PALISADE BIO, INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Management’s Discussion and Analysis of Financial Condition and Results of Operations or MD&A, is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows: · Executive Overview — Overview discussion of our business in order to provide context for the remainder of MD&A. · Trends & Outlook — Discussion of what we view as the overall trends affecting our business and the strategy for 2021. · Critical Accounting Policies — Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. · Results of Operations — Analysis of our financial results comparing the: (i) year ended December 31, 2020 to the year ended December 31, 2019. · Liquidity and Capital Resources —Analysis of cash flows and discussion of our financial condition and future liquidity needs. Executive Overview Historically, we have been primarily focused on the research and development of nervous system therapies based on our proprietary human neural stem cells and our small molecule compounds with the ultimate goal of gaining approval from the United States Food and Drug Administration (“FDA”), and its international counterparts, to market and commercialize such therapies. In early 2019, we also began an in-licensing and acquisition strategy by which we are evaluating novel therapeutics with the potential to be complimentary to our current technologies or that could benefit from our development experience with the goal of developing such technologies for commercialization. 25 Our patented technology platform has three core components: 1. Over 300 lines of human, regionally specific neural stem cells, some of which have the potential to be used to treat serious or life-threatening diseases through direct transplantation into the central nervous system; 2. Proprietary screening capability – our ability to generate human neural stem cell lines provides a platform for chemical screening and discovery of novel compounds against nervous system disorders; and 3. Small molecules that resulted from Seneca’s neurogenesis screening platform that may have the potential to treat wide variety of nervous system conditions. To date, our technology platform has produced two lead assets in clinical development: our NSI-566 stem cell therapy program and our NSI-189 small molecule program. A component of our current strategy is out-licensing and we have recently initiated a formal out- licensing initiative aimed at securing partners to advance the clinical development of these two programs. We believe this technology, in partnership with an established biopharmaceutical company with the appropriate development expertise and financial resources, could facilitate the development and commercialization of products for use in the treatment of a wide array of nervous system disorders including neurodegenerative conditions and regenerative repair of acute and chronic disease. We intend to maintain these programs with the goal of finding suitable development partners. We are also seeking to in-license and acquire other novel therapeutics. On October 31, 2019, the Company announced it had entered into a non-binding term sheet with Jiangsu QYuns Therapeutics Co., Ltd., (“QYuns”) for an exclusive license agreement for certain of QYuns Therapeutics’ assets, a pipeline of cytokine-targeted monoclonal antibodies for the treatment of a range of auto-immune disease. Subsequently, on January 10, 2020, the Company filed a form 8-K disclosing that it was not able to reach an agreement on the exclusive license agreement and no longer expected to complete this transaction. However, we continue to seek other products to in-license or acquire. Trends & Outlook Revenue We generated no revenues from the sale of our proposed therapies for any of the periods presented. We have historically generated minimal revenue from the licensing of our intellectual property to third parties as well as payments under a settlement agreement. On a long-term basis, we anticipate that our revenue will be derived primarily from licensing fees and sales of our products. Because we are at such an early stage in the clinical trials process, we are not yet able to accurately predict when we will have a product ready for commercialization, if ever. Research and Development Expenses Our research and development expenses consist primarily of clinical trial expenses, including payments to clinical trial sites that perform our clinical trials and clinical research organizations (CROs) that help us manage our clinical trials, manufacturing of small molecule drugs and stem cells for both human clinical trials and for pre-clinical studies and research, personnel costs for research and clinical personnel, and other costs including research supplies and facilities. Our research and development expenses reflect the costs of the technical evaluation of our internal programs as well as the evaluation of certain potential assets we considered for acquisition. We focus on the development of therapies with potential uses in multiple indications and use employee and infrastructure resources across several projects. Accordingly, many of our costs are not attributable to a specifically identified product and we do not account for internal research and development costs on a project-by-project basis. We expect that research and development expenses, which include expenses related to our ongoing ischemic stroke clinical trial, will decrease in the future as we seek partners to further the clinical development of our therapeutic programs. This could change if we are successful in our in-licensing and acquisition strategy in which we are evaluating novel therapeutics, our research and development expenditures will be primarily devoted to advancing the acquired programs towards or through later stage clinical trials. We have a wholly owned subsidiary in the People’s Republic of China that primarily oversees our current clinical trial to treat motor deficits due to ischemic stroke. 26 In August 2017, we were awarded a Small Business Innovation Research (“SBIR”) grant by the National Institutes of Health (“NIH”) to evaluate in preclinical studies the potential of NSI-189, a novel small molecule compound, for the prevention and treatment of diabetic neuropathy. The award of approximately $1 million will be paid over a two-year period, if certain conditions are met as mid-term. The award performance period was extended through July 31, 2020 to complete the data collection and report writing. In June 2018, we were awarded a Department of Defense grant related to our efforts involving stem cell therapy for severe traumatic brain injury. The award of approximately $150,000 was received in 2019. The proceeds from the awards are recorded as a reduction of our gross research and development expenses, based on the terms and conditions of the grants. Proposed Merger. O n December 17, 2020, we announced the signing of the Merger Agreement with LBS. Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by our stockholders, a wholly-owned subsidiary of Seneca will consummate the Merger. Upon the closing of the Merger, we will adopt the business and operating plan of LBS. In the event the Merger is not consummated, our Board will be required to develop a new business plan. At this time, we cannot ascertain such plan or the financial impact on Seneca. General and Administrative Expenses General and administrative expenses are primarily comprised of salaries, benefits and other costs associated with our operations including, finance, human resources, information technology, public relations and costs associated with maintaining a public company listing, legal, audit and compliance fees, facilities and other external general and administrative services. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 of the Notes to Consolidated Financial Statements included elsewhere herein describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with U.S. GAAP, and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements: Use of Estimates - Our financial statements prepared in accordance with U.S. GAAP require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, we have estimated the expected economic life and value of our patent technology, our net operating loss carryforward and related valuation allowance for tax purposes the fair value of our liability classified warrants and our share-based compensation expenses related to employees, directors, consultants and investment banks. Actual results could differ from those estimates. Long Lived Intangible Assets - Our long-lived intangible assets consist of our intellectual property patents including primarily legal fees associated with the filings and in defense of our patents. The assets are amortized on a straight-line basis over the expected useful life which we define as ending on the expiration of the patent group. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We assess this recoverability by comparing the carrying amount of the asset to the estimated undiscounted future cash flows to be generated by the asset. If an asset is deemed to be impaired, we estimate the impairment loss by determining the excess of the asset’s carrying amount over the estimated fair value. These determinations use assumptions that are highly subjective and include a high degree of uncertainty. During the years ended December 31, 2020 and 2019, no significant impairment losses were recognized. 27 Fair Value Measurements - The fair value of our short-term financial instruments, which primarily include cash and cash equivalents, other short-term investments, accounts payable and accrued expenses, approximate their carrying values due to their short maturities. The fair value of our long-term indebtedness was estimated based on the quoted prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities which approximates the carrying value. The fair values of our liability classified warrants are estimated using Level 3 unobservable inputs. Share-Based Compensation - We account for share-based compensation at fair value; accordingly, we expense the estimated fair value of share-based awards over the requisite service period. Share-based compensation cost for stock options and warrants issued to employees, board members and non-employee consultants is generally determined at the grant date using an option pricing model. Option pricing models require us to make assumptions, including expected volatility and expected term of the options. If any of the assumptions we use in the model were to significantly change, share-based compensation expense may be materially different. Share-based compensation cost for restricted stock and restricted stock units issued to employees and board members is determined at the grant date based on the closing price of our common stock on that date. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period. Comparison of Our Results of Operations for the Years Ended December 31, 2020 and 2019 Revenue During each of the years ended December 31, 2020 and 2019, we recognized revenue of $10,000 related to ongoing fees pursuant to certain licenses of our intellectual property to third parties. In addition, d uring the years ended December 31, 2020 and 2019, we recognized $3,500 and $5,400 of royalty revenue related to a settlement of a prior patent infringement case. Operating Expenses 5 Operating expenses for 2020 and 2019 were as follows: Year Ended December 31, Increase (Decrease) 2020 2019 $ % Operating Expenses Research & development costs $ 2,018,454 $ 4,061,450 $ (2,042,996 ) (50)% General & administrative expenses 8,670,612 4,585,638 4,084,974 89% Total operating expense $ 10,689,066 $ 8,647,088 $ 2,041,978 24% Research and Development Expenses The decrease of approximately $2,043,000 or 50% in research and development expenses was primarily attributable to the continued wind down of clinical activities for our stem cell and small molecule programs in 2020. In 2019, we incurred expenses related to external consulting services engaged in the technical evaluation of our internal programs as well as the evaluation of certain potential assets we considered for acquisition. If we are successful in the Merger, we will adopt the business and operating plan of LBS. General and Administrative Expenses G&A expenses increased approximately $4,085,000 or 89%. As noted above, we have shifted the Company’s strategy and focus from the development of the stem cell assets and initiated an out-licensing effort to partner these programs while seeking to in license or acquire novel therapeutics with the potential to be complimentary to our current technologies or that could benefit from our development experience with the goal of developing such technologies for commercialization. Associated with this shift in strategic focus our G&A expenses in the 2020 period reflect an enhanced internal management structure including individual consultants in key roles as well as the engagement of two executive officers in the second quarter of 2020. Other income (expense) Other expense, net in 2020 consisted primarily of a non-cash warrant inducement charge of approximately $5,620,000 partially offset by $20,000 of net interest income and $9,000 of non-cash gains related to the fair value adjustment of our liability classified warrants. Other income, net in 2019 consisted of approximately $499,000 of non-cash gains related to the change in the fair value of our liability classified stock purchase warrants, $86,000 of sublease income and $68,000 of interest income partially offset by a $368,000 loss related to the write-off of a related party receivable. 28 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 warrants, and to a lesser degree from grants and research contracts as well as the licensing of our intellectual property to third parties. We had cash and cash equivalents of approximately $10.5 million at December 31, 2021. In January 2020, we raised approximately $6.7 million of net proceeds from the exercise of certain common stock purchase warrants pursuant to an inducement offer and in May 2020, we raised approximately $4.4 million of net proceeds through the sale of our common stock as well as approximately $3.5 million from the exercise of warrants issued in the January inducement offer. Based on our expected operating cash requirements, and assuming the Merger is not consummated, we anticipate our current cash and investments on hand will be sufficient to fund our operations, at least 12 months after this filing. However, we will require additional capital to execute our acquisition and/or in-licensing strategy as well as out-licensing initiatives and to fund our operations. Despite our ability to secure capital in the past, there can be no assurance that additional equity or debt financing will be available to us when needed or that we may be able to secure funding from any other sources. Consequently, as explained in Note 1 to our condensed consolidated financial statements, management has determined that there is substantial doubt about our ability to continue as a going concern. We will require additional capital to pursue our acquisition and in-licensing strategy and continue our pre-clinical and clinical development plans. To continue to fund our operations and the development of our product candidates we anticipate raising additional cash through the private and public sales of equity or debt securities, collaborative arrangements, licensing agreements, asset sales or a combination thereof. Although management believes that such funding sources will be available, there can be no assurance that any such collaborative arrangement will be entered into or that financing will be available to us when needed in order to allow us to continue our operations, or if available, on terms acceptable to us. If we do not raise sufficient funds in a timely manner, we may be forced to curtail operations, delay or stop our ongoing clinical trials, cease operations altogether, or file for bankruptcy. We currently do not have commitments for future funding from any source. We cannot assure you that we will be able to secure additional capital or that the expected income will materialize. Several factors will affect our ability to raise additional funding, including, but not limited to market conditions, interest rates and, more specifically, our progress in our exploratory, preclinical and future clinical development programs. Cash Flows – 2020 compared to 2019 Year Ended December 31, Increase (Decrease) 2020 2019 $ % Net cash used in operating activities $ (9,025,129 ) $ (7,255,680 ) $ (1,769,449 ) 24% Net cash provided by investing $ - $ - $ - - Net cash provided by financing activities $ 14,465,916 $ 6,589,505 $ 7,876,411 120% Net Cash Used in Operating Activities Cash used in operating activities for the year ended December 31, 2020, reflects our $16,267,000 loss for the period adjusted for certain non-cash items including: (a) $5,620,000 of expense related to our warrant inducement transaction, (ii) $954,000 of net cash inflows, including those resulting from increases in our prepaid expenses and accrued severance, related to changes in operating assets and liabilities, and (iii) $585,000 of share-based compensation. Cash used in operating activities for the year ended December 31, 2019, of approximately $7,256,000 reflects our $8,352,000 loss for the period adjusted for certain non-cash items including: (i) $881,000 of share-based compensation, (ii) a ($499,000) gain related to the change in fair value of our liability classified warrants, (iii) $362,000 of write-off of related party receivable, (iv) $208,000 of net cash inflows related to changes in operating assets and liabilities and (v) $144,000 adjustment for amortization and depreciation. Net Cash Used in Investing Activities There were no investing activities in either of the years ended December 31, 2020 or 2019. Net Cash Provided by Financing Activities For the year ended December 31, 2020, cash provided by financing activities consisted of $11.2 million of net proceeds generated from the sale of our common stock and $3.5 million of net proceeds from the exercise of warrants partially offset by payments under our short-term debt used to finance insurance premiums. For the year ended December 31, 2019, cash provided by financing activities consisted primarily of $6.6 million of net proceeds generated from the sale of our common stock and warrants coupled with borrowings and payments under our short-term debt used to finance insurance premiums. Future Liquidity and Needs We have incurred significant operating losses and negative cash flows since inception. We have not been able to generate significant revenues nor achieved profitability and may not be able to do so in the future. We do not expect to be profitable in the next several years, but rather expect to incur additional operating losses. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts, for acquisition of technologies and intellectual property rights, for preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office facilities, establishment of production capabilities, for general and administrative expenses and other working capital requirements. We have relied on cash balances and the proceeds from the offering of our securities, exercise of outstanding warrants and grants to fund our operations. 29 We intend to pursue opportunities to obtain additional funds through the out-license or sale of our existing clinical programs in addition to financing in the future through the sale of our securities and additional research grants. On September 23, 2020, our shelf registration statement (Registration No. 333-248848), which replaced our prior expiring shelf registration statement, was declared effective by the SEC. Under such replacement shelf registration statement, we can offer and sell up to $100 million of our securities. Through September 30, 2020 we have not sold any securities under this registration statement. Based on our current market capitalization, we are limited to the use of our shelf registration statement by Item I.B.6 of Form S-3. In July 2019, we completed a firm commitment underwritten public offering of our securities. The offering resulted in net proceeds of approximately $6.6 million, after deducting underwriting discounts and commissions and offering expenses. The securities in this offering were sold pursuant to a registration statement on Form S-1 (file no. 333- 232273). In January 2020, pursuant to the terms of an inducement offer, certain holders of 5,555,554 of our common stock purchase warrants exercised their warrants at an exercise price of $1.36 per share generating approximately $6.7 million of net proceeds. In May 2020, we completed an offering 5,000,000 shares of our common stock. The offering resulted in net proceeds of approximately $4.4 million, after deducting placement agent discounts and commissions and offering expenses. The common stock was offered and sold pursuant to our shelf registration statement on Form S-3 (file no. 333-218608). In May 2020, we received approximately $3.5 million from the exercise of 2,871,296 outstanding common stock warrants at an exercise price of $1.23 per share. As explained in the notes to our condensed consolidated financial statements, there continues to be substantial doubt as to our ability to continue as a going concern. The source, timing and availability of any future financing will depend principally upon market conditions, interest rates and, more specifically, current and future progress in our exploratory, preclinical and clinical development programs. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us, among other things, to delay, scale back or eliminate some or all of our research and product development programs, planned clinical trials, and/or our capital expenditures or to license our potential products or technologies to third parties. Off-balance Sheet Arrangements None. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not Applicable. 30