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OFFON

PALISADE BIO, INC.

(PALI)
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PALISADE BIO : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/23/2021 | 04:06pm EDT
Statements in this Quarterly Report that are not strictly historical are
forward-looking statements and include statements about products in development,
our in-licensing/acquisition strategy, our out-licensing sales strategy, results
and analyses of pre-clinical studies, clinical trials and studies, research and
development expenses, cash expenditures, and alliances and partnerships, among
other matters. You can identify these forward-looking statements because they
involve our expectations, intentions, beliefs, plans, projections,
anticipations, or other characterizations of future events or circumstances.
These forward-looking statements are not guarantees of future performance and
are subject to risks and uncertainties that may cause actual results to differ
materially from those in the forward-looking statements as a result of any
number of factors. Some of these factors are more fully discussed, as are other
factors, in the Company's Form 8-K/A , as filed with the SEC, in our subsequent
filings with the SEC as well as in the section of this Quarterly Report entitled
"Risk Factors" and elsewhere herein. The Company does not undertake to update
any of these forward-looking statements or announce the results of any revisions
to these forward-looking statements except as required by law.



Palisade Bio, Inc. recommends investors read this entire Quarterly Report on
Form 10-Q, including the "Risk Factors" section, the condensed consolidated
financial statements, and related notes. As used in this Quarterly Report,
unless the context otherwise requires, the words "we," "us," "our," the
"Company" and "Palisade" refers to Palisade Bio, Inc. and its subsidiary,
post-Merger. Also, any reference to "common shares" or "common stock," refers to
our $0.01 par value common stock. Any reference to "Series A Preferred Stock" or
"Preferred Stock" refers to our Series A 4.5% Convertible Preferred Stock. Any
reference to "Series C Preferred Stock" refers to the Series C Preferred Stock.
Any reference to "Leading Biosciences, Inc." or "LBS" refers to the Company's
operations prior to the completion of the Merger. The information contained
herein is current as of the date of this Quarterly Report (June 30, 2021),
unless another date is specified.



On April 27, 2021, in connection with the consummation of the Merger, the
Company completed a 1-for 6 reverse stock split of its common stock. All shares
and per share data in this report have been adjusted to reflect the reverse
stock split. The Company prepares its interim financial statements in accordance
with U.S. GAAP. Palisade's financials and results of operations for the three
and six-month periods ended June 30, 2021 are not necessarily indicative of its
prospective financial condition and results of operations for the pending full
fiscal year ending December 31, 2021. The interim financial statements presented
in this Quarterly Report as well as other information relating to Palisade
contained in this Quarterly Report should be read in conjunction and together
with the reports, statements and information filed by Palisade with the SEC.



Our Management's Discussion and Analysis of Financial Condition and Results of
Operations or MD&A is provided, in addition to the accompanying condensed
consolidated financial statements and notes, to assist you in understanding our
results of operations, financial condition and cash flows. The MD&A is organized
as follows:



   ?  Executive Overview - Discussion of our business and overall analysis of

financial and other items affecting Palisade in order to provide context for

      the remainder of MD&A.



? Critical Accounting Policies - Accounting policies that Palisade believes

are important to understanding the assumptions and judgments incorporated in

      Palisade's reported financial results and forecasts.



? Results of Operations - Analysis of Palisades financial results comparing

      the three-and six-month periods ended June 30, 2021 to the comparable
      periods of 2020.



? Liquidity and Capital Resources - An analysis of cash flows and discussion

      of our financial condition and future liquidity needs.




                               Executive Overview



We are a clinical stage biopharmaceutical company focused on discovering,
developing, and commercializing innovative oral therapies that target serious
diseases associated with the breakdown of the mucosal barrier protecting the
gastrointestinal ("GI") tract. Our goal is to be an industry leader in
developing therapies to treat these diseases and to improve the lives of
patients suffering from such diseases.



Our approach is founded on the discovery that damage to the intestinal
epithelial barrier can result in the leakage of digestive enzymes from the GI
tract that can damage tissue and promote inflammation, causing a broad array of
acute and chronic conditions.



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Using our scientific and drug development expertise, we are developing a portfolio of oral product candidates to treat conditions driven by protease (intestinal enzymes) leakage through the intestinal epithelial barrier, including surgical complications and inflammatory conditions.



                        [[Image Removed: intestine.jpg]]


Our pipeline of product candidates is illustrated in this chart:

[[Image Removed: pipeline.jpg]]

* Commercial right to LB1148 in Greater China (excluding Taiwan) have been out-licensed to Newsoara.




Our lead therapeutic candidate, LB1148, is a novel oral liquid formulation of
the well-characterized digestive enzyme inhibitor, tranexamic acid, intended to
inhibit digestive enzyme activity and preserve gut integrity during intestinal
stress, such as results from reduced blood flow to the intestine, infections,
and surgery. Peer reviewed publications of third-party research suggest that
digestive enzyme leakage from the GI tract drives GI and organ dysfunction
following these events.



We are initially developing LB1148 to be administered to patients prior to major
surgeries that risk disrupting the intestinal mucosal barrier.  As announced in
March of 2020, a randomized, double-blind, parallel, placebo-controlled Phase 2
investigator-sponsored clinical trial of LB1148 in 120 patients undergoing
coronary artery bypass grafting and/or heart valve replacement surgery requiring
cardiopulmonary bypass was completed. Patients were randomized to receive LB1148
or placebo in conjunction with surgery. The trial's primary endpoint was time to
return of bowel function. Secondary endpoints include Intensive Care Unit
("ICU") length of stay, hospital length of stay, organ function changes,
inflammatory response and glucose control. LB1148 provided an approximately 30%
improvement in the time to normal bowel function following cardiovascular ("CV")
surgery (p<0.001) compared to placebo. The treatment group also had an average
1.1-day shorter length of stay in the ICU and an average 1.1-day shorter
hospital stay. Generally, treatment with LB1148 was well tolerated. Adverse
events ("AEs") were similar between the treatment groups and not considered
unexpected for the subject population. None of the AEs or serious adverse events
("SAEs") reported were considered drug-related by the sponsor-investigator. One
of the primary factors in discharging patients from the hospital following
surgery is the return of bowel function. LB1148 has been granted Fast Track
designation from the "FDA" for the treatment of postoperative GI dysfunction
(which may present as feeding intolerance, ileus, necrotizing enterocolitis
("NEC"), etc.) associated with gut hypoperfusion injury in pediatric patients
who have undergone congenital heart disease repair surgery.



The Company and our co-development partner Newsoara announced positive topline Phase 2 clinical trial data that LB1148 had a statistically significant (p=0.0008) effect in accelerating the return of bowel function in patients undergoing elective bowel resection surgery.

Results from the study include:

? A 1.1-day improvement in GI recovery in patients receiving LB1148 vs placebo.

The median time to return of bowel function was 2.77 days in patients treated

with LB1148 and 3.83 days in those receiving placebo (hazard ratio = 1.886; p

= 0.0008).

? The difference between groups increased at the 3rd quartile (75th percentile),

with LB1148 (3.4 days) demonstrating a 1.5-day faster recovery of bowel

function compared to placebo (4.9 days).

? LB1148 was well tolerated with only 10.9% and 4.8% of patients in the LB1148

group and placebo group, respectively, experiencing a drug-related adverse

event.

? The most common drug-related adverse events were GI disorders (LB1148 4.7% vs.

    placebo 3.2%).
  ? No drug-related serious adverse events occurred in the trial.




Full results from this study are expected to be reported at an upcoming
surgical-focused medical conference. Based on the beneficial clinical outcomes
and good safety profile observed to date in phase 2 trials in both CV surgery
and GI surgery, Palisade Bio and Newsoara plan to advance LB1148 to pivotal
Phase 3 clinical trials for accelerating the return of bowel function for major
surgical indications. We are also currently conducting a randomized,
double-blind, placebo-controlled, proof-of-concept Phase 2 clinical trial of
LB1148 in patients undergoing elective bowel resection surgery in the Unites
States. This trial will evaluate return of bowel function following surgery and
whether patients treated with LB1148 also experience fewer postoperative
intra-abdominal adhesions. We are planning to initiate a Phase 2/3 clinical
trial of LB1148 in neonatal patients undergoing CV surgery to correct congenital
heart defects. We anticipate that this clinical trial will enroll 100 patients,
with an initial data readout from the first ten patients.



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Beyond our lead product candidate, we are continuing to develop additional
therapeutic candidates. We believe that protease-based therapeutics hold promise
in meeting a number of unmet needs resulting from chronic protease leak, beyond
our initial therapeutic focus on GI-related pathology triggered by major
surgeries.

con



Contingent Value Right



Immediately prior to the closing of the Merger, we issued each share of our
common stock held by our stockholders of record, one contingent value right
("CVR"). Each CVR entitles the holder of such right (the "CVR Holder") to
receive their pro-rata share of 80% of the net proceeds (subject to certain
conditions), if any, derived from the sale or licensing of all or any part of
the intellectual property owned, licensed or controlled by us immediately prior
to the closing of the Merger (the "Legacy Technology") provided however that CVR
Holders will only be entitled to receive such net proceeds if the sale or
licensing of such Legacy Technology occurs on or before the 18-month anniversary
of such closing ("Legacy Monetization").  Additionally, pursuant to the terms of
the CVR agreement, CVR Holders are only entitled to participate in their
pro-rata share of net proceeds which we receive during the 48-month period
following the closing of the Merger.



As of August 19, 2021, we have engaged a financial advisor to assist in the
Legacy Monetization. It is still too early in the process to determine if we
will be successful in the sale or licensing of any of the Legacy Technology. In
the event we are not able to sell or license the Legacy Technology, or the
consideration received is not sufficient, CVR Holders may not receive any
proceeds from their CVRs and the CVRs may expire valueless.



                          Critical Accounting Policies



Palisade's unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP"). The preparation of these financial statements requires
Palisade to make estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities as of the date of the balance sheet and the reported amounts of
expenses during the reporting period. Palisade's estimates are based on its
historical trends and other factors that it believes 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.



Palisade's significant accounting policies are described in more detail in Note
2-Summary of Significant Accounting Policies and in the notes to its unaudited
condensed consolidated financial statements included elsewhere herein and
highlight the significant accounting policies used in the preparation of the
consolidated financial statements. However, Palisade believes that the following
accounting policies are the most critical for fully understanding and evaluating
our financial condition and results of operations:



Stock-based compensation



Stock-based compensation expense represents the cost of the grant date fair
value of equity awards recognized over the requisite service period of the
awards (usually the vesting period) on a straight-line basis. We estimate the
fair value of stock option awards using the Black-Scholes option pricing model
and recognize forfeitures as they occur. The Black-Scholes option pricing model
requires the use of subjective assumptions, including the risk-free interest
rate, the expected stock price volatility, the expected term of stock options,
the expected dividend yield and the fair value of the underlying common stock on
the date of grant. Changes in the assumptions can materially affect the fair
value and ultimately how much stock-based compensation expense is recognized.
These inputs are subjective and generally require judgment to develop. Due to
the lack of an adequate history of a public market for the trading of our common
stock and a lack of adequate company-specific historical and implied volatility
data, we have based our estimate of expected volatility on the historical
volatility of a group of similar companies that are publicly traded. For these
analyses, we have selected companies with comparable characteristics to ours,
including enterprise value, risk profiles, and position within the industry, and
with historical share price information sufficient to meet the expected life of
the stock-based awards. We compute the historical volatility data using the
daily close prices for the selected companies' shares during the equivalent
period of the calculated expected term of our stock-based awards. We will
continue to apply this process until a sufficient amount of historical
information regarding the volatility of our common stock price becomes
available. We have estimated the expected life of our employee stock options
using the "simplified" method, whereby the expected life equals the average of
the vesting term and the original contractual term of the option. The risk-free
interest rates for periods within the expected life of the option are based on
the yields of zero-coupon U.S. treasury securities. See Note 9 of the Notes to
the Unaudited Condensed Consolidated Financial Statements for additional
information and specific assumptions used in applying the Black-Scholes option
pricing model to determine the estimated fair value of our stock options granted
in the year ended December 31, 2020, and the six months ended June 30, 2021.
Stock-based compensation totaled approximately $2.0 million for the year ended
December 31, 2020, and $1.1 million for the six months ended June 30, 2021.



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Fair Value of Financial Instruments




The Company's financial instruments consist principally of cash equivalents,
accounts receivable, restricted cash, accounts payable, accrued liabilities,
debt and derivative liabilities. The carrying amounts of financial instruments
such as cash equivalents, accounts receivable, restricted cash, accounts
payable, and accrued liabilities approximate their related fair values due to
the short-term nature of these instruments. The carrying value of the Company's
current and non-current debt approximates its fair value due to the market rate
of interest. The Company's derivative financial instruments are carried at fair
value based on unobservable market inputs. None of the Company's non-financial
assets or liabilities are recorded at fair value on a non-recurring basis.



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 Monte-Carlo simulations. Derivative
instruments are valued at inception and subsequent valuation dates. The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities, is re-assessed 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, including options or
warrants to non-employees in exchange for consulting or other services
performed.



The Company accounts for its common stock warrants and tranche liability in
accordance with Accounting Standards Codification ("ASC") Topic 815, Derivatives
and Hedging ("ASC 815"). Based upon the provisions of 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 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 and remeasured at fair value each balance sheet date with the
offset adjustments recorded in change in fair value of warrant liability within
the condensed statements of operations. Common stock warrants classified as
equity are initially measured at fair value on the grant date and are not
subsequently remeasured.



Accrued Research and Development Costs




We are required to make estimates of our accrued expenses resulting from our
obligations under contracts with CROs, clinical sites, manufacturers, vendors
and consultants, in connection with conducting research and development
activities. The financial terms of these contracts vary from contract to
contract and may result in payment flows that do not match the periods over
which materials or services are provided under such contracts. We reflect
research and development expenses in our financial statements by matching those
expenses with the period in which services and efforts are expended. We account
for these expenses according to the progress our study as measured by the timing
of various aspects of the study or related activities. In accruing for these
activities, we obtain information from various sources and estimate level of
effort or expense allocated to each period.



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.



Common Stock Fair Value



Prior to becoming a publicly traded company, Palisade was required to
periodically estimate the fair value of common stock when issuing stock options
and computing its estimated stock-based compensation expense. The fair value of
common stock was determined on a periodic basis, with the assistance of an
independent third-party valuation expert. The assumptions underlying these
valuations represented management's best estimates, which involved inherent
uncertainties and the application of significant levels of management judgment.



The fair value of the common stock underlying Palisade's stock options was
estimated at each grant date. Palisade's board of directors intended all options
granted with an exercise price per share no less than the estimated fair value
per share of common stock underlying those options on the date of grant.



In order to determine the fair value, Palisade considered, among other things,
contemporaneous valuations of Palisade's Common Stock, Palisade's business,
financial condition and results of operations, including related industry trends
affecting its operations; the likelihood of achieving a liquidity event, such as
an initial public offering or sale, given prevailing market conditions; the lack
of marketability of Palisade's common stock (pre-Merger); the market performance
of comparable publicly traded companies; and U.S. and global economic and
capital market conditions.



Recently Adopted Accounting Pronouncements

See Note 2 to our unaudited condensed consolidated financial statements for the quarter ended June 30, 2021, included elsewhere in this document.

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                             RESULTS OF OPERATIONS



Revenue


Palisade generated no revenues from the sale of its proposed therapies for any of the periods presented.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the clinical development of Palisade's lead product candidate LB1148, which include:

· expenses under agreements with third-party contract research organizations, investigative clinical trial sites that conduct research and development activities on Palisade's behalf, and consultants;

· costs related to develop and manufacture preclinical study and clinical trial material;

· salaries and employee-related costs, including stock-based compensation;

· costs incurred under Palisade's third-party licensing agreements; and

· laboratory and vendor expenses related to the execution of preclinical and clinical trials.




Palisade's 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 its preclinical
development, process development, manufacturing and clinical development
activities. Palisade does not allocate employee costs and costs associated with
its 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. Palisade
primarily uses internal resources to conduct its research as well as for
managing its preclinical development, process development, manufacturing and
clinical development activities.



General and Administrative Expenses




General and administrative expenses consist primarily of personnel-related
costs, insurance costs, facility costs and professional fees for legal, patent,
consulting, investor and public relations, accounting and audit services.
Personnel-related costs consist of salaries and benefits. We expect our general
and administrative expenses will increase substantially as we: (i) incur
additional costs associated with being a public company, including audit, legal,
regulatory, and tax-related services associated with maintaining compliance with
exchange listing and SEC requirements; director and officer insurance premiums;
and investor relations costs, (ii) hire additional personnel, and (iii) protect
our intellectual property.



Going Concern



The Company's management has evaluated whether there is substantial doubt about
the Company's ability to continue as a going concern and has determined that
substantial doubt existed as of the date of the end of the period covered by
this Quarterly Report on Form 10-Q (the "Form 10-Q"). This determination was
based on the following factors: (i) the Company's available cash as of the date
of this filing will not be sufficient to fund its anticipated level of
operations for the next 12 months; (ii) the Company will require additional
financing by the first quarter of 2022 to continue at its expected level of
operations; and (iii) if the Company fails to obtain the needed capital, it will
be forced to delay, scale back, or eliminate some or all of its development
activities or perhaps cease operations. In the opinion of management, these
factors, among others, raise substantial doubt about the ability of the Company
to continue as a going concern as of the date of the end of the period covered
by this Form 10-Q and for one year from the issuance of the unaudited condensed
consolidated financial statements.



COVID-19



The COVID-19 pandemic has resulted in quarantines, restrictions on travel and
other business and economic disruptions. Palisade has evaluated the impact of
the pandemic on its business operations and plans, including but not limited to
the impact on access to capital, planned and ongoing clinical trials, cash
management and our investment policies regarding cash as well as the long-term
effects in the medical and drug development fields.



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Results of Operations


Comparison of the three months ended June 30, 2021, and 2020



Operating Expenses


The following table summarizes our results of operations for the three months ended June 30, 2021, and 2020 (in thousands):



                                               Three Months Ended
                                                    June 30,                Increase (Decrease)
                                               2021          2020              $             %
Operating expenses
Research and development expenses           $      314     $     650            (336 )         -52 %
In-process research and development             30,117             -          30,117           100 %
General and administrative expenses              2,427         1,191           1,236           104 %
Total operating expenses                    $   32,858     $   1,841     $    31,017          1685 %
Loss from operations                           (32,858 )      (1,841 )       (31,017 )
Other income (expense):
Change in fair value of warrant liability        5,133             -           5,133           100 %
Change in fair value of share liability             73             -              73           100 %
Interest expense                                  (655 )         (11 )          (644 )        5855 %
Other income                                        16             1              15          1500 %
Loss on issuance of equity                      (1,881 )           -          (1,881 )         100 %
Issuance costs of warrants                      (1,574 )           -          (1,574 )         100 %
Total other income (expense)                     1,112           (10 )         1,122        -11220 %
Net loss                                    $  (31,746 )   $  (1,851 )   $   (29,895 )        1615 %



Research and Development Expenses




The decrease of approximately $0.3 million or 52% in research and development
expenses was primarily attributable to (i) a $0.2 million decrease in clinical
trial activities due to higher trailing enrollment in the prior period before
the COVID-19 pandemic and (ii) a general decrease of approximately $0.2 million
in personnel related costs and stock-based compensation. These decreases were
offset by an increase of $0.1 million related to consultant and other costs
required to support our research and development activities.



In-process research and development




In-process research and development expense increased $30.1 million in the three
month period ended June 30, 2021, compared to the comparable prior period, as a
result of the Merger.


General and Administrative Expenses




General and administrative expenses during the three months ended June 30, 2021,
increased approximately $1.2 million or 104% when compared to the three months
ended June 30, 2020. This increase is related to: (i) $0.5 million in
personnel-related compensation including stock-based compensation and (ii) $0.7
million increase in other general and administrative expenses associated with
operating as a public company.



Other income (expense)



Other income, net increased by $1.1 million for the three months ended June 30,
2021 as compared to the three month period ended June 30, 2020. The increase was
primarily due (i) a reduction in the fair value of warrant liabilities of $5.1
million, and (ii) a $0.1 million reduction in the fair value of share liability.
These increases were offset by a decrease of (i) a $0.6 million in interest
expense primarily related to the non-cash debt discount accretion related to the
pre-merger senior secured debt financing that was accelerated when this debt was
converted to equity at the close of the Merger, (ii) a $1.9 million loss on the
issuance of LBS Series 1 Preferred Stock due to fair value of the liability
classified warrants being in excess of the equity proceeds, and (iii) $1.6
million of equity issuance costs allocated to the warrant liability.



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Comparison of the six months ended June 30, 2021 and 2020

The following table summarizes our results of operations for the six months ended June 30, 2021 and 2020 (in thousands):



                                               Six Months Ended
                                                   June 30,                Increase (Decrease)
                                              2021          2020               $             %
Operating expenses
Research and development expenses           $   1,006     $   1,902             (896 )         -47 %
In-process research and development            30,117             -           30,117           100 %
General and administrative expenses             3,688         2,334            1,354            58 %
Total operating expenses                    $  34,811     $   4,236     $     30,575           722 %
Loss from operations                          (34,811 )      (4,236 )        (30,575 )
Other income (expense):
Gain on forgiveness of PPP loan                   279             -              279           100 %
Loss on issuance of secured debt                (686)             -            (686)          -100 %
Change in fair value of warrant liability       5,175             -            5,175           100 %
Change in fair value of share liability            73             -               73           100 %
Interest expense                               (2,367 )         (11 )         (2,355 )       21418 %
Other income                                       16            12                4            33 %
Loss on issuance of equity                     (1,881 )           -           (1,881 )         100 %
Issuance costs of warrants                     (1,574 )           -           (1,574 )         100 %
Total other income (expense)                     (965 )           1             (966 )        -966 %
Net loss                                    $ (35,776 )   $  (4,235 )   $    (31,541 )         745 %



Research and Development Expenses




The decrease of approximately $0.9 million or 47% in research and development
expenses was primarily attributable to (i) $1.0 million decrease in clinical
trial activities due to higher trailing enrollment in the prior period before
the COVID-19 pandemic as well as decreased liquidity. This decrease was offset
by an increase of $0.1 million related to consultant and other costs required to
support our research and development activities.



In-process research and development




In-process research and development expense increased $30.1 million in the six
month period ended June 30, 2021, compared to the comparable prior period, as a
result of the Merger.


General and Administrative Expenses




General and administrative expenses increased approximately $1.3 million or 58%.
This increase is related to: (i) $0.8 million in personnel-related compensation
including stock-based compensation and (ii) a $0.6 million increase in other
general and administrative expenses associated with operating as a public
company.



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Other income (expense)



Other income, net increased by $1.0 million for the six months ended June 30,
2021 as compared to the six month period ended June 30, 2020. The increase was
primarily due (i) a $0.3 million gain on the forgiveness of the Company's PPP
loan, (ii) a reduction in the fair value of warrant liabilities of $5.2 million,
and (ii) a $0.1 million reduction in the fair value of share liability. These
increases were offset by (i) a $2.4 million decrease in interest expense is
mostly due to the non-cash debt discount accretion related to the pre-merger
senior secured debt financing that was accelerated when this debt was converted
to equity at the close of the Merger; (ii) a $1.9 million loss on the issuance
of LBS Series 1 Preferred Stock due to fair value of the liability classified
warrants being in excess of the equity proceeds, (iii) $1.6 million of equity
issuance costs allocated to the warrant liability and (iv) $0.7 million loss
recorded on the issuance of secured debt in connection with the discount given
for the pre-Merger senior secured debt.



                        Liquidity and Capital Resources



Financial Condition



Since Palisade's inception, it has financed its operations through the sales of
its 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 its intellectual property to third parties.



Management expects the Company to incur substantial operating losses for the
foreseeable future in order to complete clinical trials and launch and
commercialize any product candidates for which it receives regulatory approval.
The Company will need to raise additional capital through a combination of
equity offerings, debt financings, collaborations, and other similar
arrangements. The COVID-19 pandemic continues to rapidly evolve and has already
resulted in a significant disruption of global financial markets. The Company's
ability to raise additional capital may be adversely impacted by potential
worsening of global economic conditions and the recent disruptions to, and
volatility in, the credit and financial markets in the United States and
worldwide resulting from the pandemic. If the disruption persists and deepens,
the Company could experience an inability to access additional capital. In
addition, the Company is restricted, pursuant to agreements with the Investor in
the private financing conducted in connection with the Merger, from issuing
equity securities in the near term without the consent of such Investor.



As of June 30, 2021, we had $12.7 million in cash, cash equivalents and restricted cash. The following table shows a summary of our cash flows for the six months ended June 30, 2021 and 2020 (in thousands):



                                               Six Months ended June 30,            Increase (Decrease)
                                               2021                2020                $              %

Net cash used in operating activities      $      (8,972 )     $      (2,351 )   $    (6,621 )          282 %
Net cash provided by (used in) investing
activities                                 $         294       $          (6 )   $       300          -5000 %
Net cash provided by financing
activities                                 $      20,618       $         279     $    20,339           7290 %



Net Cash Used in Operating Activities




Cash used in operating activities for the six months ended June 30, 2021,
reflects Palisade's $35.8 million loss for the period adjusted for certain
non-cash items including: (i) $5.4 million of net cash outflows related to
changes in operating assets and liabilities, (ii) $0.1 million of non-cash lease
expense, (iii) $0.3 million gain on forgiveness of a PPP loan, (iv) $1.1 million
recorded for stock-based compensation, (v) $5.2 million gain recorded for the
change in the fair market value of the warrant liabilities, (vi) $0.1 million
gain recorded for the change in the fair market value of the share liability
(vii) $0.7 million loss on the issuance of the senior secured debt, (viii) $0.2
million in accounts payable write-off's. Additionally, the following net
non-cash expenses of $35.7 million were incurred in connection with the Merger
transaction:


(a) $30.1 million expense related to in-process research and development solely

related to the Merger.

(b) $2.2 million relating to the accelerated debt accretion as a result of the

Merger

(c) $1.9 million loss recorded in connection with the issuance of LBS Series 1

Preferred Stock

(d) $1.6 million issuance cost allocated to the warrant liability incurred as a

result of the transaction costs associated with the Merger.

(e) $0.1 million non-cash benefit for transaction costs shared with Seneca.





                                       33

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Table of Contents

Net Cash Provided by (Used in) Investing Activities




For the six months ended June 30, 2021, cash provided by investing activities
consisted of $3.3 million in cash acquired in connection with the Merger.
Approximately $3.0 million was used to pay for acquisition related costs in the
same period.


Net Cash Provided by Financing Activities




For the six months ended June 30, 2021, cash provided by financing activities
was $20.6 million which was primarily generated as follows: (i) $19.9 million in
net proceeds from the issuance of LBS Series 1 Preferred Stock and (ii) $1.2
million in proceeds from the issuance of senior secured debt. These increases
were offset by payments on debt of $0.3 million, redemption of warrants of $0.1
million, and payment of debt issuance costs of $0.1 million.



Future Liquidity and Needs


Palisade has incurred significant operating losses and negative cash flows since inception. Palisade has not been able to generate significant revenues nor achieved profitability.

As explained in the notes to Palisade's Unaudited Condensed Consolidated Financial Statements, there continues to be substantial doubt as to Palisade's ability to continue as a going concern

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