Palisade Bio, Inc. Form 10-Q Summary
Business context and reporting period
This quarterly report covers the three and nine months ended September 30, 2021. Palisade Bio is a clinical-stage biopharmaceutical company developing oral therapies for diseases associated with gastrointestinal barrier disruption. Its lead candidate, LB1148, is being developed initially for postoperative gastrointestinal dysfunction, including delayed return of bowel function and potentially postoperative adhesions.
The April 27, 2021 merger with Seneca Biopharma was accounted for as a reverse asset acquisition, with Leading Biosciences treated as the accounting acquirer. Accordingly, pre-merger operating results primarily reflect Leading Biosciences, while the post-merger company operates under the Palisade Bio name. A 1-for-6 reverse stock split was effected in connection with the merger.
Financial condition and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | None | None |
| Research and development expense | $0.6 million, up 51% | $1.6 million, down 30% |
| In-process research and development expense | None | $30.1 million related to the merger |
| General and administrative expense | $2.4 million, up 70% | $6.1 million, up 63% |
| Total operating expenses | $3.0 million, up 66% | $37.8 million, up 525% |
| Net income (loss) | $8.1 million income | $(27.7) million loss |
| Operating cash flow | Not separately reported for the quarter | $(11.7) million |
| Cash, cash equivalents and restricted cash | $14.1 million at September 30, 2021 |
The third-quarter net income was driven primarily by a non-cash $12.8 million gain from the reduction in the fair value of warrant liabilities, partially offset by $3.0 million of operating expenses and a $1.7 million loss on warrant issuance. The nine-month net loss includes the $30.1 million non-cash merger-related in-process research and development charge.
At September 30, 2021, total assets were $16.3 million, total liabilities were $12.4 million, and stockholders’ equity was $3.9 million. Net debt was approximately $0.6 million, all classified as current. The company also reported a $9.4 million warrant liability.
For the nine months, financing activities provided $25.2 million, including $19.9 million from LBS Series 1 preferred stock, $5.2 million from common stock and warrant issuance, and $1.3 million from debt issuance, partly offset by debt payments and issuance costs. Investing activities used $0.1 million net, including $3.3 million of cash acquired in the merger and $3.3 million of acquisition-related costs.
Material changes versus the prior comparable period
- Revenue remained zero.
- Operating expenses increased substantially because of the $30.1 million merger-related in-process research and development charge and higher public-company costs.
- Research and development expense declined for the nine-month period because clinical activity and enrollment were below the elevated pre-pandemic levels in early 2020, although activity began increasing in the third quarter.
- Third-quarter research and development expense increased 51% as nonessential surgical procedures and clinical enrollment began returning toward pre-pandemic levels.
- General and administrative expense increased primarily because of public-company accounting, legal, SEC reporting, insurance, personnel and compliance costs.
- Cash increased from $0.7 million at December 31, 2020 to $14.1 million at September 30, 2021, primarily due to merger-related financings and the August 2021 private placement.
- Common shares outstanding increased to approximately 12.9 million at September 30, 2021 from approximately 2.8 million at December 31, 2020, reflecting the merger, financings and other equity issuances.
- Warrants outstanding increased to approximately 8.5 million from approximately 0.2 million at December 31, 2020, creating potential future dilution and significant fair-value volatility.
Guidance, outlook, risks and unusual items
Management expects continued operating losses and negative operating cash flows. It stated that available cash would not fund anticipated operations for the next 12 months and that additional financing would be required by the second half of 2022. The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern. Potential funding sources include equity or debt financings, collaboration or licensing arrangements and other third-party funding; no assurance is provided that capital will be available on acceptable terms.
Management plans to advance LB1148 toward pivotal Phase 3 trials based on reported Phase 2 results. The filing cites approximately 30% improvement in return to normal bowel function in a cardiovascular-surgery study and a 1.1-day improvement in gastrointestinal recovery in a bowel-resection study. The company also described plans for additional LB1148 trials, including a pediatric cardiac-surgery program. These plans remain subject to clinical, regulatory, funding, enrollment, manufacturing and partnership risks.
COVID-19 previously paused clinical enrollment and program activities and could continue to delay trials, affect clinical sites and personnel, disrupt suppliers, or restrict access to capital. The filing states that COVID-19 had not affected production or supply of LB1148 as of the reporting date.
The company recorded a $279,000 gain from forgiveness of its PPP loan. Senior secured debt was converted into preferred stock in connection with the merger. In July 2021, Altium waived certain warrant reset provisions; the modification produced a favorable $3.9 million fair-value effect, while additional warrants issued under the agreement generated a $1.7 million issuance loss.
The company identified material weaknesses in internal control over financial reporting, including insufficient segregation of duties and inadequate formalization of journal-entry and account-reconciliation controls. It also identified a separate material weakness related to fair-value calculations for options granted during the period, which resulted in a material audit adjustment. Disclosure controls and procedures were therefore not effective as of September 30, 2021. Management is implementing additional finance staffing, formal procedures, segregation of duties and third-party reviews.
After quarter-end, the company received gross proceeds of approximately $0.4 million from the early exercise of an option to purchase NSI-189 assets. Because proceeds were below the $0.5 million CVR distribution threshold, the filing states that no distribution to CVR holders was required. Future CVR payments remain uncertain.
Most important facts for investors to verify
- Whether additional financing is obtained before the company’s projected liquidity shortfall in the second half of 2022.
- Whether the going-concern uncertainty is resolved and whether operating plans must be reduced, delayed or abandoned.
- Progress, enrollment, safety and efficacy results for LB1148 trials, including planned Phase 3 and pediatric programs.
- The regulatory pathway for LB1148, including whether the FDA accepts the proposed 505(b)(2) approach and how it classifies PEG in the formulation.
- The remediation and eventual auditor evaluation of the identified material weaknesses in financial reporting and fair-value calculations.
- The quantity, exercise terms and potential dilution associated with approximately 8.5 million outstanding warrants and other equity awards.
- The volatility and cash-flow impact of recurring fair-value remeasurement of liability-classified warrants.
- Whether remaining legacy assets, including NSI-566, are monetized and whether CVR holders ultimately receive any distributions.
- Continued effects of COVID-19 or other disruptions on clinical sites, enrollment, manufacturing, suppliers and capital markets.