ("PPP") loan, and (iv) a $0.1 million gain on the change in the fair value of a share liability owed to a former Seneca shareholder.

The year ended December 31, 2022 includes a $2.4 million non-cash gain associated with the revaluation of liability-classified warrants in the period, which was partially offset by a $1.1 million non-cash loss on the issuance of warrants. On January 31, 2022 (the "Effective Date"), the Company entered into an agreement to irrevocably waive any adjustment to the exercise price of the certain warrants held by an investor from and after the Effective Date for the Company's issuances of equity or equity-linked securities at a price below the exercise price of the related warrants (the "January 2022 Waiver Agreement"). As consideration for this waiver, pursuant to the January 2022 Waiver Agreement, the Company issued the investor 45,000 warrants (the "January 2022 Warrants"). The $1.1 million non-cash loss on the issuance of the January 2022 Warrants represents the fair value of the warrants on the date of issuance, January 31, 2022. The year ended December 31, 2021 includes a $23.0 million non-cash gain associated with the revaluation of liability-classified warrants in the period, $3.9 million of which is attributable to a gain resulting from the modification of certain liability-classified warrants, partially offset by $3.2 million of costs associated with on the issuance of warrants in 2021.

The remainder of the net decrease in other income (expense), net, is due to lower interest expense for the year ended December 31, 2022 as the prior year period included a $1.6 million non-cash interest charge associated with a debt discount on pre-Merger debt, and increased interest expense of $0.8 million due to a higher debt balance outstanding during the year. Other income was approximately $0.1 million higher in 2022 as a result of higher interest rates on the Company's short-term investments of cash on hand, which were higher in 2022 due to the Company's increased financing activities.

Liquidity and Capital Resources

Since the Company's inception, it has financed its operations through the sales of its securities, issuance of long-term debt, the exercise of investor common stock warrants, and to a lesser degree grants and research contracts as well as the licensing of its intellectual property to third parties. Refer to the paragraph under the heading "Going Concern" in the Financial Overview section above for management's assessment of the Company’s ability to continue as a going concern.

Sources of Liquidity

Management expects the Company to incur substantial operating losses for the foreseeable future in order to complete clinical trials and launch and commercialize any product candidates for which it may receive regulatory approval. The Company will need to raise additional capital through a combination of equity offerings, debt financings, collaborations, and other similar arrangements. The Company’s ability to raise additional capital may be adversely impacted by (i) general political or economic conditions, (ii) inflation, (iii) rising interest rates, (iv) ongoing supply chain disruptions, (v) the ongoing conflict in the Ukraine, (vi) limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry, (vii) or a resurgence of COVID-19, COVID-19 variants, or another pandemic. In the event the Company is unable to access additional capital, it may need to curtail or greatly reduce its operations, which could have an adverse impact on its business, financial condition, and results of operations.

Recent Financings

May 2022 Registered Direct Offering

On May 6, 2022, the Company entered into securities purchase agreements with certain investors pursuant to which it agreed to sell and issue, in a registered direct offering (the “May 2022 Registered Direct Offering”), an aggregate of 72,935 shares of its common stock, par value $0.01 per share, at a purchase price of $27.50 per share (all amounts adjusted for Reverse Stock Split) and, in a concurrent private placement, also agreed to sell and issue to such purchasers warrants (the “May 2022 Purchase Warrants”) to purchase up to 72,935 shares of common stock.

In connection with the May 2022 Registered Direct Offering and concurrent private placement transaction, the Company engaged a placement agent. The Company issued placement agent warrants (“May 2022 Placement Agent Warrants”) to purchase an aggregate of 4,376 shares of its common stock. The May 2022 Placement Agent Warrants and the May 2022 Purchase Warrants are referred to collectively as the May 2022 Warrants.

The net cash proceeds from the May 2022 Registered Direct Offering of $1.4 million consisted of gross cash proceeds of $2.0 million less equity issuance costs of approximately $0.6 million.

August 2022 Public Offering

On August 16, 2022, the Company closed on a registered public offering pursuant to which the Company agreed to issue and sell (i) 987,200 shares of the Company's common stock, par value $0.01 per share, (ii) 1,460 shares of Series B Convertible Preferred Stock, of which each share is convertible into 80 shares of the Company's common stock, (iii) 1,104,000 Series 1 warrants with a term of one year from the date of issuance (“Series 1 Warrant”) to purchase one share of the Company's common stock, and (iv) 1,104,000 Series 2 warrants with a term of five years from the date of issuance (“Series 2 Warrant”) to purchase one share of the Company's common stock (the "August 2022 Public Offering"). The warrants became exercisable beginning on the date of stockholder approval of the exercisability of the warrants, which was received on October 6, 2022. Gross proceeds from the August 2022 Public Offering, including the full exercise of the underwriter overallotment option, were $13.8 million and net proceeds were approximately $11.5 million after deducting equity issuance costs of $2.3 million, which includes the underwriter discount, professional fees, and the fair value of the warrants issued to the underwriter of the August 2022 Public Offering, Ladenburg Thalmann & Co. Inc. (the "Underwriter"). All shares of the Series B Convertible Preferred Stock have been converted into shares of the Company's common stock as of December 31, 2022.

January 2023 Registered Direct Offering and Private Placement

On January 4, 2023, the Company announced that it had closed on a previously announced agreement with certain institutional and accredited investors pursuant to which it agreed to sell and issue, in a registered direct offering (the “Registered Offering”), an aggregate of (i) 476,842 shares of the Company's common stock, par value $0.01 per share, at a purchase price per share of $2.375, and (ii) 37,000 pre-funded warrants to purchase shares of the Company's common stock at a purchase price of $2.3749, with such warrants having an exercise price of $0.0001 per share and a perpetual term. Additionally, in a concurrent private placement, the Company also agreed to sell and issue to such purchasers, an aggregate of (i) 538,789 pre-funded warrants to purchase shares of the Company's common stock at an exercise price of $0.0001 per share, and a perpetual term; and (ii) 1,052,631 warrants to purchase shares of the Company's common stock at an exercise price of $2.375 per share and a term of five (5) years (collectively, the “January 2023 Offering”). All of the warrants are immediately exercisable from their date of issuance.

Pursuant to a placement agency agreement dated as of December 30, 2022, the Company engaged Ladenburg Thalmann & Co. Inc. (the “Placement Agent”), to act as the exclusive placement agent in connection with the Registered Offering and concurrent private placement transaction. The Company issued warrants to the Placement Agent to purchase an aggregate of 63,158 shares of the Company's common stock (the "Placement Agent Warrants"). The Placement Agent Warrants have an exercise price of $2.9688 per share and a term of five (5) years. The Placement Agent Warrants are immediately exercisable from issuance.

Gross proceeds from the January 2023 Offering were $2.5 million and net proceeds are expected to be approximately $2.1 million after deducting equity issuance costs of approximately $0.4 million.

Warrant Exercises

As of December 31, 2022, holders of 1.4 million Series 1 and Series 2 common stock purchase warrants issued pursuant to the August 2022 Public Offering have exercised such warrants for gross cash proceeds of $3.68 million, $1.4 million of which was receivable to the Company as of December 31, 2022. Subsequent to December 31, 2022, an additional 0.5 million Series 1 and Series 2 common stock warrants have been exercised for additional gross cash proceeds of $1.2 million.

The Company intends to use the net proceeds from its recent equity financings for working capital and general corporate purposes, including the development of the Company’s lead product candidate LB1148. With the additional cash proceeds of $4.7 million received subsequent to year end as a result of the January 2023 Offering, and cash received from Series 1 and Series 2 warrant exercises, combined with the Company's cash and cash equivalents balance of $12.4 million as of December 31, 2022, the Company believes it has sufficient cash to fund its operations and clinical programs beyond its U.S. Phase 2 adhesions study topline data readout expected in the second quarter of 2023, and into mid-2024.

Cash Flows

As of December 31, 2022, the Company had $12.4 million in cash, cash equivalents and restricted cash. The following table shows a summary of the Company's cash flows for the years ended December 31, 2022 and 2021 (in thousands):

Year Ended December 31,

Net cash used in operating activities $ (13,360 ) $ (14,773 )

Net cash used in investing activities $ (10 ) $ (54 )

Net cash provided by financing activities $ 15,258 $ 24,609

Net Cash Used in Operating Activities

Cash used in operating activities of $13.4 million for the year ended December 31, 2022 reflects a $14.3 million net loss adjusted for $1.3 million of net cash inflows related to changes in operating assets and liabilities, and certain non-cash items including: (i) a $1.1 million loss recognized from the issuance of the January 2022 Warrants, (ii) a $2.4 million gain recognized for the change in the fair market value of the warrant liabilities in the period, and (iii) a $1.0 million non-cash expense recognized for stock-based compensation.

Cash used in operating activities of $14.8 million for the year ended December 31, 2021 includes a $26.6 million net loss adjusted for $4.8 million of net cash outflows related to changes in operating assets and liabilities, and certain non-cash items including: (i) $0.3 million gain on forgiveness of the PPP loan, (ii) $1.7 million in costs allocated to the warrant issuances not related to the Merger, (iii) $1.9 million non-cash expense for stock-based compensation, (iv) $23.0 million gain recorded for the change in the fair market value of the warrant liabilities in the period, of which $3.9 million resulted from the modification of certain liability-classified warrants, (v) $0.1 million gain recorded for the change in the fair market value of the share liability, and (vi) $0.7 million loss on the issuance of the senior secured debt. Additionally, the year ended December 31, 2021 includes net non-cash expenses of $35.7 million, which were incurred directly in connection with the Merger.

Net Cash Used in Investing Activities

For the year ended December 31, 2022, cash used in investing activities consisted of approximately $10,000 used to purchase property and equipment, primarily leasehold improvements. For the year ended December 31, 2021, cash used in investing activities consisted of $3.3 million in cash acquired in connection with the Merger that was more than offset by $3.3 million of cash used to pay for acquisition related costs in 2021.

Net Cash Provided by Financing Activities

For the year ended December 31, 2022, cash provided by financing activities of $15.3 million was attributable to cash proceeds of $1.8 million from the May 2022 Registered Direct Offering and $12.6 million from the August 2022 Public Offering and cash proceeds from the redemption of Series 1 and Series 2 warrants, partially offset by payments

of equity issuance costs of $0.6 million during the year and payments made on the Company's insurance financing arrangements of $0.8 million during the year.

For the year ended December 31, 2021, cash provided by financing activities of $24.6 million consisted of $19.9 million in net proceeds from the issuance of LBS Series 1 Preferred Stock, $5.2 million in net proceeds from the issuance of common stock and warrants, and $1.3 million in proceeds from the issuance of senior secured debt. These increases were partially offset by payments on debt of $1.4 million, redemption of warrants of $0.1 million, payment of debt issuance costs of $0.2 million and payment of equity issuance costs of $0.1 million.

Contractual Obligations

Office Lease

On May 12, 2022, the Company entered into a new, non-cancelable facility operating lease (the "Corporate Office Lease") of office space for its corporate headquarters, replacing its existing corporate headquarters lease that expired on July 31, 2022. The Corporate Office Lease is for 2,747 square feet of an office building in Carlsbad, California. The initial contractual term is for 39-months commencing on June 1, 2022 and expiring on August 31, 2025. The Company has the option to renew the Corporate Office Lease for an additional 36-month period at the prevailing market rent upon completion of the initial lease term. The Company has determined it is not reasonably certain that it will exercise this renewal option.

Commencing on June 1, 2022, the Company is subject to contractual monthly lease payments of $10,850, plus certain utilities, for the first 12 months with 3 percent escalations at the first, second and third lease commencement anniversaries. As of December 31, 2022, the total remaining future minimum lease payments associated with the Corporate Office Lease of approximately $316,000, less imputed interest of $46,000, will be paid over the remaining lease term of approximately 2.7 years.

Insurance Financing Arrangements

Consistent with past practice, on May 9, 2022 and May 24, 2022, the Company entered into agreements to finance certain insurance policies which renewed in April 2022 and May 2022. The financing arrangements entered into on May 9, 2022 and May 24, 2022 have stated interest rates of 3.82% and 6.92%, respectively, and are payable over a 9-month period and 10-month period, respectively, with the first payment commencing May 27, 2022. The insurance financing arrangements are secured by the associated insurance policies. As of December 31, 2022, the aggregate remaining balance under the Company's insurance financing arrangements was $88,000.

Other than the final insurance financing arrangements payments due, as of December 31, 2022, the Company has no other minimum debt payments required in 2023 or thereafter.

Future Liquidity Needs

The Company has incurred significant operating losses and negative cash flows from operations since inception. To date, the Company has not been able to generate significant revenues nor achieve operating profitability. The Company plans to fund its current operating needs using cash on hand. The Company’s available cash as of the date of this filing will not be sufficient to fund its anticipated level of operations for the next 12 months and the Company will require additional financing by mid-2024 to continue at its expected level of operations. If the Company fails to obtain the needed capital, it will be forced to delay, scale back, or eliminate some or all of its development activities or perhaps cease operations.

Critical Accounting Policies and Estimates

The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments, and assumptions that impact the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of expenses during the reporting period. The Company’s estimates are based on historical experience, known trends, events and various other factors that it believes are reasonable under the

circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In making estimates and judgments, management employs critical accounting policies.

The Company's significant accounting policies used in the preparation of the consolidated financial statements are described in more detail in Note 2 in Part II, Item 8. "Financial Statement and Supplemental Data" of this Annual Report on Form 10-K. However, the Company believes that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations:

Accrued research and development expenses

The Company is required to make estimates of our accrued expenses resulting from our obligations under contracts with CROs, clinical sites, manufacturers, vendors and consultants, in connection with conducting research and development activities. This process involves reviewing open contracts and purchase requisitions, communicating with Company personnel and consultants to identify services that have been performed on the Company's behalf, and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company's service providers invoice the Company monthly in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date based on facts and circumstances known to it at that time.

The financial terms of the Company's contracts with CROs, clinical sites, manufacturers, vendors and consultants are subject to negotiation and vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. The Company reflects research and development expenses associated with its clinical trial activities by matching those expenses with the period in which the Company estimates services and efforts are expended. The Company accounts for research and development expenses according to the progress of the underlying study as measured by the timing of various aspects of the study or related activities, such as the successful enrollment of subjects and the completion of clinical study milestones. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period and adjusts accordingly. There may be instances in which payments made to the Company's vendors will exceed the level of services provided and result in a prepayment of the clinical expense.

Other examples of estimated accrued research and development expenses include fees paid to:

•

investigative sites in connection with clinical studies;

•

vendors in connection with preclinical development activities; and

•

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.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates its financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company values its derivatives using the Black-Scholes option pricing model or the Monte-Carlo simulation model when a variety of future events and outcomes is required to be factored into the valuation based on the terms of the underlying derivative instrument. Derivative instruments are valued at inception, upon events such as an exercise of the underlying financial instrument, and at subsequent reporting periods. The classification of derivative instruments, including whether such instruments should be recorded as liabilities, is re-assessed at the end of each reporting period.

to be bifurcated and accounted for separately as a derivative financial instrument. Additionally, in connection with the issuance of financing instruments, the Company may issue freestanding options and warrants.

The Company accounts for its common stock warrants in accordance with ASC 480, Distinguishing Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 480 and ASC 815, the Company accounts for common stock warrants as liabilities if the warrant requires net cash settlement or gives the holder the option of net cash settlement, or it fails the equity classification criteria. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement and the warrants meet the requirements to be classified as equity. Common stock warrants classified as liabilities are initially recorded at fair value on the grant date and remeasured at fair value at each balance sheet date with the offsetting adjustments recorded in change in fair value of warrant liability within the consolidated statements of operations. If the terms of a common stock warrant previously classified as a liability are amended and pursuant to such amendment meet the requirements to be classified as equity, the common stock warrants are reclassified to equity at the fair value on the date of the amendment and are not subsequently remeasured. Common stock warrants classified as equity are recorded on a relative fair value basis when they are issued with other equity classified financial instruments.

See Note 6 in the consolidated financial statements of this Annual Report on Form 10-K for additional information and specific assumptions used in applying the Black-Scholes option pricing model and the Monte Carlo simulation valuation model to determine the estimated fair value of the Company's liability-classified warrants issued in the years ended December 31, 2022 and 2021. As of December 31, 2022 and 2021, the Company's liability-classified warrants had a fair value of $0.1 million and $2.7 million, respectively, and in the years ended December 31, 2022 and 2021, the Company recognized gains associated with the change in fair value of warrants of $2.4 million and $23.0 million, respectively. The significant decrease in the fair value of the Company's liability-classified warrants from December 31, 2021 to December 31, 2022 was the result of the $2.4 million decrease in the fair value of the outstanding warrants, due primarily to a significant decrease in the market price of Company's common stock over the period, and a $1.3 million decrease due to the fair value of warrants exercised in the period, partially offset by the initial fair value of liability-classified warrants issued during the year.

Recently Adopted Accounting Pronouncements

See Note 2 to the consolidated financial statements included elsewhere in this report.

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

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets as of December 31, 2022 and 2021 76

Notes to Consolidated Financial Statements 82

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Palisade Bio, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Palisade Bio, Inc. (the “Company”) as of December 31, 2022, and the related consolidated statement of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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

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

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

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accounting for Complex Financial Instruments

As described in Notes 7 and 8 to the consolidated financial statements, the Company executed several transactions during the year that included the issuance of convertible preferred stock and warrants.

We identified the accounting for these complex financial instruments as a critical audit matter. This includes both the evaluation of the various features as potential embedded derivatives and the determination of the respective fair value of the instruments and embedded features. The application of the accounting guidance applicable to the transactions is complex, and therefore, applying such guidance to the contract terms is complex and requires significant management judgement. Auditing these elements involved especially complex auditor judgement due to the nature of the terms of these instruments, and the effort required to address these matters, including the extent of specialized skills and knowledge required.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others:

•

Inspecting the agreements associated with the transactions and evaluating the completeness and accuracy of the Company's technical accounting analysis, including the identification of potential embedded derivatives, and the application of the relevant accounting literature.

•

Utilizing personnel with specialized knowledge and skills in technical accounting matters and in the determination of fair valuation to assist in assessing management's analysis of the transactions, including (i) evaluating the contracts to identify relevant terms that affect the recognition of the financial instruments in the consolidated financial statements, and (ii) assessing the appropriateness of conclusions reached by management.

/s/ Baker Tilly US, LLP

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

Tewksbury, Massachusetts

March 22, 2023

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

Palisade Bio, Inc.

Carlsbad, California

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Palisade Bio, Inc. (the “Company”) as of December 31, 2021, the related consolidated statements of operations, statements of convertible preferred stock and stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements.”) In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

Basis for Opinion

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

/s/ BDO USA, LLP

We served as the Company's auditor from 2017 to 2022.

San Diego, California

March 17, 2022, except for the immaterial revision to previously issued financial statements as described in Note 3 and the impact of the reverse stock split on the 2021 financial statements as described in Note 2, as to which date is March 22, 2023

Palisade Bio, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

December 31,

ASSETS

Current assets:

Prepaid expenses and other current assets 2,350 1,011

Restricted cash 26 26

Property and equipment, net 10 3

Other noncurrent assets 694 868

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accrued compensation and benefits 486 511

Current portion of lease liability 105 112

Lease liability, net of current portion 211 —

Commitments and contingencies (Note 11)

Stockholders' equity:

Total liabilities and stockholders' equity $ 15,763 $ 12,512

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

Restructuring costs (Note 11) 410 —

Other income (expense):

Gain on forgiveness of PPP loan — 279

Loss on issuance of secured debt — (686 )

Gain on change in fair value of warrant liability 2,426 23,033

Gain on change in fair value of share liability — 91

Interest expense (13 ) (2,398 )

Loss on issuance of warrants (1,110 ) (3,247 )

Loss per common share*:

Weighted average shares used in computing loss per common share:

Net loss attributable to common shares - basic $ (14,548 ) $ (26,616 )

Net loss attributable to common shares - diluted $ (14,548 ) $ (31,735 )

(*) Basic and diluted loss per common share for the year ended December 31, 2021 adjusted to reflect the 1-for-50 reverse stock split effected on November 16, 2022.

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

Palisade Bio, Inc.

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

(in thousands, except share amounts)

Shares Amount Shares Amount Shares* Amount*

Stock-based compensation expense — — — — — — 1,032 — 1,032

Reverse stock split fractional share settlement — — — — (91 ) — — — —

(*) Adjusted to reflect the 1-for-50 reverse stock split effected on November 16, 2022.

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

Palisade Bio, Inc.

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

(in thousands, except share amounts)

Shares Amount Shares Amount Shares* Amount*

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

Issuance of common stock to vendor — — — — 2,376 — 1,184 — 1,184

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

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

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

Issuance of common stock upon warrant exercises — — — — 26,185 — 1,689 — 1,689

Conversion of share liability to common stock — — — — 250 — 33 — 33

Conversion of restricted stock units to common stock — — — — 176 — — — —

(*) Adjusted to reflect the 1-for-50 reverse stock split effected on November 16, 2022.

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

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 3 2

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

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

Loss on issuance of secured debt — 686

Change in fair value of warrant liabilities (2,426 ) (23,033 )

Change in fair value of share liability — (91 )

Changes in operating assets and liabilities:

Other receivables — 84

Prepaid and other assets and other noncurrent assets 1,027 (1,157 )

Accounts payable and accrued liabilities 399 (2,395 )

Accrued compensation (25 ) (1,120 )

Operating lease liabilities (151 ) (168 )

Net cash used in operating activities (13,360 ) (14,773 )

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 (10 ) —

Net cash used in investing activities (10 ) (54 )

Cash flows from financing activities:

Proceeds from issuance of debt — 1,250

Proceeds from issuance of common stock and warrants 14,401 5,209

Proceeds (payments) from the redemption of warrants 2,274 (99 )

Payment of equity issuance costs (627 ) (67 )

Payment of debt issuance costs — (151 )

Net cash provided by financing activities 15,258 24,609

Cash, cash equivalents and restricted cash, beginning of period 10,521 739

Cash, cash equivalents and restricted cash, end of period $ 12,409 $ 10,521

Restricted cash 26 26

Total cash, cash equivalents and restricted cash $ 12,409 $ 10,521

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,

Supplemental disclosures of cash flow information:

Interest paid $ 12 $ 64

Right-of-use assets obtained in exchange for lease liabilities $ 355 $ —

Supplemental disclosures of non-cash investing and financing activities:

Issuance of common stock for the cashless exercise of warrants $ 1,274 $ 1,689

Fair value of warrants issued to placement agent $ 55 $ —

Fair value of warrants issued to underwriter agent $ 459 $ —

Transaction costs shared with Seneca $ — $ 135

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

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

Net assets acquired in the Merger $ — $ 2

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

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

Palisade Bio, Inc.

Notes To Consolidated Financial Statements

1. Organization and Business

The Merger

On April 27, 2021, Leading Biosciences, Inc. (“LBS”) became a wholly owned subsidiary of Seneca Biopharma Inc. (“Seneca”) in accordance with the terms of the agreement and plan of merger and reorganization, dated as of December 16, 2020, (the “Merger Agreement”) by and among Seneca, Townsgate Acquisition Sub 1, Inc., a wholly owned subsidiary of Seneca (“Merger Sub”), and LBS, pursuant to which Merger Sub merged with and into LBS, with LBS surviving as a wholly owned subsidiary of Seneca (the “Merger”). Concurrent with the closing of the Merger, LBS outstanding common stock, common stock warrants and stock options for the purchase of LBS common stock were exchanged for Seneca common stock, Seneca common stock warrants, and options for the purchase of Seneca common stock, at a ratio of 0.02719 shares of LBS common stock equivalents to one share of Seneca common stock equivalents (the “Exchange Ratio”). Immediately following the Merger, Seneca changed its name to “Palisade Bio, Inc.”

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

Liquidity and Going Concern

The Company has a limited operating history, and the sales and income potential of the Company’s business and market are unproven. The Company has experienced operating losses and negative cash flows from operations since its inception. At December 31, 2022, the Company had an accumulated deficit of $109.2 million and cash and cash equivalents of $12.4 million. The Company expects to continue to incur operating losses 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.

Based on the Company’s current working capital, anticipated operating expenses, and anticipated net operating losses, there is substantial doubt about the Company's ability to continue as a going concern for a period of one year following the date that these consolidated financial statements are issued. The consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments for the recovery and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Historically, the Company has funded its operations primarily through a combination of debt and equity financings. The Company plans to continue to fund its operations through cash and cash equivalents on hand, as well as through future equity offerings, debt financings, other third-party funding, and potential licensing or collaboration arrangements. Refer to Note 7, Stockholders' Equity (Deficit) and Note 15, Subsequent Events, for discussion of the recent financings undertaken by the Company. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to the Company. Even if the Company raises additional capital, it may also be required to modify, delay or abandon some of its plans which could have a material adverse effect on the Company’s business, operating results and financial condition and the Company’s ability to achieve its intended business objectives. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

COVID-19

In April 2020, as a result of impacts and risks associated with the COVID-19 pandemic ("COVID-19"), the Company paused enrollment and program activities surrounding the Company’s clinical trials of its lead therapeutic candidate, LB1148, due primarily to slower enrollment. The Company's U.S. Phase 2 clinical study for the prevention of postoperative abdominal adhesions re-started in February 2022, and in June 2022 the Company initiated its U.S. Phase 3 clinical study for the return of bowel function. Notwithstanding, in the fourth quarter of 2022 the Company paused enrollment in the U.S Phase 3 clinical study for the return of bowel function upon determining that the study's protocol requires additional standardization across sites and further clarification in the definition of endpoints to permit an adequate assessment of the efficacy of LB1148 to recover GI function. The Company is currently assessing the next steps for the study. The Company cannot predict how legal and regulatory responses to ongoing concerns about COVID-19 or other major public health issues will impact the Company’s business, nor can it predict potential adverse impacts related to the availability of capital to fund the Company’s operations. Any of these factors, alone or in combination with others, could harm the Company’s business, results of operations, financial condition or liquidity. However, the magnitude, timing, and duration of any such potential financial impacts cannot be reasonably estimated at this time.

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Dollar amounts contained in these consolidated financial statements are in whole numbers, unless otherwise indicated.

The accompanying consolidated financial statements prior to the closing of the Merger are representative of LBS’s operations as LBS was determined to be the accounting acquirer for financial reporting purposes. The consolidated financial statements subsequent to the closing of the Merger include the accounts of the Company and its wholly owned subsidiaries, Leading Biosciences, Inc. and Suzhou Neuralstem Biopharmaceutical Co., Ltd. All the entities are consolidated in the Company's consolidated financial statements and all intercompany activity and transactions, if any, have been eliminated.

Reverse Stock Split

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments, and assumptions that impact the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet, and the reported amounts of expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relate to clinical trial accruals and its derivative financial instruments. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as 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, 2022 and December 31, 2021, 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 Equity Issuance Costs

Deferred equity issuance costs consist of the legal, accounting and other direct and incremental costs incurred by the Company related to its equity offerings (refer to Note 15, Subsequent Events) or shelf registration statements. As of December 31, 2022, deferred equity issuance costs of $114,000 were included in prepaid expenses and other current assets in the consolidated balance sheets. There were no deferred equity issuance costs as of December 31, 2021. These costs will be netted against additional paid-in capital as a cost of the future equity issuances to which they relate.

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.

Convertible Preferred Stock

The Company’s Series C Convertible Preferred Stock has been classified as temporary equity, in accordance with authoritative guidance of Accounting Standard Codification ("ASC") 480-10-S99 for the classification and measurement of potentially redeemable securities, as the Series C Convertible Preferred Stock are redeemable for cash or other assets upon the occurrence of an event that is not solely within the Company’s control, including the liquidation, sale or transfer of control of the Company.

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

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, restricted cash, other current receivables, accounts payable, accrued liabilities, debt and liability-classified warrants. The carrying amounts of financial instruments such as cash equivalents, restricted cash, other current receivables, accounts payable, and accrued liabilities approximate their related fair values due to the short-term nature of these instruments. The carrying value of the Company’s debt approximates its fair value due to the market rate of interest, which is based on level 2 inputs. The Company’s liability-classified warrants are carried at fair value based on level 3 inputs as defined below. None of the Company’s non-financial assets or liabilities are recorded at fair value on a nonrecurring basis.

The Company follows ASC 820, Fair Value Measurements and Disclosures which, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability.

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

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 the Company's liability-classified financial warrants can be found at Note 6, Fair Value Measurements.

Derivative Financial Instruments

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

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.

Leases

In accordance with ASC 842, Leases, the Company assesses contracts for lease arrangements at inception. Operating right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date equal to the present value of future lease payments using the implicit, if readily available, or incremental borrowing rate based on the information readily available at the commencement date. ROU assets include any lease payments as of commencement and initial direct costs but exclude any lease incentives. Lease and non-lease components are generally accounted for separately and the Company recognizes operating lease expense straight-line over the term of the lease.

Research and Development Costs

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

Clinical Trial Expenses

Expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to the Company’s contract arrangements. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to the Company’s service providers will temporarily exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients, site initiation and the completion of clinical milestones. The Company makes estimates of its accrued expenses as of each balance sheet date in its consolidated financial statements based on facts and circumstances known at that time. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual or prepaid expense balance accordingly. As of December 31, 2022 and December 31, 2021, the Company has accrued for $184,000 and $158,000, respectively, in clinical trial expenses for which services have been provided but the Company has not yet been invoiced as of the balance sheet date. 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.

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 Common Share

Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company's Series B Convertible Preferred Stock and certain of the Company's outstanding warrants contain non-forfeitable rights to dividends with the common stockholders, and therefore are considered to be participating securities. The Series B Convertible Preferred Stock and the warrants do not have a contractual obligation to fund the losses of the Company; therefore, the application of the two-class method is not required when the Company is in a net loss position but is required when the Company is in a net income position. When in a net income position, diluted earnings per share is computed using the more dilutive of the two-class method or the if-converted and treasury stock methods.

As the Company was in a net loss position for both periods, basic and diluted loss per share for the years ended December 31, 2022 and December 31, 2021 were calculated under the if-converted and treasury stock methods. Accordingly, in computing the net loss attributable to basic and diluted common shares for the year ended December 31, 2022, the Company has deducted the value of the effect of the down round feature on equity classified warrants that was triggered in the period as it was determined to be anti-dilutive. Basic and diluted earnings per share during the three months ended September 30, 2021 were calculated under the two-class method, as the Company was in a net income position for that period. Certain of the liability-classified warrants were dilutive in the three months ended September 30, 2021 resulting in a dilutive impact for the year ended December 31, 2021.

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 $ (14,548 ) $ (26,616 )

Weighted average shares used in calculating basic loss per share 880,311 186,195

Basic net loss per common share $ (16.53 ) $ (142.95 )

Diluted net loss per common share:

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

Net loss attributable to common shares - diluted $ (14,548 ) $ (31,735 )

Effect of potentially dilutive securities — 763

Diluted net loss per common share $ (16.53 ) $ (169.74 )

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

December 31,

Series A Convertible Preferred Stock 129 129

Comprehensive Income (Loss)

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

Recently Adopted Accounting Pronouncements

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The ASU introduced a new credit loss methodology, the

Current Expected Credit Losses (“CECL”) methodology, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to maturity debt securities, trade receivables and other receivables measured at amortized cost at the time the financial asset is originated or acquired. After the issuance of ASU 2016-13, the FASB issued several additional ASUs to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. In November 2019, the FASB issued an amendment making this ASU effective for fiscal years beginning after December 15, 2022 for smaller reporting companies. The Company adopted this standard as of January 1, 2023 and expects it will not have a material impact on its consolidated financial statements and related disclosures for the three months ending March 31, 2023.

3. Revision of Previously Issued Financial Statements for Correction of Immaterial Errors

In connection with the preparation of the Company's condensed consolidated financial statements required to be included in the Quarterly Report on Form 10-Q as of and for the nine months ended September 30, 2022, which the Company filed with the SEC on November 14, 2022, management identified a classification error, between current assets (prepaid expenses and other current assets) and noncurrent assets (other noncurrent assets), in the Company's historical financial statements, resulting in a conclusion that for comparability purposes a correction should be made to the Company's consolidated financial statements as of December 31, 2021. The Company has revised its balance sheet as of the year ended December 31, 2021 accordingly and included such revisions herein. Based on an analysis of quantitative and qualitative factors, the Company concluded this error was not material to its consolidated financial position as of December 31, 2021 and had no impact on the Company’s results of operations, including net (loss) earnings per share or cash flows as presented in the Company’s previously issued financial statements. As a result, amendment of such reports is not required.

The adjustment to “prepaid expenses and other current assets” and “other noncurrent assets” within the Company’s consolidated balance sheet as of the year ended December 31, 2021 are as follows:

As Reported Adjustment As Adjusted

ASSETS

Current assets:

Prepaid expenses and other current assets 1,879 (868 ) 1,011

Restricted cash 26 — 26

Other noncurrent assets — 868 868

Property and equipment, net 3 — 3

4. Merger between Seneca and LBS

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

The transaction was accounted for as a reverse asset acquisition. Under this method of accounting, LBS was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) LBS’s stockholders owned a substantial majority of the voting rights in the combined company, (ii) LBS designated a majority of the members of the initial board of directors (five of eight total members at the time) 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 immediately prior to the Merger, 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.

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. The Legacy Monetization period of the CVR expired on October 27, 2022.

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

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

On October 27, 2022, the Company entered an agreement to license NSI-532.IGF-1 to the Regents of the University of Michigan ("University of Michigan") for maintaining NSI-532.IGF-1 cell lines, continued development, maintaining patent protection, and seeking licensees. The Company received no upfront fees for the license. NSI-532.IGF-1 is a preclinical cell therapy being investigated as a potential therapy for prevention and treatment of Alzheimer’s disease. The University of Michigan shall bear 100% of the costs for patent filing, prosecution, maintenance, and enforcement of the patent rights. The Company will receive 50% of net revenues received by the University of Michigan from the licensing of patent rights through the last-to-expire patent in patent rights, unless otherwise earlier terminated, less all reasonable and actual out-of-pocket costs incurred in the litigation of patent rights. There can be no assurance that NSI-532.IGF-1 will ever be successfully monetized or that CVR holders will receive CVR Payment Amounts from the sale of the NSI-532.IGF-1 assets.

Merger

The Merger was accounted for as an asset acquisition pursuant to Accounting Standards Codification ("ASC") 805, as substantially all of the fair value of the assets acquired were concentrated in a group of similar identifiable intangible assets, and the acquired assets did not have outputs or employees. As Seneca had not yet received regulatory approval for its product candidates, the fair value attributable to these assets was recorded as acquired in-process research and development (“IPR&D”) expense in the Company’s consolidated statements of operations for the year ended December 31, 2021.

The total purchase price paid in the Merger has been allocated to the net assets acquired and liabilities assumed based on their fair values as of the completion of the Merger. 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. Amount has not been adjusted for the Reverse Stock Split.

(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). Amount has not been adjusted for the Reverse Stock Split.

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.

5. Balance Sheet Details

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

December 31,

Prepaid subscriptions and fees 157 215

Prepaid software licenses 54 78

Deferred equity issuance costs 114 —

Prepaid other 6 28

Other receivables as of December 31, 2022 includes a $1.4 million receivable for the cash exercise price of common stock purchase warrants that had been exercised but the cash had not yet been received by the Company as of that date. The entire amount of this receivable was received by the Company in January of 2023. There was no such receivable as of December 31, 2021.

Accrued liabilities consisted of the following (in thousands):

December 31,

Accrued accounts payable $ 69 $ 195

Accrued clinical trial costs 184 158

Accrued director stipends 141 110

Accrued severance and benefits (Note 11) 180 —

Other noncurrent assets consisted of the following (in thousands):

December 31,

Prepaid insurance, less current portion $ 682 $ 868

Other noncurrent assets 12 —

6. Fair Value Measurements

The Company has issued warrants that are accounted for as liabilities based upon the guidance of ASC 480 and ASC 815. Estimating fair values of liability-classified financial instruments requires the development of estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Because liability-classified financial instruments are initially and subsequently carried at fair value, the Company’s financial results will reflect the volatility in these estimate and assumption changes. Changes in fair value are recognized as a component of other income (expense) in the consolidated statement of operations.

In connection with the transactions contemplated by the Merger, on December 16, 2020, the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with an investor (the “Investor”) pursuant to which, among other things, the Company agreed to issue (i) senior secured promissory notes in the aggregate principal amount of up to $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 to

purchase shares of the Company’s common stock (“Senior Secured Promissory Note Warrants”) were issued. At the date of issuance, the Company valued the Senior Secured Promissory Note Warrants using a Monte-Carlo valuation model with a resulting fair value of $3.6 million.

In connection with the Merger, on April 27, 2021, the outstanding principal and interest on both tranches of the Senior Secured Promissory Notes were cancelled for shares of Series 1 Preferred Stock of the Company. As of both December 31, 2022 and 2021, there is no principal or interest outstanding on the Senior Secured Promissory Notes.

On May 20, 2021, pursuant to the terms of the Securities Purchase Agreement, the Company issued to the Investor warrants to purchase shares of common stock (the “May 2021 Warrants”). All of the outstanding May 2021 Warrants were exercised in the fourth quarter of 2021 and the first quarter of 2022 in exchange for 106,072 shares of the Company's common stock in a series of exercises by the Investor. As of December 31, 2022, there are no May 2021 Warrants outstanding.

On July 21, 2021, the Company and the Investor entered into an agreement to waive certain provisions of the previous Security Purchase Agreement (the "July 2021 Waiver Agreement"). As part of the July 2021 Waiver Agreement, the Investor agreed to waive the reset provisions of the Senior Secured Promissory Note Warrants and the May 2021 Warrants such that the number of shares and exercise price in effect immediately prior to the effective date of the July 2021 Waiver Agreement shall no longer be subject to price-based resets. The waiver of the reset provision of the Senior Secured Promissory Note Warrants and the May 2021 Warrants is considered a modification to those warrants and as a result, the underlying warrants were re-valued using a Black-Scholes based valuation model, which resulted in a favorable change in the fair value of the underlying warrants of $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 consideration for the July 2021 Waiver Agreement, the Company issued the Investor additional warrants to purchase shares of the Company's common stock (the "July 2021 Warrants"). The initial fair value of the July 2021 Warrants was $1.7 million and is included in loss on issuance of warrants at the consolidated statements of operations for the year ended December 31, 2021. The initial fair value was determined using a Monte Carlo simulation model that considered: (i) starting stock price of $3.58 (not adjusted for the Reverse Stock Split), (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.

On January 31, 2022, the Company and the Investor entered into an agreement to irrevocably waive any adjustment to the exercise price of the Senior Secured Promissory Note Warrants and the May 2021 Warrants held by the Investor from and after January 31, 2022 for the Company's issuances of equity or equity-linked securities at a price below the exercise price of the warrants (the "January 2022 Waiver Agreement"). The waiver of any adjustments to the exercise price of the Senior Secured Promissory Note Warrants and the May 2021 Warrants is considered a modification to those warrants. The modification was determined to have no impact on the valuation of the warrants.

As consideration for the foregoing, pursuant to the January 2022 Waiver Agreement, the Company issued the Investor an additional warrants to purchase shares of the Company’s common stock (the “January 2022 Warrants”). The initial fair value of the January 2022 Warrants was determined to be $1.1 million and is included in loss on issuance of warrants in the consolidated statements of operations for the year ended December 31, 2022. The initial fair value was determined using a Monte Carlo simulation model that considered: (i) a starting stock price of $1.17 (not adjusted for the Reverse Stock Split), (ii) certain key event dates such as expected capital financings, if any, (iii) an expected re-levered volatility of 93.0 percent, (iv) an estimated risk-free interest rate of 1.65 percent, (v) an estimated contractual term of approximately 5.5 years, and (vi) a zero percent dividend rate.

As of December 31, 2022, the fair value of the Senior Secured Promissory Note Warrants outstanding was determined using a Black-Scholes option pricing model to be insignificant.

As of December 31, 2022, the fair value of the July 2021 Warrants in the amount of $8,000 was determined using a Monte Carlo simulation model that used the follow assumptions: (i) a starting stock price of $6.15, (ii) certain key event dates such as expected capital financings, (iii) an exercise price per share of $181.55, (iv) an expected re-levered volatility of 83.7 percent; (v) an estimated risk-free rate of 4.10 percent, (vi) estimated contractual terms of approximately 4.1 years, and (vii) a zero percent dividend rate.

As of December 31, 2022, the fair value of the January 2022 Warrants in the amount of $50,000 was determined using a Monte Carlo simulation model that used the following assumptions: (i) a starting stock price of $6.15, (ii) certain key event dates such as expected capital financings, (iii) an exercise price per share of $55.00, (iv) an expected re-levered volatility of 82.8 percent; (v) an estimated risk-free rate of 4.04 percent, (vi) estimated contractual terms of approximately 4.6 years, and (vii) a zero percent dividend rate.

The following table summarizes the activity of the Company’s Level 3 warrant liabilities which are fair valued on a recurring basis (in thousands):

Year Ended December 31,

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

Initial fair value at the original issuance date 1,110 25,417

Equity classified warrant put feature activated — 51

Change in fair value during the period (2,426 ) (23,033 )

Fair value of liability classified warrants exercised (1,274 ) (1,689 )

Seneca liability classified warrants assumed — 200

Expiration of equity classified warrant put feature — (26 )

Settlement of liability-classified warrants — (99 )

Fair value at end of period $ 61 $ 2,651

Seneca had certain common stock purchase warrants that were originally issued in connection with the May 2016 and August 2017 offerings that are accounted for as liabilities whose fair value was determined using Level 3 inputs. The May 2016 warrants expired in the second quarter of 2021, with only the August 2017 warrants recorded as a liability as of December 31, 2022. As a result of the Merger, the put right was activated on the August 2017 offering warrants and these warrants were valued at their put right value using a Black-Scholes option pricing model. The Company settled the put feature for these warrants during the quarter ended June 30, 2021. The put right became inactive in July 2021 and the remaining warrants had an insignificant value as of December 31, 2022, which was determined using a Black-Scholes option pricing model.

In connection with the May 2022 Registered Direct Offering (see Note 7, Stockholders' Equity (Deficit)), the Company issued warrants to purchase shares of its common stock to certain investors and the placement agent. All of these warrants were classified as equity as of the date of issuance of May 10, 2022.

In connection with the August 2022 Public Offering (see Note 7, Stockholders' Equity (Deficit)), the Company issued warrants to purchase shares of its common stock to certain investors and the underwriter of the offering. All of these warrants were classified as equity as of the date of issuance of August 16, 2022.

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

7. Stockholders’ Equity (Deficit)

Classes of Stock

Prior to the completion of the Merger, LBS was authorized to issue 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 (pre-split) of the Company's common 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. 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 for the year ended December 31, 2021.

Common Stock

As of December 31, 2021, the Company was authorized to issue 300,000,000 shares of $0.01 par value common stock. On October 6, 2022, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to decrease the number of authorized shares of common stock of the Company from 300,000,000 to 280,000,000, which took effect upon the filing of an amendment to the Company's Certificate of Incorporation. As a result of this amendment, as of December 31, 2022 the Company was authorized to issue 280,000,000 shares of $0.01 par value common stock. Each share of the Company's common stock entitles the holder thereof to one vote on each matter submitted to a vote at a meeting of stockholders.

On November 15, 2022, the Company effected the Reverse Stock Split. Accordingly, each of the Company’s shareholders received one new share of the Company's common stock for every 50 shares of the Company's common stock such shareholder held immediately prior to the effective time of the Reverse Stock Split. The Reverse Stock Split affected all of the Company’s issued and outstanding shares of the Company's common stock equally. The Reverse Stock Split also affected the Company’s outstanding stock options, warrants and other exercisable or convertible securities and resulted in the shares underlying such instruments being reduced and the exercise price being increased proportionately to the Reverse Stock Split ratio. No fractional shares were issued as a result of the Reverse Stock Split with any fractional shares that would have otherwise resulted from the Reverse Stock Split paid in cash, at an amount equal to the resulting fractional interest in one share of the Company's common stock to which the shareholder would otherwise be entitled, multiplied by the closing trading price of the Company's common stock on November 15, 2022. The amount of cash paid for fractional shares was insignificant.

As a result of the Reverse Stock Split, the number of issued and outstanding shares of the Company's common stock was adjusted from 77,080,169 shares to approximately 1,541,508 shares. Each share of the Company's common stock entitles the holder thereof to one vote on each matter submitted to a vote at a meeting of stockholders.

Preferred Stock

As of December 31, 2022 and December 31, 2021, the Company was authorized to issue 7,000,000 shares of $0.01 par value preferred stock of which 1,000,000 shares have been designated as Series A 4.5% Convertible Preferred Stock ("Series A Convertible Preferred Stock") and 200,000 of which are issued and outstanding. As of December 31, 2022, the Company's Series A Convertible Preferred Stock issued in the amount of 200,000 preferred stock shares is convertible into 129 shares of common stock.

In connection with the August 2022 Public Offering (see below), the Company's Board designated 1,460 shares of the Company's preferred stock as $0.01 par value Series B Convertible Preferred Stock. Each share of Series B Convertible Preferred Stock will be convertible at any time at the holder’s option into one share of the Company's common stock, which conversion ratio will be subject to adjustment for stock splits, stock dividends, distributions, subdivisions and combinations. Subject to certain limitations, if the volume weighted average price of the Company's stock during any 30 consecutive trading day period exceeds 300% of the conversion price, the average daily dollar trading volume for such 30 consecutive trading period $500,000 per trading day and the holder is not in possession of any material non-public information, the Company may force each holder of Series B Convertible Preferred Stock to convert all of their shares of Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock carries no voting rights and is not eligible for any dividends paid by the Company on shares of the Company's common stock, other than dividends in the form of the Company's common stock. The Series B Convertible Preferred Stock was classified as permanent equity as of the date of issuance, in accordance with authoritative guidance of ASC 480-10-S99 for the classification

and measurement of potentially redeemable securities. As of December 31, 2022, all of the shares of the Series B Convertible Preferred stock issued in connection with the August 2022 Public Offering (see below) have been converted into shares of the Company's common stock and there were no shares of the Series B Convertible Preferred Stock issued or outstanding.

Yuma Private Equity

On August 19, 2021, the Company entered into a Private Securities Purchase Agreement with Yuma Regional Medical Center (“Yuma”), a related party, pursuant to which Yuma purchased 30,197 shares of the Company’s common stock, par value $0.01 per share at a purchase price of $172.50 per share (all amounts adjusted for Reverse Stock Split). 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).

May 2022 Registered Direct Offering

On May 6, 2022, the Company entered into securities purchase agreements with certain investors pursuant to which it agreed to sell and issue, in a registered direct offering (the “May 2022 Registered Direct Offering”), an aggregate of72,935 shares of its common stock, par value $0.01 per share, at a purchase price of $27.50 per share (all amounts adjusted for Reverse Stock Split) and, in a concurrent private placement, also agreed to sell and issue to such purchasers warrants (the “May 2022 Purchase Warrants”) to purchase up to 72,935 shares of common stock.

The net proceeds from the May 2022 Registered Direct Offering of $1.4 million consisted of gross proceeds of $2.0 million less equity issuance costs of approximately $0.6 million. The fair value of the May 2022 Placement Agent Warrants was recognized as an equity issuance cost.

The shares of common stock (but not the warrants or the shares of common stock underlying such warrants) offered in the Registered Offering were offered and sold by the Company pursuant to a "shelf" registration statement on Form S-3, including a base prospectus, previously filed with and declared effective by the SEC on April 26, 2022. The May 2022 Warrants and shares of common stock underlying such warrants were later registered for resale on a separate registration statement on Form S-1.

August 2022 Public Offering

On August 16, 2022, the Company closed on a registered public offering pursuant to which the Company agreed to issue and sell (i) 987,200 shares of the Company's common stock, par value $0.01 per share, (ii) 1,460 shares of Series B Convertible Preferred Stock, of which each share is convertible into 80 shares of the Company's common stock, (iii) 1,104,000 Series 1 warrants with a term of one year from the date of issuance (“Series 1 Warrant”) to purchase one share of the Company's common stock, and (iv) 1,104,000 Series 2 warrants with a term of five years from the date of issuance (“Series 2 Warrant”) to purchase one share of the Company's common stock (the "August 2022 Public Offering"). The warrants became exercisable beginning on the date of stockholder approval of the exercisability of the warrants, which was received on October 6, 2022. Gross proceeds from the August 2022 Public Offering, including the full exercise of the underwriter overallotment option, were $13.8 million and net proceeds were approximately $11.5 million after deducting equity issuance costs of $2.3 million, which includes the underwriter discount, professional fees, and the fair value of the warrants issued to the underwriter of the August 2022 Public Offering, Ladenburg Thalmann & Co. Inc. (the "Underwriter") (see Note 8). All shares of the Series B Convertible Preferred Stock have been converted into shares of the Company's common stock as of December 31, 2022.

8. Common Stock Warrants

The Company’s outstanding common stock warrants that are classified as equity warrants are included as a component of stockholder’s equity (deficit) at the date of grant at the relative fair value at that grant date. Common stock warrants accounted for as liabilities in accordance with the authoritative accounting guidance are included in non-current liabilities. The Company had common stock warrants exercisable and outstanding of 1,055,672 and 143,602, at December 31, 2022 and December 31, 2021, respectively. Of the Company's 1,055,672 common stock warrants exercisable at December 31, 2022, 805,202 common stock warrants have an exercise price of $2.38 and are subject to down round price reset provisions.

Liability-Classified Warrants

The Company accounts for certain of its warrants as liability-classified in accordance with ASC 480 and ASC 815, including primarily the Senior Secured Promissory Note Warrants, the July 2021 Warrants and the January 2021 Warrants. The May 2021 Warrants issued during the year ended December 31, 2021, which had been liability- classified, were fully exercised in the in the fourth quarter of 2021 and the first quarter of 2022 for 26,186 and 79,886 shares of the Company's common stock, respectively, in cashless exercises. As of December 31, 2022, there are no May 2021 Warrants outstanding.

January 2022 Warrants

As consideration for the January 2022 Waiver Agreement (see Note 6), the Company issued the January 2022 Warrants. The January 2022 Warrants expire five and a half years from the date of issuance, or July 31, 2027. As of December 31, 2022, the January 2022 Warrants outstanding were exercisable for 45,000 shares of the Company’s common stock at an exercise price of $55.00.

July 2021 Warrants

As consideration for the July 2021 Waiver Agreement (see note 6), the Company issued the July 2021 Warrants. The July 2021 Warrants expire five years from the date of registration of the warrants, or August 19, 2026. As of December 31, 2022, the July 2021 Warrants outstanding were exercisable for 22,000 shares of the Company’s common stock at an exercise price of $181.50.

Senior Secured Promissory Note Warrants

The Senior Secured Promissory Note Warrants expire five years from the date of registration of the warrants, or August 10, 2026. As of December 31, 2022, the Senior Secured Promissory Note Warrants outstanding were exercisable for 17,177 shares of the Company’s common stock at an exercise price of $194.00.

Equity-Classified Warrants

The Company accounts for the majority of its warrants as equity-classified in accordance with ASC 480 and ASC 815. Equity-classified warrants are recorded in equity based on their relative fair value on the date of issuance.

August 2022 Public Offering Warrants

In connection with the August 2022 Public Offering, on August 16, 2022 the Company issued Series 1 Warrants exercisable for 1,104,000 shares of the Company's common stock and the Series 2 Warrants for 1,104,000 shares of the Company's common stock. Both the Series 1 Warrants and the Series 2 Warrants became exercisable beginning on the date of stockholder approval of the exercisability of the warrants, which was received on October 6, 2022. The Series 1 Warrants expire one year from the date of issuance and the Series 2 Warrants expire five years from the date of issuance. The original exercise price of the Series 1 Warrants and Series 2 Warrants was $12.50. Per the terms of the underlying warrant agreements, the exercise price of the Series 1 Warrants and Series 2 Warrants was adjusted to $2.81, based upon the five day volume weighted average price of the Company's common stock immediately following the effective date of the Reverse Stock Split. Concurrent with the August 2022 Public Offering, the Company issued the underwriter warrants to purchase 66,240 shares of the Company's common stock at an exercise price of $15.63 (the "Underwriter Warrants"). The Underwriter Warrants expire five years from the date of issuance.

In addition, the exercise price of the Series 1 Warrants and Series 2 Warrants can be further adjusted in the event of issuances of the Company's common stock at a price lower than the exercise price of the Series 1 Warrants and Series 2 Warrants then in effect (the “Down Round Feature”). During the year ended December 31, 2022, the Down Round Feature was triggered due to the December 30, 2022 announcement of an agreement to issue common stock of the Company (see Note 15, Subsequent Events). As a result of the triggering of the Down Round Feature, the exercise price of any outstanding Series 1 Warrants or Series 2 Warrants was adjusted down to $2.38, which represents the price per share of the equity being offered in the December 30, 2022 announcement.

The Company calculated the value of the effect of Down Round Feature measured as the difference between the Series 1 Warrant and Series 2 Warrant fair value, using a Monte Carlo valuation model, immediately before and immediately after the Down Round Feature was triggered using the original exercise price and the new exercise price. The difference in fair value of the effect of the Down Round Feature of $288,000 and was recognized as a deduction from the loss available to common shareholders for the year ended December 31, 2022. The exercise price of the Series 1 Warrants and Series 2 Warrants will continue to be adjusted in the event the Company issues additional shares of common stock below the current exercise price, in accordance with the terms of the warrants.

During the year ended December 31, 2022, the Company received proceeds of $3.7 million from exercises of 777,399 Series 1 Warrants and 625,399 Series 2 Warrants, $1.4 million of which was receivable to the Company as of December 31, 2022, and was received in cash shortly after that date. As of December 31, 2022, the Series 1 Warrants outstanding were exercisable for 326,601 shares of the Company’s common stock the Series 2 Warrants outstanding were exercisable for 478,601 shares of the Company’s common stock, each at an exercise price of $2.38. All of the Underwriter Warrants are outstanding as of December 31, 2022 at an exercise price of $15.63, and are not subject to any exercise price reset or down round provisions.

May 2022 Registered Direct Offering Warrants

In connection with the May 2022 Registered Direct Offering, on May 10, 2022 the Company issued the May 2022 Purchase Warrants to purchase 72,935 shares of the Company's common stock at an exercise price of $35.53. The May 2022 Purchase Warrants are not exercisable until six months following the date of issuance and expire five and a half years from the date of issuance. Concurrently, the Company issued the May 2022 Placement Agent Warrants to purchase 4,376 shares of the Company's common stock at an exercise price of $35.53. The May 2022 Placement Agent Warrants are not exercisable until six months following the date of issuance and expire five years from the date of issuance. Neither the May 2022 Purchase Warrants or the May 2022 Placement Agent Warrants are subject to any exercise price reset or down round provisions.

The following table summarizes all warrant activity for the year ended December 31, 2022:

Forfeited, expired or cancelled (1,797 ) 3,879.49 —

9. Equity Incentive Plans

In 2013, LBS adopted the 2013 Employee, Director, and Consultant Equity Incentive Plan, (as amended and restated, the “2013 Plan”). Upon the closing of the Merger, each outstanding, unexercised and unexpired LBS option under the 2013 Plan, whether vested or unvested, was assumed by the Company and converted into an option to purchase common stock of the Company and became exercisable by the holder of such option in accordance with its terms. In connection with the closing of the Merger, no further awards will be made under the 2013 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 EIP Plan”). As of December 31, 2022, there were 20,589 shares of the Company's common stock authorized and available for issuance as equity-based awards under the 2021 EIP Plan. In addition, such aggregate number of shares of the Company's common stock shares available for issuance under equity-based awards 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 of the Company (the "Board") 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.

Also in April 2021, the Company's stockholders approved the Palisade Bio, Inc. 2021 Employee Stock Purchase Plan (the "2021 ESPP"). The 2021 ESPP was adopted in order to provide eligible employees of the Company an opportunity to purchase shares of the Company's common stock. As of December 31, 2022, there were 5,160 shares of the Company's common stock authorized and available under the ESPP. 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 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, 2022, there have been no shares issued under the ESPP.

In November 2021, the Company's compensation committee of the Board adopted the Palisade Bio, Inc. 2021 Inducement Award Plan (the "2021 Inducement Plan"). The 2021 Inducement Plan was adopted in order to grant equity-based awards to individuals not previously employed by the Company, as an inducement to join the Company. As of December 31, 2022, there were 6,440 shares of the Company's common stock authorized and available for issuance as equity-based awards under the 2021 Inducement Plan.

Stock Options

The Company believes that stock options align the interests of its employees and directors with the interests of its stockholders. Stock option awards are generally granted with an exercise price equal to the market price of Company’s stock at the date the grants are awarded, a term as determined by the Company's Board but generally not to exceed ten-years, and generally vest in equal proportions each quarter over three years. Vesting could be accelerated in the event of retirement, disability, or death of a participant, or change in control of the Company, as defined in the individual stock option agreements or employment agreements. Stock-based awards are valued as of the measurement

date, which is the grant date, and are generally amortized on a straight-line basis over the requisite vesting period for all awards. The Company's equity incentive plans allow for the issuance of both incentive stock options and non-statutory stock options.

The fair value of options granted during the year ended December 31, 2022 is estimated as of the grant date using the Black-Scholes option pricing model using the assumptions in the following table:

Year Ended December 31,

Weighted-average exercise price per share $ 40.32 $ 116.00

Weighted-average expected term (years) 5.81 5.63

Weighted-average risk-free interest rate 2.30 % 1.25 %

Weighted-average expected dividend yield — —

Weighted-average volatility 73.66 % 74.32 %

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

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

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

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

The following table summarizes stock option activity and related information under the 2013 Plan, the 2021 EIP Plan and the 2021 Inducement Plan for the year ended December 31, 2022:

Exercised — — — —

Forfeited, expired or cancelled (11,242 ) 110.43 — —

The weighted-average grant date fair value of options granted during the years ended December 31, 2022 and December 31, 2021 was $26.15 per share and $83.79 per share, respectively. The fair value of the options vested during each the years ended December 31, 2022 and December 31, 2021 was $1.0 million and $1.2 million, respectively.

Share-Based Compensation Expense

In 2021, the Company determined that the outstanding stock options under the 2013 Plan had an exercise price per share that was significantly higher than the current fair market value of the Company's common stock (the

100

"Underwater Options"). On November 18, 2021, the compensation committee of the Company's Board resolved that it was in the best interests of the Company and its stockholders to amend the Underwater Options for five key employees to reduce the exercise price per share to the closing per share price of the Company’s common stock on November 18, 2021 (the “Repricing”). In accordance with the 2013 Plan requirements, the holders of the Underwater Options identified under the Repricing consented to the modification of their affected awards. All the other terms of the Underwater Options other than the exercise price remained the same, including the number of shares granted, vesting schedule and expiration date.

The Company determined that the Repricing represented a modification of share-based awards under ASC 718. Accordingly, the Company recognized incremental compensation expense of $20,000 and $0.4 million for the years ended December 31, 2022 and 2021, respectively. The additional unrecognized compensation expense to be recognized in future periods associated with the Repricing is insignificant.

The Company’s former Chief Development Officer was terminated in February 2021. As part of the separation package, the Company’s Board agreed to (i) accelerate vesting by 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.

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

Year Ended December 31,

Research and development expense $ 182 $ 440

General and administrative 850 1,451

As of December 31, 2022, the unrecognized compensation cost related to outstanding options was $0.5 million, which is expected to be recognized over a weighted-average period of approximately 1.96 years.

10. Collaborations and License Agreements

Co-Development and Distribution Agreement with Newsoara

LBS has entered into a co-development and distribution agreement with Newsoara Biopharma Co., Ltd. (“Newsoara”), a joint venture established with Biolead Medical Technology Limited, as amended, (the “Co-Development Agreement”). Pursuant to the Co-Development Agreement (and subsequent assignment agreement), LBS granted or licensed Newsoara an exclusive right under certain patents to develop, use, sell, offer to sell, import, and otherwise commercialize licensed products (the “Licensed Products”) for any and all indications in the People’s Republic of China, including the regions of Hong Kong and Macao, but excluding Taiwan (the “Territory”). The Licensed Products only include the Company's lead drug candidate, LB1148. The right includes the right to grant sublicenses to third parties, subject to LBS’ written consent, provided that both parties agreed that Newsoara would be permitted to use a certain partner for development purposes. The Co-Development Agreement obligates Newsoara to initially use LBS as the exclusive supplier for all of Newsoara’s requirements for Licensed Products in the Territory. During the term of the Co-Development Agreement, Newsoara may request to manufacture the Licensed Product in the Territory, subject to satisfying certain conditions to LBS' reasonable satisfaction. LBS is obligated to approve Newsoara manufacturing rights without undue refusal or delay.

In consideration of the rights granted to Newsoara under the Co-Development Agreement, Newsoara paid LBS a one-time upfront fee of $1.0 million. In addition, Newsoara is obligated to make (i) 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

PALI US Equity

PALI · 10-K · period ended 2022-12-31

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 2022-12-31

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