PALISADE BIO, INC. quarterly report, Q3 FY2022

Palisade Bio, Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2022. The filing was signed November 14, 2022. Palisade Bio is a clinical-stage biopharmaceutical company developing LB1148, an oral protease inhibitor intended to reduce post-surgical abdominal adhesions and accelerate return of bowel function. The company has no approved products and has generated no product revenue.

Financial performance and liquidity

Metric	Three months ended September 30	Nine months ended September 30
Revenue	$0	$0
Research and development expense	$1.9 million	$4.2 million
General and administrative expense	$2.1 million	$7.3 million
Restructuring expense	$0.4 million	$0.4 million
Total operating expenses	$4.4 million	$11.9 million
Net loss	$4.0 million	$10.5 million
Loss per common share	$0.08	$0.37
Net cash used in operating activities	Not separately provided	$10.1 million

Cash and cash equivalents were $14.0 million at September 30, 2022, compared with $10.5 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $14.0 million.
Total assets were $16.3 million and stockholders’ equity was $12.4 million at September 30, 2022.
Current liabilities were $3.5 million, including $0.4 million of debt. Total liabilities were $3.8 million, including an $84,000 warrant liability and $0.3 million of lease liabilities.
Financing activities provided $13.5 million during the first nine months, including net proceeds of approximately $1.4 million from the May registered direct offering and $11.5 million from the August public offering.
The company had 77.1 million common shares outstanding at September 30, 2022 and 122.9 million common-stock warrants outstanding, with a weighted-average exercise price of $0.44.

Material changes versus prior comparable periods

Third-quarter research and development expense increased 209% to $1.9 million, primarily due to resumed Phase 2 activity, initiation of the U.S. Phase 3 program, increased clinical site and vendor costs, manufacturing scale-up, and higher personnel and contractor costs.
Research and development expense increased 158% for the first nine months to $4.2 million. The prior-year period included a $30.1 million in-process research and development charge related to the 2021 merger; no comparable charge was recorded in 2022.
General and administrative expense decreased 13% in the third quarter but increased 19% for the nine-month period, reflecting higher public-company, insurance, staffing, investor-relations and consulting costs during the year.
The company recorded a $0.4 million restructuring charge in September 2022 related to an approximately 20% workforce reduction. Remaining severance payments were expected to be substantially completed by the end of the first quarter of 2023.
Net loss increased to $4.0 million in the third quarter from prior-year net income of $8.1 million because the prior-year period benefited from a $12.8 million noncash gain on warrant revaluation. For the nine-month period, net loss improved from $27.7 million to $10.5 million, primarily because of the absence of the prior-year merger-related in-process research and development charge.
Operating cash burn improved to $10.1 million from $11.7 million in the prior-year nine-month period, while financing cash inflows declined from $25.2 million to $13.5 million.

Clinical outlook, contingencies and risks

The U.S. Phase 2 study evaluating prevention of post-surgical abdominal adhesions had enrolled 31 of an expected 70 patients. Management planned to prioritize this study and expected topline data in the second half of 2023.
Enrollment in the U.S. Phase 3 return-of-bowel-function study was paused. A review identified that, in 2020, a former management member received unblinded bowel-function data from a subset of Phase 2 patients. Management concluded that the Phase 3 protocol requires additional site standardization and endpoint clarification. The company stated that the finding did not affect LB1148’s favorable safety and tolerability profile.
The company’s Chinese partner had clearance to proceed with a Phase 3 LB1148 study. Management remained optimistic about the program based on the partner’s Phase 2 data, but clinical and regulatory success remains uncertain.
Management stated that recent financing and the decision to pause the U.S. Phase 3 study were expected to fund the Phase 2 adhesions study through its anticipated second-half-2023 data readout. However, the filing states that available cash was not sufficient to fund the company’s expected operations for the following 12 months and that additional financing would be required in the second half of 2023.
The financial statements disclose substantial doubt about the company’s ability to continue as a going concern. Future funding may come from equity or debt offerings, collaborations, licensing transactions or other third-party funding, none of which is assured.
Nasdaq issued notices concerning noncompliance with the $1.00 minimum bid-price requirement and a closing bid price below $0.10 for ten consecutive trading days. The company intended to request a Nasdaq hearing and stay of delisting action. Stockholders had authorized a 1-for-10 to 1-for-50 reverse stock split, but the board had not yet effected it as of the filing.
Disclosure controls and procedures were not effective as of September 30, 2022 because previously identified material weaknesses in financial close, segregation of duties, account reconciliations, journal-entry controls and fair-value calculations remained unremediated. A new accounting and finance system was implemented July 1, 2022, but remediation had not operated long enough to demonstrate effectiveness.
Other significant risks include clinical-trial failure or delay, regulatory uncertainty, reliance on third-party CROs and manufacturers, supply-chain and COVID-19 disruptions, intellectual-property challenges, substantial dilution from future financings and warrants, management turnover, and continued operating losses.

Most important facts for investors to verify

Whether Palisade can secure financing before its projected cash shortfall in the second half of 2023 and on terms that do not cause excessive dilution.
The status, protocol changes, enrollment and data-readout timing for the U.S. Phase 2 adhesions study.
Whether the U.S. Phase 3 return-of-bowel-function study will restart, be redesigned or be discontinued following the clinical-data review.
The outcome of the Nasdaq hearing, any delisting stay, and whether the authorized reverse stock split is implemented.
Progress in remediating the material weaknesses in internal control over financial reporting.
The potential dilution from 122.9 million outstanding warrants, 2.6 million stock options and future equity financings.
Whether LB1148 ultimately demonstrates safety and efficacy sufficient for regulatory approval and commercial adoption.