Palisade Bio, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021; filed August 23, 2021. Palisade is a clinical-stage biopharmaceutical company developing oral therapies for gastrointestinal barrier dysfunction. The April 27, 2021 merger with Seneca Biopharma was accounted for as a reverse asset acquisition, with Leading BioSciences treated as the accounting acquirer. The company also completed a 1-for-6 reverse stock split and changed its name to Palisade Bio, Inc.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $0.3 million | $1.0 million |
| In-process R&D expense | $30.1 million | $30.1 million |
| General and administrative expense | $2.4 million | $3.7 million |
| Total operating expenses | $32.9 million | $34.8 million |
| Net loss | $31.7 million | $35.8 million |
| Basic loss per share | $3.59 | $6.17 |
| Net cash used in operating activities | Not separately presented | $9.0 million |
Liquidity: Cash and cash equivalents were $12.7 million at June 30, 2021, compared with $0.7 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $12.7 million. Management stated that available cash was insufficient to fund anticipated operations for at least 12 months and that additional financing would be required by the first quarter of 2022.
Debt and liabilities: Total debt was $1.2 million net of discounts, all classified as current. The company also reported a $20.5 million warrant liability, compared with $1.8 million at year-end. Total liabilities were $24.4 million, and stockholders’ deficit was $9.4 million. The company had 11.4 million common shares outstanding as of August 20, 2021.
Margins and profitability: No operating margin is meaningful because the company had no revenue. The company remains loss-making and expects operating losses to continue.
Material Changes Versus Prior Comparable Period
- Six-month net loss increased to $35.8 million from $4.2 million, primarily due to the $30.1 million noncash in-process R&D charge recognized in connection with the merger.
- Three-month net loss increased to $31.7 million from $1.9 million, reflecting the merger-related R&D charge and higher public-company costs.
- Research and development expense declined 47% for the six-month period, principally because of lower clinical activity and reduced liquidity; COVID-19 had previously paused enrollment and program activities.
- General and administrative expense increased 58% for the six-month period, driven by compensation, stock-based compensation and costs associated with operating as a public company.
- Operating cash use increased to $9.0 million from $2.4 million. Financing provided $20.6 million, principally from $19.9 million of LBS Series 1 preferred stock proceeds and $1.2 million of debt proceeds.
- The number of outstanding warrants increased substantially to 7.0 million from 0.2 million at December 31, 2020. The May 2021 warrant was exercisable for approximately 5.3 million shares at $3.88 per share at June 30, 2021.
Business, Outlook, Risks and Unusual Items
- Lead program: LB1148 is being developed for postoperative gastrointestinal dysfunction, including faster return of bowel function and potentially reduced postoperative adhesions. Management reported positive Phase 2 results and planned pivotal Phase 3 studies, subject to financing and regulatory progress.
- Clinical and regulatory risk: LB1148 remains investigational, with no approved products or product revenue. Future trials may fail, enrollment may be delayed, and the FDA could require additional studies or determine that the 505(b)(2) pathway is unavailable or inadequate.
- Going concern: The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern. Management expects to seek equity, debt, licensing, collaboration or other financing, but no assurance is provided that funding will be available on acceptable terms.
- COVID-19: The pandemic previously paused clinical enrollment and program activities and could continue to affect trial sites, supply chains, personnel, regulatory processes and access to capital. The filing states that production or supply of LB1148 had not been affected as of the filing.
- Warrant volatility: Liability-classified warrants are remeasured using Level 3 valuation models. Changes in fair value produced $5.2 million of other income for the six-month period and may cause significant future earnings volatility.
- Internal controls: Disclosure controls were ineffective as of June 30, 2021. Management identified material weaknesses in the financial close and reporting process, segregation of duties, journal-entry and reconciliation controls, and fair-value calculations for options. Remediation efforts were underway.
- Legal matter: Nine merger-related stockholder lawsuits were voluntarily dismissed after supplemental disclosures; the company settled related mootness-fee claims for $216,000 in the second quarter.
- Subsequent financing and warrant amendment: In July 2021, certain warrant reset provisions were waived in exchange for a warrant covering up to 1.1 million shares. On August 19, 2021, Yuma Regional Medical Center invested approximately $5.2 million for approximately 1.5 million shares and a warrant for 377,474 additional shares, subject to the stated terms.
- Contingent value rights: Legacy Seneca stockholders may receive 80% of specified net proceeds from a qualifying sale or license of legacy technology, but the filing states that the rights may expire without value.
Most Important Facts to Verify
- Timing, amount and terms of the additional financing needed to support operations beyond the company’s projected cash runway.
- Progress, enrollment, endpoints and regulatory requirements for planned LB1148 Phase 2/3 and Phase 3 trials.
- Potential dilution from approximately 7.0 million outstanding warrants, 0.8 million options and subsequent warrant issuances.
- Remediation and auditor assessment of the material weaknesses in financial reporting and option fair-value calculations.
- Fair-value assumptions and potential earnings volatility associated with the $20.5 million warrant liability.
- Whether the merger-related accounting, noncash $30.1 million IPR&D charge and subsequent financing disclosures are comparable with future periods.