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.”

As used in this Annual Report on Form 10-K, unless the context indicates or otherwise requires, “Palisade,” “Palisade Bio,” “the Company,” “we,” “us,” and “our” or similar designations in this report refer to Palisade Bio, Inc., a Delaware Corporation, and its subsidiaries. Any reference to “common shares” or “common stock,” refers to our $0.01 par value common stock. Any reference to “Series A Preferred Stock” refers to our Series A 4.5% Convertible Preferred Stock. Any reference to “Leading Biosciences, Inc.” or “LBS” refers to our operations prior to the completion of our merger with Seneca Biopharma, Inc. ("Seneca") on April 27, 2021 (the "Merger"). Any technology that we currently own or may acquire the rights to in the future is referred to by us as either a “product candidate” or "product candidates". Additionally, any reference herein that refers to pre-clinical studies also refers to nonclinical studies.

OVERVIEW

On September 1, 2023, we entered into a research collaboration and license agreement for substantially all of Giiant Pharma, Inc.'s (“Giiant”) current and future proposed products (“Giiant License Agreement”). Under the terms of the Giiant License Agreement, we obtained the rights to develop, manufacture, and commercialize all compounds from Giiant, existing now and in the future, and any product containing or delivering any licensed compound, in any formulation or dosage for all human and non-human therapeutic uses for any and all indications worldwide, including those technologies that are the basis of PALI-2108. Pursuant to the terms of the Giiant License Agreement, pre-clinical development PALI-2108 will be jointly undertaken by us and Giiant with a portion of development costs being paid by Giiant’s current grants. Upon the first approval of either an investigational new drug application ("IND") or a Canadian Clinical Trial Application ("CTA"), we will assume all development, manufacturing, regulatory and commercialization costs.

On August 9, 2023, we announced that the topline data from our U.S Phase 2 PROFILE study of LB1148 did not meet its primary endpoint. Based on the results of the efficacy and safety value results of the U.S. Phase 2 PROFILE study, we terminated the development of LB1148.

As a result of our entering into the Giiant Licensing Agreement, we have significantly reshaped the business into a pre-clinical stage biotechnology company focused on developing and advancing novel therapies for patients living with autoimmune, inflammatory, and fibrotic diseases. Our lead product candidate, PALI-2108, is being developed as a therapeutic for patients living with inflammatory bowel disease ("IBD"), including ulcerative colitis and Crohn's disease.

Financial Results

Our operating loss for the year ended December 31, 2023 was approximately $13.1 million, which consisted of research and development expense and general and administrative expense of approximately $6.9 million and $6.2 million, respectively, and restructuring costs of approximately $0.2 million, partially offset by license revenue of approximately $0.3 million. Net cash used in operating activities was approximately $11.1 million for the year ended December 31, 2023, which includes a $12.3 million net loss adjusted for $0.4 million of net cash inflows related to changes in operating assets and liabilities and certain non-cash items impacting the net loss. Net cash provided by financing activities was approximately $11.2 million for the year ended December 31, 2023.

Recent Financings

In January 2023, we completed a registered direct offering and concurrent private placement of common stock and warrants to purchase common stock for net cash proceeds of $2.2 million consisting of gross cash proceeds of $2.5 million less cash equity issuance costs of approximately $0.3 million.

In April 2023, we completed a registered direct offering and concurrent private placement of common stock and warrants to purchase common stock for net cash proceeds of approximately $5.3 million consisting of gross cash proceeds of $6.0 million, less cash equity issuance costs of approximately $0.7 million.

In September 2023, we completed a registered direct equity offering of common stock for net cash proceeds of approximately $1.7 million consisting of gross cash proceeds of $2.0 million, less cash equity issuance costs of approximately $0.3 million.

In February 2024, we completed a warrant inducement transaction for net cash proceeds of approximately $2.2 million consisting of gross cash proceeds of $2.5 million, less cash equity issuance costs of approximately $0.3 million.

We intend to use the net proceeds from these recent financings for working capital and general corporate purposes, including the development of PALI-2108 for the treatment of IBD. Based on our cash and cash equivalents balance of $12.4 million as of December 31, 2023 and additional net cash proceeds of approximately $2.2 million from the warrant inducement transaction completed in February 2024, we believe we have sufficient cash to fund our currently planned operations into the first quarter of 2025, including the anticipated commencement of a Phase 1 clinical trial of our lead drug candidate, PALI-2108.

FINANCIAL OVERVIEW

License Revenue

We generated no revenues from the sale of our product candidates for any of the periods presented. For the year ended December 31, 2023, we recognized license revenue of approximately $0.3 million from the co-development and distribution agreement with Newsoara, a joint venture established with Biolead Medical Technology Limited, as amended, (the “Newsoara Co-Development Agreement”). For the year ended December 31, 2022, we recognized no licensing revenue.

Research and Development Expenses

Research and development expenses have historically consisted primarily of costs incurred for the clinical development of our product candidate LB1148. On August 9, 2023, based on the results of the efficacy and safety data of the U.S. Phase 2 PROFILE study, we terminated the development of LB1148. The research and development costs included:

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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 pre-clinical 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 our behalf, and consultants;

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costs related to develop and manufacture pre-clinical study and clinical trial material; and

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regulatory expenses.

While we have made the decision to no longer pursue the clinical development of LB1148, we continued to incur expenses related to its development in the year ended December 31, 2023. We do not expect to incur any additional costs in 2024 or beyond related to the closing down of the associated clinical trials. Although the nature of our research and development expenses is expected to shift from clinical activities to those pre-clinical activities associated with the development of PALI-2108, we expect our overall net research and development expenses to remain consistent with prior periods.

Our 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 our pre-clinical development, process development, manufacturing, clinical development, and regulatory activities. We do not allocate employee costs and costs associated with our 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. As needed, we manage third parties that are engaged to conduct our (i) research activities, (ii) pre-clinical, clinical and translational science development activities, and (iii) process development. Pursuant to situations whereby we perform any research and development or manufacturing activities under a co-development agreement, we record the expense reimbursement from the co-development partner as a reduction to research and development expense once the reimbursement amount is approved for payment by the co-development partner. Pursuant to agreements where we perform research and development activities under a joint development plan, such as our collaboration with Giiant, qualifying development costs pursuant to the terms of the Giiant License Agreement are expensed as research and development costs as incurred.

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 fees and stipends, and general corporate expenses.

Restructuring Costs

In order to better utilize our resources on the implementation of our refocused business plans and corporate strategy, we committed to a cost-reduction plan on September 9, 2022 (the "2022 Cost-Reduction Plan") and a reduction-in-workforce on October 27, 2023 (the "2023 RIF"). The 2022 Cost-Reduction Plan consisted primarily of a 20% reduction in our employee workforce to better align our resources with our proposed business plan. The 2023 RIF consisted of a 25% reduction in our employee workforce, specifically research and development employees that were no longer deemed critical for our development of PALI-2108.

Going Concern

We believe we have sufficient cash to fund our currently planned operations into the first quarter of 2025. Notwithstanding, our management has evaluated all conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that these financial statements are issued, including: (i) the probability that significant changes to our anticipated level of operations, due to factors that are within or outside of our control, would cause our available cash as of the date of this filing to not be sufficient to fund our anticipated level of operations for the next 12 months, and (ii) the uncertainties of the cost and timing of our efforts to in-license or acquire additional product candidates. In the opinion of management, these factors, among others, raise substantial doubt about our ability 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.

Reverse Stock Split

On November 15, 2022, we effected a 1-for-50 reverse stock split of our issued and outstanding common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, each of our shareholders received one new share of our common stock for every 50 shares such shareholder held immediately prior to the effective time of the Reverse Stock Split. 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 consolidated 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.

Results of Operations

The following table summarizes our results of operations for the year ended December 31, 2023 and 2022 (in thousands):

Year Ended December 31, Change

License revenue $ 250 $ — $ 250 n/a

Operating expenses

Other income (expense):

Interest expense (15 ) (13 ) (2 ) 15 %

Loss on issuance of warrants — (1,110 ) 1,110 n/a

License revenue

During the year ended December 31, 2023, we recognized license revenue of approximately $0.3 million earned upon the achievement of a milestone under the Newsoara Co-Development Agreement. During the year ended December 31, 2022, we recognized no license revenue.

Research and Development Expenses

Research and development expenses were approximately $6.9 million for the year ended December 31, 2023. The $0.3 million, or 5%, increase in research and development expenses compared to the year ended December 31, 2022 is attributable to increased costs associated with the Giiant License Agreement, which we entered into on September 1, 2023, as well an increase in employee-related costs and employee recruiting costs, which were partially offset by a decrease in costs directly related to our development of LB1148, which we ceased in August of 2023.

For the year ended December 31, 2023, we recognized expenses associated with the Giiant License Agreement of approximately $1.1 million. Of these expenses, approximately $0.7 million relate directly to the joint development of our new lead asset being licensed under the Giiant License Agreement, PALI-2108. We expect these costs, which were primarily recognized in the fourth quarter of 2023, to increase as our pre-clinical activity around the development of PALI-2108 increases. Also, in conjunction with our entry into the Giiant License Agreement, we recognized non-cash expenses of approximately $0.4 million for the year ended December 31, 2023, consisting of the initial recognition and subsequent remeasurement of the fair value of the contingent consideration milestone payment obligation incurred in the transaction in the amount of $0.2 million, and transaction-related costs in the amount of $0.2 million.

Research and development employee compensation-related costs increased by approximately $0.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to increased year-over-year headcount through most of 2023 compared to 2022. Research and development employee recruiting costs for the year ended December 31, 2023 compared to the year ended December 31, 2022 increased by approximately $0.2 million in conjunction with our hiring of our Chief Medical Officer on September 5, 2023. On October 27, 2023, the 2023 RIF resulted in a 25% reduction-in-workforce, consisting entirely of research and development employees that were no longer deemed critical for our development of PALI-2108.

In August 2023, we made the decision to no longer pursue the clinical development of LB1148, including our U.S. Phase 2 PROFILE study and U.S. Phase 3 Return of Bowel Function study, and we ceased all directly related research and development activities. Accordingly, direct clinical trial-related costs, including clinical trial vendor fees, investigator site fees, and clinical trial consultant and contractor fees decreased by approximately $0.7 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. Similarly, drug manufacturing costs

decreased by approximately $0.9 million and costs associated with regulatory activity decreased approximately $0.3 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. Partially offsetting these decreases was an approximately $0.8 million increase in translational research costs associated with LB1148 for the year ended December 31, 2023, of which there were none of these costs in 2022.

General and Administrative Expenses

General and administrative expenses decreased by approximately $2.6 million, or 29%, from approximately $8.8 million for the year ended December 31, 2022 to approximately $6.2 million for the year ended December 31, 2023, primarily as a result of cost-saving initiatives implemented by us in the third and fourth quarters of 2022, including those associated with the 2022 Cost-Reduction Plan. Compared to the year ended December 31, 2022, general and administrative employee compensation costs for the year ended December 31, 2023 decreased by approximately $1.4 million primarily due to an approximately $0.9 million decrease in salaries and benefits and an approximately $0.5 million decrease in stock-based compensation expense. Other decreases in general and administrative expenses for the year ended December 31, 2023 compared to last year include: (i) an approximately $0.3 million decrease in professional fees, including accounting and legal fees and financial printing costs, (ii) an approximately $0.3 million decrease in investor and public relations costs and shareholder services costs, (iii) an approximately $0.2 million decrease in consultants and contract labor costs, (iv) an approximately $0.2 million decrease in general and administrative employee recruiting costs, and (v) an approximately $0.2 million decrease in insurance costs.

Restructuring Expenses

Associated with the 2023 RIF and the 2022 Cost-Reduction Plan, we recognized restructuring expenses of approximately $0.2 million and approximately $0.4 million for the years ended December 31, 2023 and December 31, 2022, respectively, consisting of severance and benefits payments pursuant to employment agreements and the execution of severance and release agreements. We do not expect to incur any other significant costs associated with either the 2022 Cost-Reduction Plan or the 2023 RIF.

Other income (expense)

Other income, net, of approximately $0.8 million for the year ended December 31, 2023 includes primarily dividend income of approximately $0.7 million from our short-term investments of excess cash in money market funds with maturities of three months or less, and a non-cash gain of approximately $0.1 million associated with the revaluation of our liability-classified warrants in the year.

Other income, net, of approximately $1.5 million for the year ended December 31, 2022 includes an approximately $2.4 million non-cash gain associated with the revaluation of our liability-classified warrants in the period and dividend income of approximately $0.2 million, which was partially offset by a $1.1 million non-cash loss on the issuance of warrants. On January 31, 2022, we issued 45,000 common stock warrants to certain investors as consideration for the waiver of certain rights pursuant to the underlying warrant agreements (the "January 2022 Warrants"). As a result of this issuance, we recognized an approximately $1.1 million non-cash loss upon the issuance of the January 2022 Warrants, which represents the fair value of the warrants on the date of issuance.

Liquidity and Capital Resources

Since our inception, we have financed our operations through the sales of our 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 our 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 our ability to continue as a going concern.

Sources of Liquidity

We expect to incur substantial operating losses for the foreseeable future. We will need to raise additional capital through a combination of equity offerings, debt financings, collaborations, and other similar arrangements. Our 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 global conflicts, including those in the Ukraine and Middle East, (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 we are unable to access additional capital, we may need to curtail or greatly reduce our operations, which could have a materially adverse impact on our business, financial condition, and results of operations.

Recent Equity Offerings

On September 11, 2023, we completed a registered direct offering of common stock pursuant to an effective shelf registration statement on Form S-3 filed with the SEC (the "September 2023 Offering"). Gross cash proceeds from the September 2023 Offering were $2.0 million and net cash proceeds were $1.7 million after deducting cash equity issuance costs of approximately $0.3 million.

On April 3, 2023, we completed a registered direct offering and concurrent private placement of common stock and warrants to purchase common stock (the "April 2023 Offering"). Gross cash proceeds from the April 2023 Offering were $6.0 million and net cash proceeds were $5.3 million after deducting cash equity issuance costs of approximately $0.7 million.

On January 4, 2023, we completed a registered direct offering and concurrent private placement of common stock and warrants to purchase common stock (the "January 2023 Offering"). Gross cash proceeds from the January 2023 Offering were $2.5 million and net cash proceeds were approximately $2.2 million after deducting cash equity issuance costs of approximately $0.3 million.

On August 16, 2022, we completed a registered public offering (the "August 2022 Offering"). Gross cash proceeds from the August 2022 Offering, including the full exercise of the underwriter overallotment option, were $13.8 million and net cash proceeds were approximately $12.0 million after deducting cash equity issuance costs of approximately $1.8 million.

On May 10, 2022, we completed a registered direct offering and concurrent private placement of common stock and warrants to purchase common stock (the “May 2022 Offering”). Gross cash proceeds from the May 2022 Offering were $2.0 million and net cash proceeds were approximately $1.4 million after deducting cash equity issuance costs of approximately $0.6 million.

Refer to Note 6, Stockholders' Equity in Part II Item 8 of this Annual Report on Form 10-K for further details of our recent equity transactions.

Warrant Exercises

During the year ended December 31, 2023, we received gross cash proceeds of approximately $2.8 million from common stock warrant exercises, approximately $1.4 million of which related to common stock warrant exercises on December 30, 2022 for which the related cash was received by us in January 2023. During the year ended December 31, 2022, we received gross cash proceeds of approximately $2.3 million for the exercise of outstanding common stock warrants.

On January 30, 2024, we entered into warrant inducement agreements (the “Warrant Inducement Agreements”) with certain accredited and institutional holders (collectively, the “Warrant Holders”) of certain of our remaining outstanding common stock purchase warrants issued pursuant to: (i) the May 2022 Offering, (ii) the January 2023 Offering, and (iii) the April 2023 Offering, as well as certain outstanding common stock purchase warrants outstanding from the August 2022 Offering (the "August 2022 Warrants") (collectively, the “Existing Warrants”). Pursuant to the Warrant Inducement Agreements, the exercise price of each Existing Warrant was reduced to $0.7313 per share. Each of the Warrant Holders that exercised their Existing Warrants pursuant to the Warrant Inducement Agreements received one replacement warrant for each Existing Warrant exercised with each such replacement warrant having a term of five years from issuance and an exercise price per share of $0.7313.

The Warrant Holders collectively exercised an aggregate of 3,422,286 Existing Warrants. As a result of the exercises, we issued an aggregate of 3,422,286 shares of our common stock. The transaction closed on February 1, 2024 with us receiving net cash proceeds of approximately $2.2 million consisting of gross cash proceeds of $2.5 million, less transaction-related expenses and placement agent fees of approximately $0.3 million.

Refer to Note 13, Subsequent Events in Part II Item 8 of this Annual Report on Form 10-K for further details of our warrant inducement transaction.

Cash Flows

As of December 31, 2023, we had $12.5 million in cash, cash equivalents and restricted cash. The following table shows a summary of our cash flows for the years ended December 31, 2023 and 2022 (in thousands):

Year Ended December 31,

Net cash used in operating activities $ (11,133 ) $ (13,360 )

Net cash used in investing activities (4 ) (10 )

Net cash provided by financing activities 11,186 15,258

Net Cash Used in Operating Activities

Cash used in operating activities was $11.1 million for the year ended December 31, 2023, which reflects a $12.3 million net loss adjusted for $0.4 million of net cash inflows related to changes in operating assets and liabilities and certain non-cash items impacting the net loss, consisting primarily of a $0.6 million non-cash expense recognized for stock-based compensation and related charges, and a non-cash expense of $0.2 million related to the recognition of the fair value of the contingent consideration obligation incurred pursuant to the Giiant Licensing Agreement transaction. The net cash inflow from operating assets and liabilities was driven by (i) a $0.7 million cash inflow from the decrease in prepaids and other current assets and other noncurrent assets, which was primarily attributable to the amortization of the current and non-current portions of our prepaid insurance policies, and (ii) a $0.3 million cash inflow from an increase in accrued compensation and benefits, partially offset by (i) a $0.5 million cash outflow for accounts payable and accrued liabilities due to the timing of payments, and (ii) a $0.1 million cash outflow related to payments of our operating lease.

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.

Net Cash Used in Investing Activities

Cash used in investing activities for the years ended December 31, 2023 and December 31, 2022 consists of payments for leasehold improvements.

Net Cash Provided by Financing Activities

For the year ended December 31, 2023, cash provided by financing activities of $11.2 million was primarily attributable to net cash proceeds of $9.4 million from the January 2023 Offering, the April 2023 Offering, and the September 2023 Offering. Also contributing to the cash provided by financing activities in the year was $2.8 million from the exercise of common stock purchase warrants, which includes the receipt in early January 2023 of a $1.4 million other receivable from warrant exercises on December 30, 2022, partially offset by payments of equity issuance costs of $0.6 million and payments of $0.4 million for our insurance financing arrangement.

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 Offering and $12.6 million from the August 2022 Offering and cash

proceeds of $2.3 million from the exercise of common stock purchase warrants, partially offset by payments of equity issuance costs of $0.6 million during the year and payments of $0.8 million for our insurance financing arrangements.

Contractual Obligations

Office Lease

On May 12, 2022, we entered a new, non-cancelable facility operating lease (the "Corporate Office Lease") of office space for our corporate headquarters, replacing our 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. We have 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. We have determined that it is not likely we will exercise this renewal option.

Commencing on June 1, 2022, we are 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, 2023, the total remaining future minimum lease payments associated with the Corporate Office Lease of approximately $229,000, including imputed interest of $18,000 calculated using a discount rate of 10.75%, will be paid over the remaining lease term of approximately 1.7 years.

Insurance Financing Arrangement

Consistent with past practice, in June 2023, we entered into an agreement to finance an insurance policy that renewed in May 2023. The financing arrangement entered into in June 2023 has a stated annual interest rate of 7.92% and is payable over a 9-month period with the first payment commencing June 30, 2023. The insurance financing arrangement is secured by the associated insurance policy. As of December 31, 2023, the aggregate remaining balance under our insurance financing arrangement was $158,000.

Other than the remaining insurance financing arrangement payments due in 2024, as of December 31, 2023 we have no other minimum debt payments required in 2024 or thereafter.

Reduction in Workforce

Associated with the 2023 RIF, we recognized restructuring costs of approximately $0.2 million for the year ended December 31, 2023 consisting of severance and benefits payments pursuant to employment agreements and the execution of severance and release agreements, of which a remaining amount of approximately $0.1 million is expected to be paid in cash during the first half of 2024.

Board Resignations

In December of 2023, based on their annual self-assessment, our Board of Directors ("Board") determined that based on our stage of development and number of employees a reduction in the size of our Board was appropriate. In the first quarter of 2024, five directors voluntarily resigned from our Board. We do not expect to recognize any significant expense or cash payments associated with the Board resignations. We expect that the reduction in the size of our Board will result in significant cost savings in future periods.

Future Liquidity Needs

We have incurred significant operating losses and negative cash flows from operations since our inception. To date, we have not been able to generate significant revenues nor achieve operating profitability. Based upon our cash and cash equivalents balance of $12.4 million as of December 31, 2023, we believe we have sufficient cash to fund our currently planned operations into the first quarter of 2025. Notwithstanding, should our anticipated level of operations significantly change, we may require additional financing sooner than the first quarter of 2025. Further, beyond the first quarter of 2025 we will require additional financing to continue at our expected level of operations. If we fail to obtain the needed capital, we will be forced to delay, scale back, or eliminate some or all of our development activities, or potentially cease our operations.

Critical Accounting Policies and Estimates

Our 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 us 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. Our estimates are based on historical experience, known trends, events and various other factors that we believe 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.

Our 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. We believe 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

We required to make estimates of our accrued expenses resulting from our obligations under contracts or agreements with, as applicable, research and development collaboration partners, CROs, pre-clinical and clinical sites, manufacturers, vendors, and consultants in connection with conducting research and development activities, including those related to joint drug development that are advanced or reimbursed to Giiant pursuant to the terms of the Giiant License Agreement. This process involves reviewing open contracts and purchase requisitions, communicating with our personnel, consultants, and research and development collaboration partners to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost.

Pursuant to the terms of the Giiant License Agreement, we are invoiced by Giiant on or about the 1st and 15th of each calendar month for any qualifying costs or expenses incurred or to be incurred under the agreed upon joint development plan. The financial terms of the contracts entered into by Giiant with CROs, pre-clinical sites, manufacturers, vendors and consultants are subject to negotiation and vary from contract to contract. Often, this will result in payment flows that do not match the periods over which services are provided or milestones are met under the joint development plan. We recognize research and development expenses associated with the Giiant License Agreement only when the qualifying expenses are incurred by matching those expenses with the period in which we estimate services and efforts are expended or other aspects of the drug development or related activities are achieved, examples of which may include authorization of a study, the commencement of a study, the submission of study results milestones. In instances where the expense determined to be recognized under the joint development plan exceeds the payments made to Giiant, we recognize an accrual of the joint development expenses. In addition, there may be instances in which payments made to Giiant will exceed the level of services provided, which results in a prepayment of the joint development expenses.

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

Contingent Consideration Obligations

Pursuant to the Giiant License Agreement, we incurred a contingent consideration obligation consisting of milestone payments. Because the contingent consideration associated with the milestone payments may be settled in shares of our common stock solely at the election of the Company, we have determined it should be accounted for under Accounting Standards Codification ("ASC") 480, Distinguishing Liabilities from Equity ("ASC 480") and accordingly we have recognized it as a liability measured at its estimated fair value. As of September 1, 2023, the date the contingent consideration obligation was incurred, the fair value of the liability was determined to be approximately $0.2 million.

At the end of each reporting period, we re-measure the contingent consideration obligation to its estimated fair value and any resulting change is recognized in research and development expenses in the consolidated statements of operations. The fair value of the contingent consideration obligation is determined using a probability-based model that estimates the likelihood of success in achieving each of the defined milestones which is then discounted to present value using our incremental borrowing rate. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurements and Disclosures. As of December 31, 2023, approximately $143,000 of the contingent consideration obligation was recognized in accrued liabilities at the consolidated balance sheet as it is expected to be settled within one-year of the balance sheet date. The remaining amount of the contingent consideration liability of approximately $61,000 was recognized as a noncurrent liability in the consolidated balance sheet as of December 31, 2023. The initial fair value of the contingent consideration liability and an insignificant change in the fair value of the contingent consideration liability for the year ended December 31, 2023 is recognized in research and development expenses in the consolidated statements of operations.

Derivative Financial Instruments

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate our financial instruments, including our common stock warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. We determine the fair value of our derivatives using the Black-Scholes option pricing model or, 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, 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.

We review 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, we may issue freestanding options and common stock warrants.

We account for our common stock warrants in accordance with ASC 480 and ASC 815, Derivatives and Hedging (“ASC 815”). Based upon the provisions of ASC 480 and ASC 815, we account for our common stock warrants as liabilities if the common stock warrant requires net cash settlement or it gives the holder the option of net cash settlement, or if it fails the equity classification criteria. We account for our common stock warrants as equity if the contract requires physical settlement or net physical settlement or if we have the option of physical settlement or net physical settlement and the common stock 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.

As of December 31, 2023, the fair value of our liability-classified warrants outstanding was determined using a Black-Scholes option pricing model valuation model to be insignificant due to the low market price of our common stock at the date of valuation relative to the exercise price of the underlying common stock warrants outstanding. As of December 31, 2022, our liability-classified warrants had an estimated fair value of approximately $0.1 million. For the years ended December 31, 2023 and 2022, we recognized gains associated with the change in fair value of liability-classified warrants of approximately $0.1 million and $2.4 million, respectively. We expect any gains or losses from the change in the fair value of our liability-classified warrants to remain insignificant in future periods.

Recently Issued and Adopted Accounting Pronouncements

See Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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, 2023 and 2022 68

Notes to Consolidated Financial Statements 73

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Palisade Bio, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Palisade Bio, Inc. (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, convertible preferred stock and stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, 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 consolidated financial statements, the Company has suffered losses and negative cash flows from operations, and has an accumulated deficit as of December 31, 2023, that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

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

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Accounting for Complex Financial Instruments

Critical Audit Matter Description

As described in Notes 4 and 6 to the consolidated financial statements, the Company executed several transactions during the year that included the issuance of common 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 derivative instruments and the determination of the respective fair value of the instruments. 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 auditor judgment.

How the Critical Audit Matter was Addressed in the Audit

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 features that were relevant to the classification determination.

•

Utilizing personnel with specialized knowledge and skills in technical accounting matters 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.

Accounting for Research Collaboration and License Agreement

Critical Audit Matter Description

As described in Notes 5 and 8 to the consolidated financial statements, the Company entered into a research collaboration and license agreement (“Agreement”) with Giiant Pharma, Inc. (“Giiant”) (“Giiant Transaction).

We identified the accounting for the Giiant Transaction as a critical audit matter. This includes both the evaluation of the various terms of the Agreement and the determination of the fair value of the contingent consideration obligation on the future milestone payments. The application of the accounting guidance applicable to the Giiant Transaction is complex, and therefore, applying such guidance to the contract terms is complex, and requires significant auditor judgment.

How the Critical Audit Matter was Addressed in the Audit

•

Inspecting the Agreement and evaluating the completeness and accuracy of the Company's technical accounting analysis 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 value of the contingent consideration to assist in assessing management's analysis of the transaction, including:

Evaluating the contract to identify relevant terms that affect the recognition in the consolidated financial statements;

Assessing the appropriateness and reasonableness of the valuation methodologies and the significant assumptions in the discounted cash flow analysis, including estimates of the discount rate and discrete execution risk associated with the clinical probability of successfully achieving each phase of clinical development, which would trigger a contractually defined milestone payments;

Evaluating and testing the source information underlying the assumptions and, where necessary, included an evaluation of available information that either corroborated or contradicted management’s conclusions;

Testing the calculations employed to estimate the fair value of the contingent considerations; and

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 26, 2024

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 896 2,350

Restricted cash 26 26

Property and equipment, net 10 10

Operating lease right-of-use asset 198 300

Other noncurrent assets 490 694

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accrued compensation and benefits 778 486

Current portion of operating lease liability 121 105

Insurance financing debt 158 88

Warrant liability 2 61

Contingent consideration obligation 61 —

Operating lease liability, net of current portion 90 211

Commitments and contingencies (Note 9)

Stockholders' equity:

Total liabilities and stockholders' equity $ 14,052 $ 15,763

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,

License revenue $ 250 $ —

Operating expenses:

Restructuring costs (Note 9) 225 410

Other income (expense):

Interest expense (15 ) (13 )

Loss on issuance of warrants — (1,110 )

Net loss available to common stockholders $ (12,316 ) $ (14,548 )

Basic and diluted net loss per common share $ (1.80 ) $ (16.53 )

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

Palisade Bio, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(in thousands, except share amounts)

Shares Amount Shares Amount Shares Amount

Stock-based compensation expense and related charges — — — — — — 624 — 624

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

Palisade Bio, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(in thousands, except share amounts)

Shares Amount Shares Amount Shares* Amount*

Stock-based compensation expense and related charges — — — — — — 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 of Cash Flows

(in thousands)

Year Ended December 31,

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

Depreciation 4 3

Noncash operating lease expense 102 164

Loss on issuance of warrants — 1,110

Fair value of contingent consideration obligation 204 —

Change in fair value of warrant liabilities (59 ) (2,426 )

Stock-based compensation and related charges 624 1,032

Changes in operating assets and liabilities:

Prepaid and other current assets and other noncurrent assets 705 1,027

Accounts payable and accrued liabilities (492 ) 399

Accrued compensation 292 (25 )

Operating lease liabilities (105 ) (151 )

Net cash used in operating activities (11,133 ) (13,360 )

Cash flows from investing activities:

Purchases of property and equipment (4 ) (10 )

Net cash used in investing activities (4 ) (10 )

Cash flows from financing activities:

Payments on insurance financing debt (391 ) (790 )

Proceeds from issuance of common stock and warrants 9,419 14,401

Proceeds from the exercise of warrants 2,758 2,274

Payment of equity issuance costs (617 ) (627 )

Proceeds from issuance of common stock under Employee Stock Purchase Plan 17 —

Net cash provided by financing activities 11,186 15,258

Net increase in cash, cash equivalents and restricted cash 49 1,888

Cash, cash equivalents and restricted cash, beginning of year 12,409 10,521

Cash, cash equivalents and restricted cash, end of year $ 12,458 $ 12,409

Restricted cash 26 26

Total cash, cash equivalents and restricted cash $ 12,458 $ 12,409

Supplemental disclosures of cash flow information:

Interest paid $ 14 $ 12

Supplemental disclosures of non-cash investing and financing activities:

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

Fair value of warrants issued to placement agent 384 55

Fair value of warrants issued to underwriter agent — 459

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

Palisade Bio, Inc.

Notes To Consolidated Financial Statements

1. Organization and Business

As used in this Annual Report on Form 10-K, unless the context indicates or otherwise requires, “Palisade,” “Palisade Bio,” “the Company,” “we,” “us,” and “our” or similar designations in this report refer to Palisade Bio, Inc., a Delaware Corporation, and its subsidiaries. Any reference to “common shares” or “common stock,” refers to the Company's $0.01 par value common stock. Any reference to “Series A Preferred Stock” refers to the Company's Series A 4.5% Convertible Preferred Stock. Any reference to “Leading Biosciences, Inc.” or “LBS” refers to the Company’s operations prior to the completion of its merger with Seneca Biopharma, Inc. ("Seneca") on April 27, 2021 (the "Merger"). Any reference herein that refers to pre-clinical studies also refers to nonclinical studies.

Description of Business

On September 1, 2023, the Company entered into the Giiant License Agreement. Under the terms of the Giiant License Agreement, the Company obtained the rights to develop, manufacture, and commercialize all compounds from Giiant, existing now and in the future, and any product containing or delivering any licensed compound, in any formulation or dosage for all human and non-human therapeutic uses for any and all indications worldwide, including those technologies that are the basis of the Company's lead product candidate, PALI-2108. Pursuant to the terms of the Giiant License Agreement, pre-clinical development PALI-2108 will be jointly undertaken by Giiant and the Company with a portion of development costs being paid by Giiant’s current grants. Upon the first approval of either an IND or CTA, the Company will assume all development, manufacturing, regulatory and commercialization costs.

On August 9, 2023, the Company announced that the topline data from its U.S Phase 2 PROFILE study of LB1148 did not meet its primary endpoint. Based on the results of the efficacy and safety value results of the U.S. Phase 2 PROFILE study, the Company terminated the development of LB1148.

As a result of the Company entering into the Giiant Licensing Agreement, the Company has significantly reshaped its business into a pre-clinical stage biotechnology company focused on developing and advancing novel therapies for patients living with autoimmune, inflammatory, and fibrotic diseases. The Company is developing PALI-2108 as a therapeutic for patients living with inflammatory bowel disease, including ulcerative colitis and Crohn's disease.

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 losses and negative cash flows from operations since its inception. As of December 31, 2023, the Company had an accumulated deficit of approximately $121.5 million and cash and cash equivalents of approximately $12.4 million. The Company expects to continue to incur 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 6, Stockholders' Equity and Note 13, 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.

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 include the accounts of the Company and its wholly owned subsidiaries, LBS 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

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 consolidated financial statements, including the exercise price of such equity instruments, as applicable, have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates, judgments, and assumptions that impact the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet, and the reported amounts of expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relate to pre-clinical and clinical trial accruals, contingent consideration liabilities, 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 is the Company's one reportable segment.

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, 2023 and December 31, 2022, the Company held restricted cash of approximately $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 13, Subsequent Events) or shelf registration statements. As of December 31, 2023 and December 31, 2022, deferred equity issuance costs of approximately $112,000 and $114,000, respectively, were included in prepaid expenses and other current assets in the consolidated balance sheets. These costs will be netted against additional paid-in capital as a cost of the future equity issuances to which they relate. During the year ended December 31, 2023, the Company netted previously deferred equity issuance costs associated with its shelf registration statement of approximately $6,000 against the additional paid-in capital recognized in conjunction with the September 2023 Offering (see Note 6, Stockholders' Equity).

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 and historically the Company has not experienced any losses in such accounts.

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, insurance financing debt, liability-classified warrants and contingent consideration obligations. The carrying amounts of financial instruments such as cash and 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 Company invests its excess cash in money market funds that are classified as level 1 in the fair value hierarchy defined below, due to their short-term maturity, and measured the fair value based on quoted prices in active markets for identical assets. The carrying value of the Company’s insurance financing debt approximates its fair value due to the market rate of interest, which is based on level 2 inputs. The Company’s derivative financial instruments, consisting of its liability-classified warrants, and its contingent consideration obligation, 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 Accounting Standards Codification ("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 5, Fair Value Measurements.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates its financial instruments, including warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The Company values its derivatives using the Black-Scholes option pricing model or other acceptable valuation models, including 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 reassessed 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.

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 if it fails the equity classification criteria. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement and the warrants meet the requirements to be classified as equity. Common stock warrants classified as liabilities are initially recorded at fair value on the grant date and remeasured at fair value at each balance sheet date with the offsetting adjustments recorded in change in fair value of warrant liability within the consolidated statements of operations. If the terms of a common stock warrant previously classified as a liability are amended and pursuant to such amendment meet the requirements to be classified as equity, the common stock warrants are reclassified to equity at the fair value on the date of the amendment and are not subsequently remeasured. Common stock warrants classified as equity are recorded on a relative fair value basis when they are issued with other equity-classified financial instruments.

Leases

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

License Revenue

The Company uses the revenue recognition guidance established by ASC 606, Revenue From Contracts With Customers (“ASC 606”). When an agreement falls under the scope of other standards, such as ASC 808, Collaborative Arrangements, the Company will apply the recognition, measurement, presentation, and disclosure guidance in ASC 606 to the performance obligations in the agreements if those performance obligations are with a customer. The Company currently does not have any collaborative arrangements with counterparties that are also considered customers. For arrangements that include amounts to be paid to the Company upon the achievement of certain development milestones of technology licensed by the Company, the Company recognizes such license revenue using the most likely method. At the end of each reporting period, the Company re-evaluates the probability or achievement of any potential milestones and any related constraints, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue in the period of adjustment.

Contingent Consideration Obligation

Pursuant to the Giiant License Agreement, the Company incurred a contingent consideration obligation consisting of milestone payments, which are recognized as a liability measured at fair value, and ongoing royalty payments of five percent of the adjusted gross proceeds, as defined in the Giiant License Agreement, upon the sales or sublicenses third parties of any products developed from the assets licensed under the Giiant License Agreement (See Note 8, Collaborations and License Agreements). Because the contingent consideration associated with the milestone payments may be settled in shares of the Company's common stock solely at the election of the Company, the Company has determined it should be accounted for under ASC 480 and accordingly the Company has recognized it as a liability measured at its estimated fair value. At the end of each reporting period, the Company re-measures the contingent consideration obligation to its estimated fair value and any resulting change is recognized in research and development expenses in the consolidated statements of operations. The Company has determined that the contingent consideration associated with the royalty payments should be recognized as a liability when they are probable and estimable, in accordance with ASC 450, Contingencies.

Research and Development Costs

Research and development expenses consist primarily of salaries and other personnel related expenses including stock-based compensation costs, and, to the extent applicable, may include pre-clinical 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. Pursuant to situations whereby the Company performs any research and development or manufacturing activities under a co-development agreement, the Company records the expense reimbursements from the co-development partner as a reduction to research and development expense once the reimbursement amount is approved for payment by the co-development partner. Expense payments made to Giiant pursuant to the terms of the Giiant License Agreement for qualifying development costs are expensed only as the associated research and development costs are incurred or other aspects of the drug development or related activities are achieved. In instances where the expense determined to be recognized exceeds the payments made to the Giiant, the Company recognizes an accrual of joint development expenses. In addition, there may be instances in which payments made to Giiant will temporarily exceed the level of services provided, which results in a prepayment of the joint development expenses.

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 ASC 740, Income Taxes (“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

The Company’s stock-based compensation expense generally includes service-based restricted stock units (“RSUs”), stock options, and market-based performance RSUs (“PSUs”). The Company accounts for forfeitures as they occur for each type of award as a reduction of expense. Stock-based compensation expense related to service-based RSUs is based on the market value of the underlying stock on the date of grant and the related expense is recognized ratably over the requisite service period, which is usually the vesting period. The Company estimates the fair value of employee and non-employee stock option grants using the Black-Scholes option pricing model. The determination of the fair value of stock-based payment awards on the date of grant using the Black-Scholes option pricing model is affected by the Company's stock price as well as assumptions, which include the expected term of the award, the expected stock price volatility, risk-free interest rate, and expected dividends over the expected term of the award. Stock-based compensation expense represents the cost of the estimated grant date fair value of employee and non-employee stock option grants recognized ratably over the requisite service period of the awards, which is usually the vesting period. For PSUs with vesting subject to market conditions, the fair value of the award is determined at grant date using the Monte Carlo simulation model, and expense is recognized ratably over the derived service period regardless of whether the market condition is satisfied. The Monte Carlo simulation model considers a variety of potential future scenarios under the market condition vesting criteria, including but not limited to share prices for the Company and its peer companies in a selected market index.

The Company does not recognize any share-based compensation expense related to conditional RSUs, stock options, or PSUs that are subject to shareholder approval. When and if approval is obtained, the Company recognizes share-based compensation expense related to the conditional equity grants ratably to the vesting of shares over the remaining requisite service period.

Basic and Diluted Net Loss Per Common Share

Basic net 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. Diluted net loss per share is calculated by dividing the net loss available to common stockholders by the weighted-average number of shares of common stock outstanding during the period, plus potentially dilutive common shares, consisting of stock-based awards and equivalents, and common stock warrants. For purposes of this calculation, stock-based awards and equivalents and common stock warrants are considered to be potential common shares and are only included in the calculation of diluted net loss per common share when their effect is dilutive.

The Company's Series A Convertible Preferred Stock and certain of the Company's outstanding common stock warrants contain non-forfeitable rights to dividends with the common stockholders, and therefore are considered to be participating securities. The Series A Convertible Preferred Stock and the common stock 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 if the Company is in a net income position. When in a net income position, diluted net earnings per common 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 years presented, basic and diluted net loss per common share for the years ended December 31, 2023 and December 31, 2022 were calculated under the if-converted and treasury stock methods. For the years ended December 31, 2023 and December 31, 2022, basic and diluted net loss per common share were the same as all common stock equivalents were anti-dilutive for both years.

In computing both the basic and diluted net loss available to common stockholders for the years ended December 31, 2023 and 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 each year as each was determined to be anti-dilutive.

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

Year Ended December 31,

Basic and diluted net loss per common share:

Basic and diluted net loss per common share $ (1.80 ) $ (16.53 )

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

December 31,

Restricted stock units 425,124 —

Series A Convertible Preferred Stock 129 129

Comprehensive Loss

Comprehensive 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 years presented.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. During the fourth quarter of 2023, the Company reclassified the fair value of the contingent consideration milestone payment obligation associated with the Giiant License Agreement, including transaction related costs, from In-process research and development expenses to Research and development expenses at the consolidated statement of operations, which impacted amounts previously reported for the three and nine months ended September 30, 2023. Amounts reported for the year ended December 31, 2022 were not impacted by this reclassification.

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 determined it did not have a material impact on its consolidated financial statements and related disclosures for the year ended December 31, 2023.

Recently Issued Accounting Pronouncements

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 720): Improvements to Income Tax Disclosures ("ASU 2023-09"), which prescribes standard categories for the components of the effective tax rate reconciliation and requires disclosure of additional information for reconciling items meeting certain quantitative thresholds, requires disclosure of disaggregated income taxes paid, and modifies certain other income tax-related disclosures. ASU No. 2023-09 is effective for annual periods beginning after December 15, 2024 and allows for adoption on a prospective basis, with a retrospective option. The Company is currently evaluating the potential impact of the adoption of ASU 2023-09. The Company expects any potential impact of ASU 2023-09 to only relate to disclosures with no impact to its results of operations, cash flows, and financial condition.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, ("ASU 2023-07"), which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The disclosure requirements included in ASU No. 2023-07 are required for all public entities, including those with a single reportable segment. ASU No. 2023-07 is effective for annual periods beginning after December 15, 2024, on a retrospective basis, and early adoption is permitted. The Company expects any potential impact of ASU 2023-07 to only relate to disclosures with no impact to its results of operations, cash flows, and financial condition.

3. Balance Sheet Details

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

December 31,

Prepaid subscriptions and fees 138 157

Prepaid software licenses 64 54

Deferred equity issuance costs 112 114

Prepaid other 6 6

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 December 31, 2022. The entire amount of this receivable was received by the Company in January of 2023. There was no such receivable as of December 31, 2023.

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

December 31,

Prepaid insurance, less current portion $ 478 $ 682

Other noncurrent assets 12 12

Accrued liabilities consisted of the following (in thousands):

December 31,

Accrued accounts payable $ 166 $ 69

Accrued clinical trial expenses 20 184

Accrued director stipends 106 141

Accrued severance and benefits (Note 9) 131 180

Accrued joint development expenses (Note 8) 98 —

Current portion of contingent consideration obligation (Note 5) 143 —

Accrued other 167 —

4. Common Stock Warrants

The Company’s outstanding common stock warrants that are classified as equity warrants are included as a component of stockholders' equity based on their relative fair value on their date of issuance. Common stock warrants accounted for as liabilities in accordance with the authoritative accounting guidance are included in noncurrent liabilities. The Company had common stock warrants outstanding of 4,080,876 and 1,055,672 at December 31, 2023 and December 31, 2022, respectively. Of the Company's common stock warrants exercisable at December 31, 2023, (i) 205,201 common stock warrants have an exercise price of $0.84, (ii) 1,012,631 common stock warrants have an exercise price of $2.375, (iii) 2,272,723 common stock warrants have an exercise price of $2.64, (iv) 136,363 common stock warrants have an exercise price of $3.30, (v) 63,158 common stock warrants have an exercise price of $2.9668, (vi) 140,364 common stock warrants have an exercise price of $1.05, and (vii) the remaining 250,436 common stock warrants have a weighted-average exercise price of $103.52. Only the 205,201 common stock warrants outstanding that have an exercise price of $0.84 are subject to down round price reset provisions.

Liability-Classified Warrants

January 2022 Warrants

On January 31, 2022, the Company and an investor entered into an agreement to irrevocably waive any adjustment to the exercise price of the Senior Secured Promissory Note Warrants (defined below) and the May 2021 Warrants (defined below) 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 was 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 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, 2023.

The January 2022 Warrants expire five and a half years from the date of issuance, or July 31, 2027. As of December 31, 2023, the January 2022 Warrants outstanding were exercisable for 45,000 shares of the Company’s common stock at an exercise price of $55.00 per common stock warrant.

July 2021 Warrants

On July 21, 2021, the Company and an investor entered into an agreement to waive certain provisions of the previous Security Purchase Agreement (defined below) (the "July 2021 Waiver Agreement"). 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 July 2021 Warrants expire five years from the date of registration of the warrants, or August 19, 2026. As of December 31, 2023, the July 2021 Warrants outstanding were exercisable for 22,000 shares of the Company’s common stock at an exercise price of $181.50 per common stock warrant.

Senior Secured Promissory Note Warrants

On December 16, 2020, the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with an investor pursuant to which, among other things, the Company agreed to issue warrants to purchase shares of the Company’s common stock (“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, 2023, 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 per common stock warrant.

Equity-Classified Warrants

The Company accounts for the majority of its warrants as equity-classified in accordance with ASC 480 and ASC 815.

September 2023 Offering

In connection with the September 2023 Offering (see Note 6, Stockholders' Equity), on September 11, 2023 the Company issued 140,364 warrants to purchase shares of the Company's common stock to the offering placement agent at an exercise price of $1.05 per share and a term of five yearsand are immediately exercisable from issuance (the "September 2023 Placement Agent Warrants"). The fair value of the September 2023 Placement Agent Warrants was recognized by the Company as an equity issuance cost, which reduced the additional paid-in capital recognized from the September 2023 Offering. The September 2023 Placement Agent Warrants are not subject to any exercise price reset or down round provisions.

April 2023 Registered Direct Offering and Private Placement Warrants

In connection with the April 2023 Offering (see Note 6, Stockholders' Equity), on April 3, 2023 the Company issued (i) 1,061,164 pre-funded warrants to purchase shares of the Company's common stock at a purchase price of $2.6399, with such warrants having an exercise price of $0.0001 per share and a perpetual term, (ii) 2,272,723 warrants to purchase shares of the Company's common stock at an exercise price of $2.64 per share and a term of five years from the date of issuance (the "April 2023 Warrants"), and (iii) 136,363 warrants to purchase shares of the Company's common stock to the offering placement agent at an exercise price of $3.30 per share and a term of five years. As of December 31, 2023, all of the pre-funded warrants issued with the April 2023 Offering have been exercised for shares of the Company's common stock. None of the warrants issued with the April 2023 Offering are subject to any exercise price reset or down round provisions.

January 2023 Registered Direct Offering and Private Placement Warrants

In connection with the January 2023 Offering (see Note 6, Stockholders' Equity), on January 4, 2023 the Company issued (i) 37,000 pre-funded warrants to purchase shares of the Company's common stock at a purchase price of $2.3749 per warrant, with such warrants having an exercise price of $0.0001 per warrant and a perpetual term (ii) 538,789 pre-funded warrants to purchase shares of the Company's common stock at a purchase price of $2.3749 per

warrant, with such warrants having an exercise price of $0.0001 per warrant and a perpetual term; (iii) 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 years (the "January 2023 Warrants"), and (iv) 63,158 warrants to purchase shares of the Company's common stock to the offering placement agent at an exercise price of $2.9688 per share and a term of five years. As of December 31, 2023, all of the pre-funded warrants issued with the January 2023 Offering have been exercised for shares of the Company's common stock and 40,000 warrants issued with the January 2023 Offering have been exercised for shares of the Company's common stock. None of the warrants issued with the January 2023 Offering are subject to any exercise price reset or down round provisions.

August 2022 Offering Warrants

In connection with the August 2022 Offering (see Note 6, Stockholders' Equity), on August 16, 2022 the Company issued warrants exercisable for 1,104,000 shares of the Company's common stock that expired one year from the date of issuance (the "Series 1 Warrants") and warrants exercisable for 1,104,000 shares of the Company's common stock that expire five years from the date of issuance (the "Series 2 Warrants"). 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 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 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.

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 the January 2023 Offering (See Note 6) (the "December 2022 Down Round"). As a result of the triggering of the December 2022 Down Round, 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 January 2023 Offering. During the year ended December 31, 2023, the Down Round Feature was again triggered on 205,201 of the Company's outstanding equity-classified Series 2 Warrants due to the September 7, 2023 announcement of the September 2023 Offering (See Note 6) (the "September 2023 Down Round"). As a result of the triggering of the September 2023 Down Round, the exercise price of any outstanding Series 2 warrants including the Down Round Feature was adjusted down to $0.84, which represents the price per share of the equity being offered in September 2023 Offering. None of the Series 1 Warrants were impacted by September 2023 Down Round as all had expired. As of December 31, 2023, Series 2 Warrants outstanding were exercisable for 205,201 shares of the Company’s common stock, each at an exercise price of $0.84. All of the Underwriter Warrants are outstanding as of December 31, 2023 at an exercise price of $15.63, and are not subject to any exercise price reset or down round provisions.

The Company calculated the value of the effect of Down Round Feature in both the December 2022 Down Round and the September 2023 Down Round as the difference between the fair of the warrants impacted, using a Monte Carlo valuation model, immediately before and immediately after the Down Round Feature was triggered using the existing exercise price and the new exercise price. The difference in fair value of the effect of the December 2022 Down Round of $288,000 and was recognized as a deduction from the loss available to common shareholders for the year ended December 31, 2022. The difference in fair value of the effect of the September 2023 Down Round of $16,000 and was recognized as a deduction from the loss available to common shareholders the year ended December 31, 2023. The exercise price of any outstanding Series 2 warrants subject to down round price reset provisions 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. Only 205,201 common stock warrants outstanding as of December 31, 2023 are subject to down round price reset provisions.

May 2022 Registered Direct Offering Warrants

In connection with the May 2022 Offering (see Note 6, Stockholders' Equity), on May 10, 2022 the Company issued the warrants to purchase 72,935 shares of the Company's common stock at an exercise price of $35.53 (the "May 2022 Warrants"). The May 2022 Warrants were 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 common stock warrants to purchase 4,376 shares of the Company's common stock at an exercise price of $35.53 to the offering placement agent (the "May 2022 Placement Agent Warrants"). 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. None of the warrants issued with the May 2022 Offering are subject to any exercise price reset or down round provisions.

The following table summarizes all common stock warrant activity for the year ended December 31, 2023:

Forfeited, expired or cancelled (72,995 ) 4.86 —

For the years ended December 31, 2023 and 2022, the Company received gross cash proceeds of approximately $2.8 million and approximately $2.3 million, respectively, from exercises of common stock warrants. Of the gross cash proceeds received for the year ended December 31, 2023, $1.4 million related to common stock warrants exercised on December 30, 2022 for which the related cash exercise price was receivable to the Company as of December 31, 2022. The related cash payment was received by the Company in January 2023.

On January 30, 2024, the Company entered into warrant inducement agreements with certain accredited and institutional holders, which resulted in the exercise of an aggregate of 3,422,286 of the Company's equity-classified warrants outstanding as of December 31, 2023. Refer to Note 13, Subsequent Events, for further details.

5. Fair Value Measurements

Contingent Consideration Obligations

Pursuant to the Giiant License Agreement entered into on September 1, 2023, the Company incurred a contingent consideration obligation related to future milestone payments. The Company has an obligation to make contingent consideration payments to Giiant, in either cash or shares of the Company’s common stock solely at the Company’s election, upon the achievement of development milestones (as set forth in the Giiant License Agreement). Because the contingent consideration may be settled in shares of the Company's common stock, the Company has determined it should be accounted for under ASC 480, Distinguishing Liabilities from Equity, and accordingly has recognized it as a liability measured at its estimated fair value.

At the end of each reporting period, the Company re-measures the contingent consideration obligation to its estimated fair value and any resulting change is recognized in research and development expenses in the consolidated statements of operations. The fair value of the contingent consideration obligation is determined using a probability-based model that estimates the likelihood of success in achieving each of the defined milestones which is then discounted to present value using the Company's incremental borrowing rate. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The significant assumptions used in the calculation of the fair value as of December 31, 2023 included a discount rate of 13.5% and management's updated projections of the likelihood of success in achieving each of the defined milestones based on reputable, published industry data.

As of September 1, 2023, the date the contingent consideration obligation was incurred, the initial fair value of the liability was determined to be approximately $0.2 million. The following table summarizes the activity of the Company’s Level 3 contingent consideration obligations, which are fair valued on a recurring basis (in thousands):

Year Ended

Contingent Consideration Obligations December 31, 2023

Fair value at beginning of year $ —

Initial fair value at the original issuance date 212

Change in fair value during the year (8 )

Fair value at end of year $ 204

As of December 31, 2023, approximately $143,000 of the contingent consideration obligation was recognized in accrued liabilities at the consolidated balance sheet as it is expected to be settled within one-year of the balance sheet date. The remaining amount of the contingent consideration liability of approximately $61,000 was recognized as a noncurrent liability in the consolidated balance sheet as of December 31, 2023. The initial fair value of the contingent consideration liability of $0.2 million, transaction-related costs of approximately $0.1 million, and the change in the fair value of the contingent consideration liability for the year ended December 31, 2023 is recognized in research and development expenses in the consolidated statements of operations.

Liability-Classified Warrants

The Company has issued warrants that are accounted for as liabilities based upon the guidance of with 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. Changes in fair value of the liability-classified warrants are recognized as a component of other income in the consolidated statement of operations.

As of December 31, 2023, the fair value of the Company's liability-classified warrants outstanding was determined using a Black-Scholes option pricing model valuation model to be insignificant due to the low market price of the Company's stock at the date of valuation relative to the exercise price of the underlying warrants outstanding.

The following table summarizes the activity of the Company’s Level 3 liability-classified warrants, which are fair valued on a recurring basis (in thousands):

Year Ended December 31,

Fair value at beginning of year $ 61 $ 2,651

Initial fair value at the original issuance date — 1,110

Change in fair value during the period (59 ) (2,426 )

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

Fair value at end of year $ 2 $ 61

6. Stockholders’ Equity

Classes of Stock

Common Stock

As of December 31, 2023, the Company was authorized to issue280,000,000 shares of $0.01 par value common stock. Each share of common stock entitles the holder thereof to one vote on each matter submitted to a vote at a meeting of stockholders.

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, 2023, the Company was authorized to issue7,000,000 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, 2023, 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 Offering (see below), the Company's Board of Directors ("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 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.

September 2023 Offering

On September 7, 2023, the Company entered into securities purchase agreements with certain institutional investors, pursuant to which the Company agreed to sell and issue in a registered direct offering an aggregate of 2,339,398 shares of the Company’s common stock, par value $0.01 per share, at a purchase price per share of $0.84 (the “September 2023 Offering”). The shares of the Company's common stock offered in the September 2023 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 September 2023 Offering closed on September 11, 2023.

Gross cash proceeds from the September 2023 Offering were approximately $2.0 million and net cash proceeds were approximately $1.7 million after deducting cash equity issuance costs of approximately $0.3 million, which excludes the grant date fair value of the September 2023 Placement Agent Warrants of approximately $0.1 million. The fair value of the September 2023 Placement Agent Warrants was recognized by the Company as an equity issuance cost.

April 2023 Registered Direct Offering and Private Placement

On April 3, 2023, the Company entered into securities purchase agreements with certain institutional and accredited investors pursuant to which the Company agreed to sell and issue, in a registered direct offering (the “April 2023

Registered Offering”), an aggregate of 756,317 shares of the Company's common stock, at a purchase price per share of $2.64. Additionally, in a concurrent private placement, the Company also agreed to sell and issue to such purchasers, an aggregate of (i) 455,242 unregistered shares of the Company's common stock, at a purchase price per share of $2.64, (ii) 1,061,164 prefunded warrants to purchase shares of the Company's common stock at a purchase price of $2.6399 per prefunded warrant, with such warrants having an exercise price of $0.0001 per share and a perpetual term; and (iii) 2,272,723 common stock warrants to purchase shares of the Company's common stock at an exercise price of $2.64 per share and a term of five years from the date of issuance (the “April 2023 Private Placement”) (collectively, April 2023 Registered Offering and April 2023 Private Placement are referred to as the “April 2023 Offering”). All of the warrants issued in the April 2023 Offering are immediately exercisable from their date of issuance.

Pursuant to a placement agency agreement dated as of April 3, 2023, the Company engaged Ladenburg Thalmann & Co. Inc. (the “April 2023 Placement Agent”), to act as the exclusive placement agent in connection with the April 2023 Offering. The Company issued warrants to the April 2023 Placement Agent to purchase an aggregate of 136,363 shares of the Company's common stock (the "April 2023 Offering Placement Agent Warrants"). The April 2023 Offering Placement Agent Warrants have an exercise price of $3.30 per share and a term of five years and are immediately exercisable from their date of issuance. The fair value of the April 2023 Offering Placement Agent Warrants was recognized by the Company as an equity issuance cost which reduced the additional paid-in capital recognized from the April 2023 Offering.

Gross cash proceeds from the April 2023 Offering were approximately $6.0 million and net cash proceeds were approximately $5.3 million after deducting cash equity issuance costs of approximately $0.7 million, which excludes the grant date fair value of the April 2023 Placement Agent Warrants of approximately $0.2 million.

January 2023 Registered Direct Offering and Private Placement

On January 4, 2023, the Company closed on an agreement with certain institutional and accredited investors pursuant to which it agreed to sell and issue, in a registered direct offering (the “January 2023 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 a purchase price of $2.3749, with such warrants having 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 years from the date of issuance (the "January 2023 Private Placement") (collectively, the January 2023 Registered Offering and the January 2023 Private Placement are referred to as the “January 2023 Offering”). All the warrants issued in the January 2023 Offering 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 “January 2023 Placement Agent”), to act as the exclusive placement agent in connection with the January 2023 Offering. The Company issued warrants to the January 2023 Placement Agent to purchase an aggregate of 63,158 shares of the Company's common stock (the "January 2023 Placement Agent Warrants"). The January 2023 Placement Agent Warrants have an exercise price of $2.9688 per share and a term of five years. The January 2023 Placement Agent Warrants are immediately exercisable from issuance. The fair value of the January 2023 Placement Agent Warrants was recognized by the Company as an equity issuance cost, which reduced the additional paid-in capital recognized from the January 2023 Offering.

Gross cash proceeds from the January 2023 Offering were approximately $2.5 million and net cash proceeds were approximately $2.2 million after deducting cash equity issuance costs of approximately $0.3 million, which excludes the grant date fair value of the January 2023 Placement Agent Warrants of approximately $0.2 million.

August 2022 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 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 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 Offering, Ladenburg Thalmann & Co. Inc. All shares of the Series B Convertible Preferred Stock have been converted into shares of the Company's common stock, and any remaining, unexercised Series 1 Warrants have expired as of December 31, 2023.

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 Offering”), an aggregate of72,935 shares of its common stock, par value $0.01 per share, 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 the Company's common stock.

In connection with the May 2022 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 proceeds from the May 2022 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 May 2022 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.

7. Equity Incentive Plans

In 2013, LBS adopted the 2013 Employee, Director, and Consultant Equity Incentive Plan, (as amended and restated, the “2013 Plan”). No further awards will be made under the 2013 Plan.

In April 2021, the Company’s shareholders approved the Palisade Bio, Inc. 2021 Equity Incentive Plan (the “2021 EIP Plan”). In June 2023, the Company's shareholders approved amendments to the 2021 EIP Plan to increase (i) the number of shares of common stock issuable under the plan by 708,072 shares and (ii) the annual evergreen share increase amount from 4% to 7.5% of the outstanding shares of common stock on January 1 of each year. As of December 31, 2023, there were 4,947 shares of the Company's common stock reserved for future issuance as equity-based awards under the 2021 EIP Plan, which excludes a total of 144,160 shares of the Company's common stock issuable upon exercise of outstanding stock options and outstanding restricted stock units that were conditionally granted to the Company's Chief Executive Officer and Chief Medical Officer on November 21, 2023 subject to sufficient shares being available under the 2021 EIP Plan, as well as any subsequent evergreen share increases in the number of shares of common stock reserved for issuance under the 2021 EIP Plan.

Also in April 2021, the Company's shareholder approved the Palisade Bio, Inc. 2021 Employee Stock Purchase Plan (the "2021 ESPP"). In June 2023, the Company's shareholders approved amendments to the 2021 ESPP to increase (i) the number of shares of common stock authorized under the plan by 109,944 shares and (ii) the annual evergreen share increase amount from 1% to 2.5% of the outstanding shares of common stock on January 1 of each year.

All employees are eligible to participate in the 2021 ESPP while employed by the Company. The 2021 ESPP permits eligible employees to purchase common stock through payroll deductions, which may not exceed $25,000 or 10,000 shares of the Company's shares of common stock each offering period, as defined in the 2021 ESPP, at a price equal to 85% of the fair value of the Company's common stock at the beginning or end of the offering period, whichever is lower. The 2021 ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The first offering period under the plan commenced on July 1, 2023 and ended on November 20, 2023, at which time a second 6-month offering period commenced. As of December 31, 2023, there have been 33,676 shares of the Company's common stock issued under the 2021 ESPP. As of December 31, 2023, there were 110,871 shares of the Company's common stock reserved for future issuance under the 2021 ESPP, which excludes any subsequent evergreen share increases in the number of shares of common stock reserved for future issuance under the 2021 ESPP.

The Company estimates the fair value of grants from the 2021 ESPP on their grant date using the Black-Scholes option pricing model. The estimated fair value of the grants from the 2021 ESPP are amortized on a straight-line basis over the requisite service period of the grants. The Company reviews, and when deemed appropriate, updates the assumptions used on a periodic basis. The Company utilizes its estimated volatility in the Black-Scholes option pricing model to determine the fair value of 2021 ESPP grants. Compensation expense associated with the 2021 ESPP for the year ended December 31, 2023 was approximately $18,000.

In November 2021, the Company's compensation committee of the Company's 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. On August 7, 2023, the Company's compensation committee of the Board approved an increase in the shares of the Company's common stock authorized and available for issuance to 1,000,000 shares. As of December 31, 2023, there were 863,214 shares of the Company's common stock reserved for future 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 and a term as determined by the Company's Board but generally not to exceed ten-years. Stock option awards to employees vest in equal proportions each quarter over three years and stock option awards to directors of the Company's Board cliff vest after a period of one year. 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 years ended December 31, 2023 and 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 $ 1.39 $ 40.32

Weighted-average expected term (years) 5.66 5.81

Weighted-average risk-free interest rate 4.08 % 2.30 %

Weighted-average expected dividend yield — —

Weighted-average volatility 78.35 % 73.66 %

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, 2023:

Exercised — — — —

Forfeited, expired or cancelled (47,366 ) 57.98 — —

Included in the stock options granted for the year ended December 31, 2023 are a total of 78,160 stock options that were conditionally granted to the Company's Chief Executive Officer and Chief Medical Officer on November 21, 2023, subject to sufficient shares being available under the 2021 EIP Plan, which occurred upon the annual evergreen share increase on January 1, 2024.

The weighted-average grant date fair value of options granted during the years ended December 31, 2023 and December 31, 2022 was $0.82 per share and $26.15 per share, respectively. The fair value of the options vested during each the years ended December 31, 2023 and December 31, 2022 was approximately $0.3 million and $1.0 million, respectively.

Restricted Stock Units

During the year ended December 31, 2023, the Company granted RSUs to employees under the 2021 EIP Plan and 2021 Inducement Plan. The RSUs generally vest proportionally each quarter over a term of one or three years.

The following table summarizes RSU activity and related information under the 2021 EIP Plan and the 2021 Inducement Plan for the year ended December 31, 2023:

Non-vested at December 31, 2022 — $ — —

Included in the RSUs granted for the year ended December 31, 2023 are a total of 66,000 RSUs that were conditionally granted to the Company's Chief Executive Officer and Chief Medical Officer on November 21, 2023, subject to

sufficient shares being available under the 2021 EIP Plan, which occurred upon the annual evergreen share increase on January 1, 2024.

The fair value of the RSUs vested during the year ended December 31, 2023 was approximately $70,000.

Performance Based Stock Units

On February 6, 2023, the Company granted to certain members of management a total of 68,700 market-based PSUs, which vest (a) 50% when the volume weighted average price of the Company’s common stock over 20 consecutive trading days is $3.20 or greater ("vesting Tranche 1"), and (b) 50% when such volume weighted average price of the Company’s common stock over 20 consecutive trading days is $4.25 or greater ("vesting Tranche 2"). The PSUs were conditional subject to shareholder approval, which such approval was received at the Company's annual shareholder meeting held on June 8, 2023. The fair value of each of the market-based vesting tranches of the PSUs was determined using a Monte Carlo simulation model that considered a variety of potential share prices for the Company's common stock. The weighted-average grant date fair value per share of vesting Tranche 1 and vesting Tranche 2 of the PSUs was $1.50 per award share and $1.47 per award share, respectively, and was determined using the following key assumptions: (i) a risk-free interest rate of 3.74%, (ii) expected stock price volatility of 76.6%, (iii) a cost of equity of 27.99%, and (iv) an expected contractual life of 9.66 years. As shareholder approval of the PSUs was received, the Company is recognizing the share-based compensation expense associated with the PSUs ratably over the derived service period of 1.75 years for vesting Tranche 1 and 2.48 years for vesting Tranche 2, regardless of whether the market condition for vesting is satisfied. None of the PSUs vested during the year ended December 31, 2023 and 6,500 PSUs were forfeited during the year. As of December 31, 2023, a total of 62,200 PSUs remain unvested and outstanding.

Share-Based Compensation Expense

On February 6, 2023, the Company granted to certain members of management a total of 81,500 stock options and 59,500 RSUs that were conditional subject to shareholder approval (the "Conditional Equity Awards"), which such approval was received at the Company's annual shareholder meeting held on June 8, 2023. Accordingly, the Company began to recognize share-based compensation expense related to the Conditional Equity Awards during the year ended December 31, 2023 ratably to the vesting of the awards.

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

Year Ended December 31,

Research and development expense $ 240 $ 182

General and administrative expense 366 850

As of December 31, 2023, the unrecognized compensation cost related to outstanding options was $0.6 million, which is expected to be recognized over a weighted-average period of approximately 1.80 years and the unrecognized compensation cost related to outstanding service-based and performance-based RSUs was $0.4 million, which is expected to be recognized over a weighted average period of approximately 2.08 years.

8. Collaborations and License Agreements

Research Collaboration and License Agreement with Giiant

On September 1, 2023 (the “Effective Date”), the Company entered into the Giiant License Agreement whereby the Company has received an exclusive, worldwide license (with the right to sublicense in multiple tiers) to develop, manufacture, and commercialize substantially all of the assets of Giiant, including: (i) the PALI-2108 (formerly GT-2108) compound, and (ii) the PALI-1908 (formerly GT-1908) compound and the associated intellectual property around each of the foregoing (the “Giiant Licensed Assets”). The Giiant License Agreement has a perpetual term.

Pursuant to the Giiant License Agreement, the Company and Giiant have established a joint development committee (“JDC”), consisting of one Giiant appointee and two Company appointees. The JDC will be responsible for: (i) overseeing the day-to-day development of the Giiant Licensed Assets through Proof of Concept (as defined below), and (ii) creation and implementation of the development plan and development budget for such development (the “Giiant Development Plan”) and any amendments or updates thereto.

Prior to receiving regulatory approval to commence a Phase 1 clinical trial (as such term is defined in the Giiant License Agreement) (the “Proof of Concept”), each of the Company and Giiant shall be solely responsible for all costs and expenses incurred by such party for the joint development of the Giiant Licensed Assets, except as set forth in the Giiant Development Plan. Prior to reaching the Proof of Concept, the Company will reimburse or advance Giiant up to an amount in the low seven-digit range for costs and expenses incurred by them, subject to increase upon unanimous consent of all members of the JDC, and provided that the costs and expenses are included in the Giiant Development Plan budget and are approved by the JDC. Upon reaching the Proof of Concept, the Company will be solely responsible for all costs and expenses incurred for the development, manufacturing, regulatory and commercialization of the Giiant Licensed Assets. For the year ended December 31, 2023, the Company has recognized expenses related to the joint development plan with Giiant in the amount of approximately $0.7 million, which are included in research and development expenses in the consolidated statements of operations. At December 31, 2023, the Company has accrued joint development expenses of approximately $98,000 in Accrued expenses at the consolidated balance sheets.

As consideration for the Giiant Licensed Assets, the Company will (i) make payments between the mid six-digit range and low seven-digit range upon the achievement of development milestones (as set forth in the Giiant License Agreement), in either cash or shares of the Company’s common stock, at the Company’s election (“ Giiant Milestone Payments”), and (ii) pay ongoing royalty payments of five percent of the adjusted gross proceeds, as defined in the Giiant License Agreement, upon the sales or sublicenses of any products developed from the Giiant Licensed Assets to third parties (“Giiant Royalty Payments”) (collectively, the Giiant Milestone Payments and the Giiant Royalty Payments are referred to as the “Giiant License Payments”). The Giiant License Payments are subject to a maximum payment cap in the very low eight-digit range, which will be increased or decreased on a dollar-for-dollar basis based on a formula related to the aggregate of development costs incurred by the parties (“Payment Cap”). The Company made no Giiant License Payments since the commencement of the Giiant License Agreement.

In the event that Giiant desires to sell or assign any rights to receive the Giiant License Payments, it will be required to notify the Company of such offer or proposal (“Offer Notice”). The Company will then have a right of first refusal for thirty days from the receipt of such Offer Notice, to acquire the rights and obligations contained in such Offer Notice on the same terms.

The Company may unilaterally terminate the Giiant License Agreement for: (i) convenience ("Company Convenience Termination"), (ii) the failure to achieve Proof of Concept within eighteen months of September 1, 2023, subject to extension upon the occurrence of certain event (“Proof-of-Concept Termination”), or (iii) a material breach by Giiant, that is not cured within ninety days of written notice (“Giiant Material Breach Termination”).

In the event of a Company Convenience Termination, the Giiant License Agreement will be terminated and Giiant will retain unencumbered ownership of the Giiant Licensed Assets and no further License Payments will be required of the Company.

In the event of a Proof-of-Concept Termination or Giiant Material Breach Termination, the Company may elect to terminate the Giiant License Agreement. In such instance, the Company will remain obligated to continue making the Giiant License Payments, if any, if and when they become due.

Giiant may unilaterally terminate the Giiant License Agreement only for a material breach by Company that is not cured within ninety days of written notice (“Company Material Breach Termination”) provided however that upon the Payment Cap being achieved, that right will terminate and the Giiant License Agreement will become perpetual. In the event of a Company Material Breach Termination, the Giiant License Agreement, including the License will be terminated and Giiant will retain unencumbered ownership of the Giiant Licensed Assets, including any improvements made up until such termination and the Company will be under no further obligations.

Co-Development and Distribution Agreement with Newsoara

LBS entered into a co-development and distribution agreement with Newsoara, a joint venture established with Biolead Medical Technology Limited, as amended, (the “Newsoara Co-Development Agreement”). Pursuant to the Newsoara 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 “Newsoara 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 Newsoara Licensed Products only include the drug asset referred to as 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 Newsoara Co-Development Agreement obligates Newsoara to initially use LBS as the exclusive supplier for all Newsoara’s requirements for Newsoara Licensed Products in the Territory. During the term of the Newsoara Co-Development Agreement, Newsoara may request to manufacture the Newsoara Licensed Products 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. Where the Company performs any research and development or manufacturing activities under the Newsoara Co-Development Agreement, the Company records the expense reimbursement from Newsoara as a reduction to research and development expense.

In consideration of the rights granted to Newsoara under the Newsoara 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 to the royalty percentage in certain events, including a change of control, the expiration of certain patents rights, and royalties paid by Newsoara third parties. To date, Newsoara has met all of its payment obligations under the Newsoara Co-Development Agreement.

During the year ended December 31, 2023, the Company recognized license revenue of $0.3 million earned upon Newsoara's achievement of a development milestone under the Newsoara Co-Development Agreement during the first quarter of 2023. During the year ended December 31, 2022, the Company recognized no license revenue from Newsoara under the Newsoara Co-Development Agreement.

The Newsoara Co-Development Agreement will expire upon the later of the expiration date of the last valid claim of any licensed patent covering the Newsoara Licensed Products in the Territory. In addition, the Newsoara Co-Development Agreement can be terminated (i) by either party for the other party’s material breach that remains uncured for a specified time period after written notice or for events related to the other party’s insolvency, (ii) by LBS if Newsoara challenges or attempts to interfere with any licensed patent rights and, (iii) by Newsoara for any reason upon specified prior written notice.

License Agreements with the Regents of the University of California

The Company has entered into three license agreements, as amended, with the Regents of the University of California (“Regents”) for exclusive commercial rights to certain patents, technology and know-how. Concurrent with the Company's decision to terminate the development of LB1148, on October 20, 2023 the Company terminated two of its license agreements with Regents. As of December 31, 2023, the only license agreement remaining with Regents is that entered into with LBS in August 2015, as amended in December 2019 and September 2022 (the “2015 UC License”). The 2015 UC License was retained for the sole purpose of maintaining the Newsoara Co-Development Agreement under which the Company may receive future milestone or royalty payments through the term of the license. Accordingly, pursuant to the 2015 UC License, the Company is obligated to pay a percentage of non-royalty licensing revenue it receives from Newsoara under the Newsoara Co-Development Agreement to Regents ranging from 30 percent to 35 percent of one-third of the upfront payment and milestone payments received from Newsoara. During the year ended December 31, 2023, the Company recognized approximately $25,000 in sublicense fees and approximately $21,000in license maintenance fees due to Regents in research and development expenses in the consolidated statements of operations. During the year ended December 31, 2022, there were no sublicense fees recognized and approximately $17,000 in license maintenance fees due to Regents recognized in research and development expenses in the consolidated statements of operations.

The 2015 UC License will expire upon the expiration date of the longest-lived patent right licensed under the 2015 UC License. The Regents may terminate the 2015 UC License if: (i) a material breach by us is not cured within 60 days, (ii) we file a claim asserting the Regents licensed patent rights are invalid or unenforceable, or (iii) we file for bankruptcy. We also have the right to terminate the 2015 UC License at any time upon at least 90 days’ written notice.

Contingent Value Right

Immediately prior to the closing of the Merger, Seneca issued each share of its common stock held by Seneca stockholders of record, one contingent value right (“CVR”). The CVR entitled the holder (the “CVR Holder”) to receive, pro rata with the other CVR Holders, 80% of the net proceeds, if any and subject to certain minimum distribution limitations (“CVR Payment Amount”), received from the sale or licensing of the intellectual property owned, licensed or controlled by Seneca immediately prior to the closing of the Merger (the “Legacy Technology”); provided however that the CVR Holders are only entitled to receive such CVR Payment Amount if the sale or licensing of such Legacy Technology occurred on or before October 27, 2022 (“Legacy Monetization”). Pursuant to the terms of the CVR agreement (“CVR Agreement”), CVR Holders are only entitled to receive CVR Payment Amounts received within 48-months following the closing of the Merger. The CVR Agreement also provides that no distributions will be made to the CVR Holders in the event such distribution is less than $0.3 million.

NSI-189 – Exclusive License and Subsequent Exercise of Purchase Option

Prior to the Merger, 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 ("Alto") agreed to terms of an early exercise of the Purchase Option under the 189 License and entered into an asset transfer agreement ("ATA"). Alto is a U.S. based public, clinical-stage biopharmaceutical company with a mission to redefine psychiatry by leveraging neurobiology to develop personalized and highly effective treatment options.

Pursuant to the terms of the CVR Agreement, no distribution was required to be made to the CVR Holders as the CVR Payment Amount after deducting costs and expenses required to maintain the 189 License was less than $0.3 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.

In addition, Alto will be required to pay the Company up to an aggregate of $4.5 million upon the achievement of certain development and regulatory approval milestones for NSI-189 (or a product containing or otherwise derived from NSI-189), which is now known as ALTO-100. If Alto sells or grants to a third party a license to the patents and other rights specific to ALTO-100 prior to the achievement of a specified clinical development milestone, Alto will be required to pay to the Company a low-double digit percentage of any consideration received by Alto from such license or sale, provided that the maximum aggregate consideration Alto will be required to pay to the Company under the ATA, including the upfront payment and all potential milestones and transaction-related payments, will not exceed $5.0 million.

Alto has successfully completed a Phase 2a clinical trial of ALTO-100 and is currently enrolling a Phase 2b clinical trial from which topline data is expected in the second half of 2024. Upon the enrollment of a patient in a Phase 3 clinical trial of ALTO-100, a milestone payment of $1.5 million will be due from Alto under the ATA. If this occurs within 48-months of the closing of the Merger, the CVR Holders will be entitled to a CVR Payment Amount, with the remaining 20% of the net proceeds deposited into the CVR escrow. If the milestone is met after 48-months of the closing of the Merger, all the net proceeds will be paid to the Company. There can be no assurance that CVR holders will receive CVR Payment Amounts from the sale of the NSI-189 assets.

NSI-532.IGF-1

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

There can be no assurance that NSI-532.IGF-1 will ever be successfully monetized or that CVR holders will receive CVR Payment Amounts from the sale of the NSI-532.IGF-1 assets.

9. Commitments and Contingencies

Corporate Office Lease

On May 12, 2022, the Company entered 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 likely 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. The Corporate Office Lease is subject to conditional abatement of fifty percent (50%) of such base rent during the second, third and fourth full calendar months of the initial lease term, as set forth in the lease agreement, as well as a $28,000 tenant improvement allowance.

The Corporate Office Lease is also subject to additional variable charges for common area maintenance, insurance, taxes and other operating costs. This additional variable rent expense is not estimable at lease inception. Therefore, it is excluded from the Company’s straight-line expense calculation at lease inception and is expensed as incurred.

PALI US Equity

PALI · 10-K · period ended 2023-12-31

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 2023-12-31

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