NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.  Organization, Business and Financial Condition

The Merger

On April 27, 2021, Leading Biosciences, Inc. (“LBS”) completed an asset acquisition with Seneca Biopharma Inc. (“Seneca”) in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of December 16, 2020, (the “Merger Agreement”) by and among Seneca, Townsgate Acquisition Sub 1, Inc., a wholly owned subsidiary of Seneca (“Merger Sub”), and LBS, pursuant to which Merger Sub merged with and into LBS, with LBS surviving as a wholly owned subsidiary of Seneca (the “Merger”). Concurrent with the closing of the Merger, LBS outstanding common stock, common stock warrants and options for the purchase of LBS common stock were exchanged for Seneca common stock, Seneca common stock warrants and options for the purchase of Seneca common stock at a ratio of 0.02719 shares of LBS common stock equivalents to one share of Seneca common stock equivalents (the “Exchange Ratio”). On April 27, 2021, in connection with the Merger, Seneca filed a certificate of amendment to its amended and restated certificate of incorporation to affect a 1-for-6 reverse stock split of its common stock (Reverse Stock Split). Stockholders’ equity and all references to share and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to reflect the 1-for-6 reverse stock split for all periods presented.

Unless the context otherwise requires, references to the “Company,” “Palisade,” “Palisade Bio,” the “combined organization,” “we,” “our” or “us” in this report refer to Palisade Bio, Inc. and its subsidiaries after completion of the Merger. In addition, references to “Seneca” or “LBS” refer to these entities prior to the completion of the Merger.

Description of Business

Palisade Bio is a clinical-stage biopharmaceutical company focused on the discovery and development of innovative therapies to improve the lives of patients affected by a broad range of diseases and conditions triggered by gastrointestinal dysregulation. The Company is on the forefront of elucidating the role the gut plays in driving multiple disease states and conditions inside and outside the gastrointestinal tract. The Company is applying its knowledge and its industry experience to develop oral small-molecule drugs to maintain the integrity of the gut epithelial barrier, microbiome, and gut immune cells to improve acute and chronic Gastrobiome™-mediated outcomes. Palisade’s initial focus is combatting the interruption of GI function (ileus) following major surgery to reduce recovery times and shorten patients’ length of stay in the hospital. The Company’s programs have the potential to prevent the formation of post-operative adhesions, as well as to address the myriad health conditions and complications associated with chronic disruption of the intestinal mucosal barrier.

The following Unaudited Condensed Consolidated Financial Statements are representative of LBS’s operations prior to the closing of the merger and the consolidated operations thereafter including the operations of Palisade’s wholly owned and controlled subsidiary located in the People’s Republic of China. All the entities are consolidated in our condensed consolidated financial statements and all intercompany activity has been eliminated.

Liquidity and Going Concern

The Company has a limited operating history and the sales and income potential of the Company’s business and market are unproven. The Company has experienced losses and negative cash flows from operations since its inception. At  June 30, 2021, the Company had an accumulated deficit of $103.8 million and cash and cash equivalents of $12.7 million. The Company expects to continue to incur losses into the foreseeable future. The successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure.

Historically, the Company has funded its operations primarily through a combination of debt and equity financings. Management’s plans continue to be focused on raising additional capital or other financings, such as potential partnering events of the Company’s existing technology. However, no assurance can be given at this time as to whether the Company will achieve these objectives. Based on the Company’s current business plan, management believes that existing cash and cash equivalents will not be sufficient to fund the Company’s obligations for at least 12 months from the date of issuance of these financial statements. The Company’s ability to execute its operating plan depends on its ability to obtain additional funding through equity offerings, debt financings or potential licensing and collaboration arrangements. The financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. However, the Company’s current working capital, anticipated operating expenses and net losses raise substantial doubt about its ability to continue as a going concern for a period of one year following the date that these financial statements are issued. The financial statements do not include any adjustments for the recovery and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company plans to continue to fund its operations through cash and cash equivalents on hand, as well as through future equity offerings, debt financings, other third-party funding, and potential licensing or collaboration arrangements. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to the Company. Even if the Company raises additional capital, it may also be required to modify, delay or abandon some of its plans which could have a material adverse effect on the Company’s business, operating results and financial condition and the Company’s ability to achieve its intended business objectives. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID- 19 pandemic”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally.

In April 2020, as a result of impacts and risks associated with the current COVID-19 pandemic, the Company paused enrollment and program activities surrounding the Company’s clinical trials. The COVID-19 pandemic has not affected the production or supply of the Company’s therapeutic candidate, LB1148. The COVID-19 pandemic may cause additional delays of the Company’s clinical trials or adversely impact the Company’s business. The Company cannot predict how legal and regulatory responses to concerns about COVID-19 or other major public health issues will impact the Company’s business, nor can it predict potential adverse impacts related to the availability of capital to fund the Company’s operations. Additionally, the Company’s workforce and outside consultants may also be affected, which could result in an adverse impact on the Company’s ability to conduct business. Any of these factors, alone or in combination with others, could harm the Company’s business, results of operations, financial condition or liquidity. However, the magnitude, timing, and duration of any such potential financial impacts cannot be reasonably estimated at this time.

2. Summary of Significant Accounting Policies

Basis of Presentation

In management’s opinion, the accompanying interim unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly Palisade’s financial position, results of operations and cash flows. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the Financial Statements and Notes included in the Company’s financial statements filed on Form 8-K/A for the year ended December 31, 2020, filed with the SEC.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and notes. The most significant estimates in the Company’s financial statements relate to clinical trial accruals and valuation of derivative liabilities and stock-based compensation. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as one operating segment which consists of research and development activities 

Cash and Cash Equivalents

Cash and cash equivalents represent cash available in readily available checking and money market accounts. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Restricted Cash

At each June 30, 2021 and December 31, 2020, the Company held restricted cash of $26,000, in a separate restricted bank account as collateral for the Company’s corporate credit card program. The Company has classified these deposits as long-term restricted cash on its condensed consolidated balance sheets.

Deferred Transaction Costs

Deferred Transaction Costs consists of the direct and incremental costs incurred by the Company related to the acquisition of assets under the Merger Agreement. These costs represent legal, accounting and other direct costs related to the acquisition of assets under the Merger Agreement. As of June 30, 2021, and December 31, 2020, deferred transaction costs were approximately $0 and $1.8 million, respectively (see Note 3, Merger between Seneca and LBS for additional disclosure).

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions and in money market accounts, and at times balances may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held nor has the Company experienced any losses in these accounts.

Property and Equipment, Net

Property and equipment, which consist of computers, are stated at cost less accumulated depreciation. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets (approximately three years). Repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred.

Convertible Preferred Stock

The Company’s Series C convertible preferred stock has been classified in the balance sheets as temporary equity instead of permanent equity within stockholders’ deficit in the balance sheet, in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities as the stock is conditionally redeemable upon certain change in control events outside of the Company’s control, including the liquidation, sale or transfer of control of the Company. Upon such change in control events the holders of the convertible preferred stock can cause its redemption.

The Company did not adjust the carrying values of the convertible preferred stock to its redemption value as of December 31, 2020 since a liquidation event was not probable. Subsequent adjustments to increase or decrease the carrying values to the ultimate liquidation values will be made only if, and when, it becomes probable such a liquidation event will occur.

In connection with the Merger, the Series C Convertible Preferred Stock converted to Common Stock.

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.

Research and Development Costs

Research and development expenses consist primarily of salaries and other personnel related expenses including stock-based compensation costs, preclinical costs, clinical trial costs, costs related to acquiring and manufacturing clinical trial materials and contract services. All research and development costs are expensed as incurred.

Clinical Trial Expenses

Expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to the Company’s contract arrangements. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to the Company’s service providers will temporarily exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients, site initiation and the completion of clinical milestones. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual or prepaid expense balance accordingly. Historically, the Company’s estimated accrued liabilities have materially approximated actual expense incurred. Clinical trial expenses are included in research and development expense.

Patent Costs

Costs related to filing and pursuing patent applications (including direct application fees, and the legal and consulting expenses related to making such applications) are expensed as incurred, as recoverability of such expenditures is uncertain. These costs are included in general and administrative expenses.

Debt Issuance Costs

Debt issuance costs incurred to obtain debt financing are deferred and are amortized over the term of the debt using the effective interest method. Debt issuance costs are recorded as a reduction to the carrying value of the debt and are amortized to interest expense for in the condensed statements of operations.

Income Taxes

The Company follows the ASC 740, Income Taxes, or ASC Topic 740 (“ASC 740”), in reporting deferred income taxes. ASC 740 requires a company to recognize deferred tax assets and liabilities for expected future income tax consequences of events that have been recognized in the Company’s financial statements. Under this method, deferred tax assets and liabilities are determined based on temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in the years in which the temporary differences are expected to reverse. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some of or all the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions pursuant to ASC 740, which prescribes a recognition threshold and measurement process for financial statement recognition of uncertain tax positions taken or expected to be taken in a tax return. If the tax position meets this threshold, the benefit to be recognized is measured as the tax benefit having the highest likelihood of being realized upon ultimate settlement with the taxing authority. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of employee and non-employee stock option grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. The Company recognizes forfeitures as they occur as a reduction of expense. The Company estimates the fair value of employee and non-employee stock option grants using the Black-Scholes option pricing model.  

Net Loss Per Share

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company’s Series C convertible preferred stock (the "Convertible Preferred Stock"), the Senior Secured Promissory Note Warrants and May 2021 Warrant issued in the pre-merger financing contain non-forfeitable rights to dividends with the common stockholders, and therefore are considered to be participating securities. The Convertible Preferred Stock and the warrants do not have a contractual obligation to fund the losses of the Company; therefore, the application of the “two-class method” is not required when the Company is in a net loss position. Dilutive loss per share is calculated by dividing net loss available to common stockholders, as adjusted for the impacts of dilutive securities, by the weighted-average number of shares outstanding plus the dilutive impact of potential common shares.

Diluted earnings per share is computed using the more dilutive of the "two class method" or the "if converted method." Dilutive earnings per share under the "two class method" is calculated by dividing net income available to common stockholders as adjusted for the participating impacts of the participating securities, by the weighted-average number of shares outstanding plus the dilutive impact of all other potential dilutive common shares. Dilutive earnings per share under the "if converted method" is calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the dilutive impact of all potential dilutive common shares.

Potentially dilutive common shares consist of shares issuable for the Senior Secured Promissory Note Warrants and the May 2021 Warrants (see Note 8). These warrants have a dilutive impact when the average market price of our common stock exceeds the applicable conversion price of the respective warrants.

The following table presents the calculation of weighted average shares used to calculate basic and diluted loss  per share:

The following potentially common shares were excluded from diluted net loss per share because the effects would be anti-dilutive:

Comprehensive Loss

Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss was the same as its reported net loss for all periods presented. 

Recently Adopted Accounting Pronouncements

In November 2017, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (“ASU 2016-18”). The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash and equivalents. ASU 2016-18 is effective for fiscal years beginning after December 31, 2018, with early adoption permitted. The Company adopted this standard on January 1, 2021, which did not have a material impact on its financial position, results of operations or cash flows.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU 2019-12"), as part of its initiative to reduce complexity in accounting standards. The amendments in ASU 2019-12 are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. As required by ASU 2019-12, we adopted this ASU effective January 1, 2021. The adoption of ASU No. 2019-12 did not have a material impact on the Company's financial position, results of operations or cash flows.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04"). The accounting standard update is effective for fiscal years beginning after December 15, 2021. The Company early adopted this standard effective January 1, 2021 and evaluated all outstanding financial instruments that would fall under the scope of ASU 2021-04. The Company applied ASU 2021-04 to the warrants modified during the second quarter of 2021 (see Note 8).

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The ASU introduced a new credit loss methodology, the Current Expected Credit Losses (“CECL”) methodology, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to maturity debt securities, trade receivables and other receivables measured at amortized cost at the time the financial asset is originated or acquired. After the issuance of ASU 2016-13, the FASB issued several additional ASUs to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. In November 2019, the FASB issued an amendment making this ASU effective for fiscal years beginning after December 15, 2022 for smaller reporting companies. The Company is currently evaluating the potential impact that this standard may have on its financial statements and related disclosures.

In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) — Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher stockholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. This ASU may be applied on a full retrospective of modified retrospective basis. For smaller reporting companies, this ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption of the ASU is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the potential impact that this standard may have on its financial statements and related disclosures.

3. Merger between Seneca and LBS

On December 16, 2020, Seneca entered into a Merger Agreement, pursuant to which Merger Sub merged with and into LBS with LBS surviving as a wholly owned subsidiary of Seneca. On April 27, 2021, the Merger was completed.

The transaction was accounted for as a reverse asset acquisition in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Under this method of accounting, LBS was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) LBS’s stockholders owned a substantial majority of the voting rights in the combined company, (ii) LBS designated a majority of the members of the initial board of directors (5 of 8 total members) of the combined company, (iii) LBS’s senior management holds all key positions in the senior management of the combined company and (iv) the only employees remaining in the combined company are that of LBS employees (all Seneca employees were terminated on the date of Merger). As a result, as of the closing date of the Merger, the net assets of the Company were recorded at their acquisition-date relative fair values in the accompanying condensed consolidated financial statements of the Company and the reported operating results prior to the Merger are those of LBS.

Pursuant to the terms of the Merger Agreement, each share of LBS common stock outstanding immediately prior to the closing of the Merger was converted into approximately 0.02719 shares of Company common stock (the “Exchange Ratio”), such that, immediately following the effective date of the Merger, preexisting LBS equity holders held approximately 74.9% of the capital stock of Seneca outstanding immediately following the Merger, and the equity holders of Seneca immediately before the Merger held approximately 25.1% of the Seneca capital stock outstanding immediately following the Merger.

Holders of the Company’s common stock will be entitled to one vote for each share of common stock held of record for the election of directors and on all matters submitted to a vote of stockholders.

In accordance with the Merger Agreement, Seneca shareholders retain the right to receive cash payments if certain of the legacy Seneca patents or assets are sold within the 48 months following the Merger close. The contingent value right (“CVR”) payment amount is calculated as 80% of the net proceeds received (i.e., gross proceeds minus selling expenses) with no CVR payment required in the event such amount is less than $300,000 during the CVR term. Based on the information available at the time of the Merger, any contingent consideration associated with the CVR payment was deemed to have a remote possibility. As such, no consideration was recorded on the Company’s financial statements.

Reverse Stock Split and Exchange Ratio

On April 27, 2021, in connection with, and prior to the completion of, the Merger, the Company effected a 1-for-6 reverse stock split of its then outstanding common stock (the “Reverse Stock Split”). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. The final Exchange Ratio incorporated the effect of this Reverse Stock Split, and all issued and outstanding common stock, excluding Seneca's assumed preferred stock (“Series A Convertible Preferred Stock”), have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. All issued and outstanding LBS common stock and underlying shares of common stock of, convertible preferred stock, options and warrants prior to the effective date of the Merger have been retroactively adjusted to reflect the Exchange Ratio for all periods presented.

Merger

The Merger, which closed on April 27, 2021, as mentioned previously, was accounted for as a reverse asset acquisition pursuant to Topic 805, Clarifying the Definition of a Business, as substantially all of the fair value of the assets acquired were concentrated in a group of similar identifiable intangible assets, and the acquired assets did not have outputs or employees. As Seneca had not yet received regulatory approval for its product candidates, the fair value attributable to these assets was recorded as acquired in-process research and development (“IPR&D”) expense in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2021.

The total purchase price paid in the Merger has been allocated to the net assets acquired and liabilities assumed based on their fair values as of the completion of the Merger. The following summarizes the purchase price paid in the Merger (in thousands, except share and per share amounts).

The allocation of the purchase price is as follows (in thousands):

(1) Represents the research and development projects of Seneca which were in-process, but not yet completed as of the date of the acquisition. Current accounting standards require that the fair value of IPR&D projects acquired in an asset acquisition with no alternative future use be allocated a portion of the consideration transferred and charged to expense on the acquisition date.

4. Balance Sheet Details

Accrued liabilities consisted of the following (in thousands):  

5. Fair Value Measurements

The Company follows ASC 820-10, Fair Value Measurements and Disclosures, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

The Company has issued warrants that are accounted for as liabilities.  These warrants were valued using a Monte Carlo based valuation model. The Monte Carlo valuation technique was utilized because it embodies all the requisite assumptions (including the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Because derivative financial instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes.  Changes in fair value are recognized as a component of other income (expense) in the statement of operations.

During 2020, the fair value, $1.9 million, of the Senior Secured Promissory Note warrant liability was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $17.71, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 87 percent, (iv) risk-free interest rate of one-half percent, (v) contractual terms of approximately six years and (vi) a zero percent dividend rate.

As of June 30, 2021, the fair value of the Senior Secured Promissory Note Warrants was determined using a Monte Carlo simulation model that considered: i) a starting stock price of $17.71, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 99 percent; (iv) risk-free rate of approximately 0.90 percent, (v) contractual terms of approximately 5.4 years and (vii) a zero percent dividend rate.

The second tranche of the Senior Secured Promissory Notes and the Senior Secured Promissory Note Warrants were issued on February 1, 2021. The initial fair value of the second tranche of the Senior Secured Promissory Note Warrant liability of $1.8 million was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $17.71, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 88 percent, (iv) risk-free interest rate of approximately one-half percent, (v) contractual terms of approximately 5.8 years and (vii) a zero percent dividend rate.

The May 2021 Warrant was issued on May 20, 2021. The initial fair value of the May 2021 Warrant was $21.9 million and was determined using a Monte Carlo simulation model that considered: (i) the starting stock price of $10.15, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 91 percent, (iv) risk-free interest rate of approximately one percent, (v) contractual terms of approximately 5.6 years and (vii) a zero percent dividend rate.

As of June 30, 2021, the fair value of the May 2021 Warrant was determined using a Monte Carlo simulation model that considered: i) a starting stock price of $4.12, (ii) certain key event dates such as expected capital financings, (iii) expected re-levered volatility of approximately 99 percent; (iv) risk-free rate of approximately 0.94 percent, (v) contractual terms of approximately 5.4 years and (vii) a zero percent dividend rate.

The following table summarizes the activity of the Company’s Level 3 instruments for the three and six months ended June 30, 2021, and 2020, respectively (in thousands):

At June 30, 2021 and December 31, 2020, Seneca had certain common stock purchase warrants that were originally issued in connection with the May 2016 and August 2017 offerings that are accounted for as liabilities whose fair value was determined using Level 3 inputs. As a result of the Merger, the put right was activated on the August 2017 offering warrants and these warrants were valued at their put right value using a Black-Scholes option pricing model. The Company settled the put feature for 7,813 of these warrants during the quarter ended June 30, 2021.

Additionally, as a result of the Merger, a put feature was activated on certain equity classified warrants associated with the October 2018 offering that temporarily required liability classification. These warrants were valued at their put right value using a Black-Scholes option pricing model. The Company settled the put feature for 12,500 of these warrants during the second quarter ended June 30, 2021. Upon expiration of the put right in May 2021, the remaining warrants were reclassified back to equity.

The (gains) losses resulting from the changes in the fair value of the liability classified warrants are classified as other income or expense in the accompanying unaudited condensed consolidated statements of operations. The fair value of the common stock purchase warrants is determined based on the Black-Scholes option pricing model or other option pricing models as appropriate and includes the use of unobservable inputs such as the expected term, anticipated volatility and expected dividends. Changes in any of the assumptions related to the unobservable inputs identified above may change the warrant fair value; increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in these unobservable inputs generally result in decreases in fair value.

6. Debt

Debt consisted of the following as of June 30, 2021 and December 31, 2020 (in thousands):

Financing Agreements

In June and October 2020, the Company entered into agreements to finance certain insurance policies (“Financing Agreements”). These Financing Agreements have a stated interest rate of 8.35%, are payable over ten months and are secured by the Company’s insurance policies. In April and May 2021, the Company entered into additional agreements to finance additional insurance policies (“Additional Financing Agreements”). The Additional Financing Agreements have a stated interest of 3.6% and 8.35% and are payable over a nine- and ten-month period. The agreements are secured by the associated insurance policies. As of June 30, 2021 and December 31, 2020, the aggregate remaining balance due under the Financing Agreements was $605,000 and $22,000, respectively.

Unsecured Promissory Notes

December 2019 Note

On December 18, 2019, the Company issued an unsecured promissory note for a principal sum of $100,000 to a consultant as payment for consulting services performed in 2019 (the “December 2019 Note”). The  December 2019 Note had a maturity date in December 2020. The outstanding principal under the  December 2019 note accrues interest at the annual rate of five percent simple interest. All principal plus accrued interest on the note is due and payable the earlier of the date which the Company closes on five million or more in revenue or gross financing proceeds or the maturity date. The maturity of the December 2019 Note was extended to March 19, 2021 and again to June 19, 2021. The debt was repaid in June 2021.

July 2020 Note

On July 9, 2020, the Company issued an unsecured promissory note for a principal sum of $125,000 with an original issue discount of 20 percent (the “July 2020 Note”). There were no issuance costs related to this transaction. Interest accrues on the unpaid principal amount at a rate equal to ten percent per annum, compounded annually. Principal and any accrued but unpaid interest under this note was due and payable upon demand of the holder at any time following the earlier to occur of (a) the date on which the Company received at least $1,250,000 in gross proceeds from the issuance of equity securities or securities convertible into or exercisable for equity securities or (b) the 120th day following the issuance date of the note. On November 6, 2020, the Company and the lender mutually agreed to extend the maturity date of the  July 2020 Note for an additional 120 days, or through March 6, 2021. No other terms of the original agreement were amended. The Company paid all outstanding accrued interest, which approximated $4,000, in conjunction with the amendment and interest will continue to accrue at the original stated interest rate. On March 6, 2021, the maturity date was further extended to June 6, 2021. On May 25, 2021, the Company and the noteholder amended the note to (i) extend the maturity date of the note to November 15, 2021 and (ii) provide for six monthly payments of $21,445 starting June 15, 2021 in full amortization of the Note (the “July 2020 Note Amendment”). See Note 7 – Common Stock Warrants for details of the warrants issued with the July 2020 Note and the warrants issued with the July 2020 Note Amendment. The Company accounted for the amendment as a modification.   

As of June 30, 2021 and December 31, 2020, the outstanding balance of the note, including accrued interest, was $105,000 and $126,000, respectively.   

October 2020 Note 

On October 16, 2020, the Company issued an unsecured promissory note for a principal sum of $500,000 with an original issue discount of ten percent. Interest accrued on the unpaid principal amount at a rate equal to ten percent per annum, compounded annually. The note was due and payable 180 days from the issuance date, or April 14, 2021. On May 25, 2021, the Company and the noteholder amended the note to (i) extend the maturity date of the note to November 15, 2021 and (ii) provide for six monthly payments of $90,901 starting June 15, 2021 in full amortization of the Note (the “October 2020 Note Amendment”). See Note 7 – Common Stock Warrants for details of the warrants issued with the October 2020 Note and the warrants issued with the October 2020 Note Amendment. The Company accounted for the amendment as a modification. This noteholder was considered a related party due to its equity investment in the Company (see Note 12).   

As of June 30, 2021 and December 31, 2020, the outstanding balance of the note, including accrued interest, was $445,000 and $510,000, respectively.    

Senior Secured Promissory Notes

In connection with the transactions contemplated by the Merger, on December 16, 2020, (i) the Company entered into a securities purchase agreement with Altium Growth Fund, LP (the “Investor”) pursuant to which, among other things, the Company agreed to issue senior secured promissory notes in the aggregate principal amount of up to $5.0 million, in exchange for an aggregate purchase price of up to $3.75 million, representing an aggregate original issue discount of up to $1.25 million (the “Senior Secured Promissory Notes”) and warrants (“Senior Secured Promissory Note Warrants”) to purchase shares of the Company’s common stock, and (ii) Seneca and LBS entered into a separate securities purchase agreement with the Investor pursuant to which, among other things, the Investor agreed to invest $20.0 million in cash and cancel any outstanding principal and interest on the Senior Secured Promissory Notes immediately prior to the closing of the Merger in exchange for shares of Series 1 Preferred Stock of LBS to be issued immediately prior to the closing of the Merger and warrants to purchase shares of Palisade’s common stock to be issued after the closing of the Merger, in private placement transactions.

The Senior Secured Promissory Notes had a first closing on December 17, 2020 and a second closing on February 1, 2021 resulting in the issuance of $1.7 million in aggregate principal of Senior Secured Promissory Notes and Senior Secured Promissory Note Warrants to acquire 94,096 shares of common stock, with an exercise price of $17.71 per share, at each closing. The third closing was at a date to be determined by the Company between March 16, 2021 and the closing of the Merger. The Company did not elect to draw down the third tranche. At issuance, the fair value of the first tranche of the Senior Secured Promissory Note Warrants exceeded the debt proceeds, resulting in a $0.8 million loss on issuance of debt. At issuance, the fair value of the second tranche of the Senior Secured Promissory Note Warrants exceeded the debt proceeds, resulting in a $0.7 million loss on issuance of debt. The debt was recognized at a zero-dollar carrying value and was being accreted to the principal amount of the debt, on a straight-line basis, through a charge to interest expense in the statement of operations. The Senior Secured Promissory Notes accrue interest at a rate of 15 percent based upon a 360-day year and was payable in arrears. In connection with the Merger, the outstanding principal and interest on the Senior Secured Promissory Notes was cancelled for shares of Series 1 Preferred Stock of the Company.

Paycheck Protection Program (“PPP”)

In April 2020, the Company applied for and received $279,000 from the PPP (the “PPP Loan”) as government aid for payroll, rent and utilities. There were no issuance costs related to this transaction. The PPP Loan accrued simple interest at a rate of one percent per annum and has an original maturity date of April 2022. Payments of principal and interest were deferred for the ten-month period following the loan forgiveness period, which is defined as the 8-week or 24-week period following the loan origination date, at which time the loan balance was payable in monthly installments unless the Company applied for, and received, forgiveness in accordance with the CARES Act and the terms of the loan executed by the Company and its lender.

The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The certification made by the Company did not contain any objective criteria and is subject to interpretation. Based in part on the Company’s assessment of other sources of liquidity, the uncertainty associated with future revenues created by the COVID-19 pandemic and related governmental responses, and the going concern uncertainty reflected in the Company’s financial statements, the Company believed in good faith that it met the eligibility requirements for the PPP Loan. If, despite the good-faith belief that given the Company’s circumstances all eligibility requirements for the PPP Loan were satisfied, it is later determined that the Company had violated any applicable laws or regulations or it is otherwise determined the Company was ineligible to receive the PPP Loan, it may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties and potential liabilities.

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “PPP Flexibility Act”) was signed into law, extending the PPP Loan forgiveness period from 8 weeks to 24 weeks after loan origination, reducing the required amount of payroll expenditures from 75 percent to 60 percent, removing the prior ban on borrowers taking advantage of payroll tax deferral after loan forgiveness and allowing for the amendment of the maturity date on existing loans from two years to five years.

In January 2021, the Company received notification the PPP Loan was forgiven and recognized a gain a $279,000, in other income in the condensed statements of operations.

The following table summarizes future minimum debt payments as of June 30, 2021 (in thousands):

7. Stockholders’ Deficit

Classes of Stock

As of June 30, 2021, the Company was authorized to issue 300,000,000 shares of $0.01 par value Common Stock and 7,000,000 shares of $0.01 par value Preferred Stock.

As of December 31, 2020, LBS was authorized to issue 6,797,500 shares of $0.01 par value Common Stock and 33,594,625 shares of $0.001 par value convertible preferred stock (the “Convertible Preferred Stock”). Of the authorized number of shares of Convertible Preferred Stock, 33,594,625 shares were designated to Series C Preferred Stock (“Series C”).

Series A Convertible Preferred Stock

In connection with the Merger, the Company assumed Seneca’s Series A 4.5% Convertible Preferred Stock. Shares of the Series A 4.5% Convertible Preferred Stock are convertible into 6,479 shares of common stock.

Series C Convertible Preferred Stock

On March 8, 2019, LBS entered into an agreement with a lead investor for the purchase and sale, of up to an aggregate of $30 million of Series C. The actual committed Series C investment resulted in two closings for total proceeds of $10.0 million. Issuance costs associated with financing were $215,000 which resulted in net proceeds of approximately $9.8 million. On March 8, 2019, LBS completed the initial closing, which was comprised of 8,398,656 shares of Series C at an offering price of $0.893 per share. Contemporaneous with the initial closing, the lead investor agreed to purchase 2,799,552 additional shares of Series C at an offering price of $0.893 at a future date (“Additional Tranche Right”). The lead investor exercised its right on August 15, 2019. LBS issued 40,785 warrants to purchase common stock at an exercise price of $41.19 per share in connection with the first closing and issued 13,595 warrants to purchase common stock at exercise price of $41.19 per share in connection with the second closing. The warrants were classified as equity and were measured using a Black-Scholes valuation model.

At inception, the Additional Tranche Right met the criteria for liability classification under ASC 480. LBS valued the Additional Tranche Right at $79,000 and recorded this right as a liability on the condensed balance sheets. The Additional Tranche Right was extinguished in August 2019 when the right was exercised by the lead Investor. The liability’s fair value mark-to-market immediately prior to the exercise was immaterial.

In addition to the Series C issued to the lead investor, LBS issued 475,923 shares of Series C to other investors for net proceeds of $425,000 during 2019. LBS issued 951 warrants to purchase common stock at an exercise price of $41.19 per share to these other investors. The warrants were classified as equity and were measured using a Black-Scholes valuation model.

In connection with the Merger, the Series C Convertible Preferred Stock converted to Common Stock.

LBS Series 1 Preferred Stock

In connection with signing the Merger Agreement, LBS, Seneca and the Altium Growth Fund (the “Investor”). entered into a Securities Purchase Agreement (the “Equity SPA”), pursuant to which, among other things, the Investor agreed to invest up to $20.0 million in cash to fund the combined company following the Merger. In return, LBS issued LBS Series 1 Preferred Stock to the Investor equal to the Purchase Price divided by the per share purchase price of $17.71. The Company recorded $19.9 million in proceeds associated with this financing. In addition, the Company issued to the Investor warrants to purchase common stock in the Combined Company (see Note 8). The fair value of these warrants exceeded the equity proceeds, resulting in a $1.9 million loss on the issuance of the LBS Series 1 Preferred Stock. The Company incurred offering costs of $1.6 million which were allocated to the warrants and were expensed in the Statements of Operations.

Common Stock

Each share of Common Stock shall entitle the holder thereof to one (1) vote on each matter submitted to a vote at a meeting of stockholders.

8. Common Stock Warrants

From time to time, the Company issues warrants to its investors, creditors and various other individuals, as noted above. The Company’s outstanding common stock warrants that are classified as equity warrants are included as a component of stockholder’s equity at the date of grant at the relative fair value at that grant date. Common stock warrants accounted for as liabilities in accordance with ASC 815 are included in non-current liabilities. The warrants have an exercise price ranging from $3.88 to $4,695.60 per share and generally expire between five and ten years after the date of issuance. The Company had common stock warrants issuable and outstanding of 7,013,629 and 195,712, at June 30, 2021 and December 31, 2020, respectively.

Amendment of Promissory Notes and Issuance of New Warrants

In 2020, LBS issued and sold to certain holders (i) unsecured promissory notes in the aggregate principal amount of $0.6 million with an interest rate of 10% per annum and (ii) warrants to purchase an aggregate of 70,000 shares of common stock of LBS at an exercise price of $0.73 per share (the “Old Warrants”). See Note 5 – Debt July 2020 Note and October 2020 Note.  In connection with the Merger, the Old Warrants automatically converted into warrants to purchase an aggregate of 1,904 shares of Common Stock at a purchase price of $26.84 per share.

On May 25, 2021, the Company, LBS and the noteholders amended the notes to extend the maturity date of the notes to November 15, 2021 (the “Notes Amendment”). In connection with the Notes Amendment, the Old Warrants were canceled, and the Company issued warrants to the noteholders to purchase an aggregate of 8,000 shares of Common Stock at a purchase price of $6.00 per share (the “New Warrants”). The incremental value of the New Warrants of $16,000 was recorded as a discount on the debt and is accreted to interest expense over the remaining term of the debt. The New Warrants were equity classified.

Issuance of Stock and Warrant to Ecoban Securities, LLC (“Ecoban”)

In connection with the closing of the Merger and the Pre-Merger Financing, on May 25, 2021, the Company issued to Ecoban (i) a warrant to purchase 18,353 shares of the Palisade’s Common Stock at a price of $17.72 per share (the “Ecoban Warrant”) and (ii) 118,833 shares of Common Stock (the “Ecoban Shares”), as payment for a success fee for closing the Merger and Pre-Merger Financing, respectively. The Ecoban Warrant was equity classified.

Senior Secured Promissory Note Warrants

In connection with the issuance of the Senior Secured Promissory Notes, the Company issued the Investor warrants for the purchase of up to 188,192 shares of the Company’s Common Stock (the Senior Secured Promissory Note Warrants) and identified an investor put right to offset future equity purchases in exchange for settlement of the Senior Secured Promissory Notes. The Senior Secured Promissory Note Warrants had an exercise price of $17.71 per share and expire five years from the date of registration or April 27, 2026. The Senior Secured Promissory Note Warrants did not meet the criteria for equity classification because of multiple features, including a potential adjustment to the exercise price and the potential for cash settlement of the warrants; therefore, the warrants are accounted for as liabilities in accordance with ASC 815. At each issuance date, the Company recognized the Senior Secured Promissory Note Warrants at fair value. The Company valued the Senior Secured Promissory Note Warrants upon the date of issuance using a Monte-Carlo valuation model with a resulting fair value of $1.8 million and $1.9 million at February 1, 2021 and December 31, 2020, respectively. As the fair value of the Senior Secured Promissory Note Warrants exceeded the proceeds from the Senior Secured Promissory Notes, a loss of $0.7 million and $0.8 million was recognized at issuance on February 1, 2021 and December 17, 2020, respectively. (See Note 5 – Debt for further discussion). The Senior Secured Promissory Note Warrants will be revalued at fair value each reporting period in accordance with ASC 815. As of June 30, 2021, due to the reset features of these warrants, the Senior Secured Promissory Note Warrants were exercisable for 858,892 shares of the Company’s Common Stock at an exercise price of $3.88.

May 2021 Warrant

On May 20, 2021, pursuant to the terms of the Securities Purchase Agreement, Palisade Bio issued to the Investor a warrant to purchase 4,995,893 shares of Common Stock at a price of $4.70 per share (the “May 2021 Warrant”). The May 2021 Warrant is immediately exercisable and will have a term of five years from the date all of the shares underlying the May 2021 Warrant have been registered for resale. The exercise price and number of shares underlying the May 2021 Warrant were subject to adjustment, if any, following each of the 16th, 45th, 90th and 135th days following April 27, 2021. As of June 30, 2021, the May 2021 Warrant was exercisable for 5,303,568 shares of the Company’s Common Stock at an exercise price of $3.88 based on the most recent price-based reset.

The May 2021 Warrant did not meet the criteria for equity classification and will therefore be accounted for in accordance with ASC 815. The Company valued the May 2021 Warrant using a Monte-Carlo valuation model with a resulting fair value of $21.9 million. As the fair value of the May 2021 Warrant exceeded the proceeds from the Pre-Merger Financing, a loss of $1.9 million was recognized at issuance on April 27, 2021. The Senior Secured Promissory Note Warrants, and May 2021 Warrant will be revalued at fair value each reporting period in accordance with ASC 815.

The following table summarizes warrant activity for the six months ended June 30, 2021:

9. Equity Incentive Plans

In 2013, LBS adopted the 2013 Employee, Director, and Consultant Equity Incentive Plan (the “2013 Plan”). Upon the closing of the Merger, each outstanding, unexercised and unexpired LBS option under the 2013 Plan, whether vested or unvested, was assumed by the Company and converted into Palisade options and became exercisable by the holder of such option in accordance with its terms, with (i) the number of shares of common stock subject to each option multiplied by the Exchange Ratio and (ii) the per share exercise price upon the exercise of each option divided by the Exchange Ratio.

Seneca’s 2019 Equity Incentive Plan (the “2019 Plan”) was approved by Seneca’s stockholders on June 12, 2019. In April 2021, in connection with the Merger, all outstanding options under the 2019 Plan were cancelled.

In April 2021, in connection with the closing of the Merger, the Company’s stockholders approved the Company’s 2021 Equity Incentive Plan (the “2021 Plan”). The maximum number of shares of the Company’s Common Stock available for issuance under the 2021 Plan will not exceed 1,502,583 shares. In addition, such aggregate number of shares of Common Stock will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2022 and ending on (and including) January 1, 2031, in an amount equal to 1% of the total number of shares of Common Stock outstanding on December 31st of the preceding year; provided, however, that the board of directors may act prior to January 1st of a given year to provide that the increase for such year will be a lesser number of shares of Common Stock. As of June 30, 2021, no options have been issued under this plan. 

Additionally, in connection with the closing of the Merger, no further awards will be made under the 2013 Plan or the 2019 Plan.

The following table summarizes stock option activity and related information under the 2013 Plan and the 2021 Plan for the six months ended June 30, 2021:

The weighted-average grant date fair value of options granted during the six months ended June 30, 2021 was $0.15

As of June 30, 2021, the unrecognized compensation cost related to outstanding options was $0.6 million which was expected to be recognized over a weighted-average period of approximately 1.35 years.

The allocation of stock-based compensation for all stock awards is as follows (in thousands):

The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of stock option grants were as follows:

Risk-free interest rate.  The Company bases the risk-free interest rate assumption on observed interest rates appropriate for the expected term of the stock option grants.

Expected dividend yield.  The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends.

Expected volatility.  Due to the Company’s limited operating history and lack of company-specific historical or implied volatility, the expected volatility assumption is based on historical volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry.  

Expected term.  The expected term represents the period of time that options are expected to be outstanding. As the Company does not have sufficient historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its vesting period. 

RSU’s

The Company has granted restricted stock units (RSU’s) to certain employees and board members that entitle the holders to receive shares of common stock upon vesting and subject to certain restrictions regarding the exercise of the RSU’s. The grant date fair value of RSU’s is based upon the market price of the underlying common stock on the date of grant.

There were 4,000 RSU’s granted in the three months ended June 30, 2021 with a weighted average grant date fair value of $10.14. In connection with the closing of the Merger, these RSU’s became fully vested, and the Company recognized RSU vesting of $41,000 during the three months ended June 30, 2021.

At June 30, 2021, the Company had 8,817 outstanding RSU’s with a weighted average grant date fair value of $9.79 and a total intrinsic value of approximately $36,000. All RSU’s were fully vested and thus, there was no remaining unrecognized compensation expense at June 30, 2021.

No RSU’s were converted to common stock during the three months ended June 30, 2021.

Officer Settlement Agreements

The Company’s former Chief Development Officer was terminated in February 2021. As part of the separation package, the Company’s board of directors agreed to (i) accelerate vesting by four months for the former employee’s outstanding options and (ii) allow up to seven years from the termination date for the former employee to exercise all vested options. The Company concluded the actions taken by the Company resulted in modification accounting for the stock options. The Company determined the incremental fair value of the modified stock options was $225,000, which was expensed to research and development expenses in the condensed consolidated statements of operations during the six-month period ending June 30, 2021. 

10. License Agreements

License Agreements with the Regents of the University of California

The Company has entered into two license agreements, as amended, with the Regents of the University of California (“Regents”) for exclusive commercial rights to certain patents, technology and know-how. The technology is related to the Company’s products under development. The Regents are entitled to certain development and sales milestones.

In conjunction with the Co-Development and Distribution Agreement with Newsoara, the Company is obligated to pay the Regents royalties for its portion of the sublicense income equal to 30 percent of one-third of the upfront payment and milestone payment received. As of June 30, 2021 and December 31, 2020, a royalty payable of $104,000 and $125,000, respectively, was included in accounts payable.

11. Commitments and Contingencies

Facility Leases

The Company leases office space for its corporate headquarters under a non-cancelable facility operating lease for 4,911 square feet located in Carlsbad, California.

In July 2019, the Company entered into a facility operating lease (the “July 2019 Headquarter Lease”) at this location. The initial contractual term is three years commencing on August 1, 2019 and expiring on July 31, 2022. The Company has the option to renew this lease for an additional 36-month period at the prevailing market rent upon completion of the initial lease term. The Company has determined it is not reasonably certain that it will exercise this renewal option. Therefore, the lease term is determined to be a total of three years commencing on August 1, 2019 and expiring on July 31, 2022. Commencing in August 2019, the Company will pay contractual monthly lease payments of $16,000 for the first 12 months. The contractual monthly lease payments are subject to three-percent escalations at the first and second lease commencement anniversary.

The July 2019 Headquarter Lease is also subject to additional variable charges for common area maintenance, insurance, taxes and other operating costs. This additional variable rent expense is not estimable at lease inception. Therefore, it is excluded from the Company’s straight-line expense calculation at lease inception and is expensed as incurred. All fixed and variable lease payment amounts were recorded within general and administrative expenses on the statement of operations.

The right-of-use asset as defined by ASC 840 (“ROU Asset”) was $195,000 and $275,000 at June 30, 2021 and December 31, 2020, respectively. The Lease Liability was $201,000 and $280,000 at June 30, 2021 and December 31, 2020, respectively.

Office lease deferral of payments concession

On April 29, 2020, the Company entered into a rent deferral agreement with its landlord pursuant to the financial impacts of the COVID-19 pandemic on the Company. Under the terms of the arrangement, the Company would begin repaying any deferred balance in equal installments prorated over six months beginning October 2020. As of June 30, 2021, and December 31, 2020, deferred balances under this arrangement totaled $0 and $87,000, respectively, and are included in accounts payable on the Company’s condensed balance sheets. 

Accrued Employee Compensation

As of December 31, 2020, certain Company executives and employees voluntarily agreed to forgo a portion of their salary benefits and bonuses. As of December 31, 2020, $1.1 million was accrued related to these forgone salary benefits and bonuses which were paid upon the closing of the Merger.

Legal Proceedings

Between January 8 and March 3, 2021, nine individual lawsuits (captioned Sheridan v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00166 (S.D.N.Y. filed Jan. 8, 2021); Pirjamaat v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00172 (S.D.N.Y. filed Jan. 8, 2021); Johnson v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00310 (S.D.N.Y. filed Jan. 13, 2021); Mathews v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00242 (E.D.N.Y. filed Jan. 15, 2021); Pechal v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00585 (S.D.N.Y. filed Jan. 22, 2021); Curtis v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00292 (D. Del. Feb. 25, 2021); Valdez v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00980 (E.D. Pa. Mar. 1, 2021); Anderson v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00326 (D. Del. Mar. 2, 2021); and McIntire v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-01869 (S.D.N.Y. Mar. 3, 2021)) were filed in federal court by alleged Seneca Biopharma, Inc. (“Seneca”) stockholders challenging the proposed merger of Seneca and the Company (the “Merger”). The complaints name Seneca and Seneca’s board of directors as defendants. The Sheridan, Valdez, and Pirjamaat complaints name the Company as an additional defendant.

On March 18, 2021, Seneca filed an amendment to the Registration Statement on Form 8-K, which contained certain supplemental disclosures intended to moot the plaintiffs’ disclosure claims (the “Supplemental Disclosures”). Thereafter, all nine cases were voluntarily dismissed, and counsel for plaintiffs requested a mootness fee for the purported benefit conferred on Seneca’s stockholders in connection with the Supplemental Disclosures. The parties engaged in a negotiation and settled for a mootness fee of $216,000 in the second quarter of 2021.

From time to time, the Company may be involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. Management believes there are no claims or actions pending against the Company through June 30, 2021, which will have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position or results of operations. Litigation, however, is subject to inherent uncertainties, and an adverse result in such matters may arise from time to time that may harm the Company’s business.

Indemnification

In accordance with the Company’s amended and restated memorandum and articles of association, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving in such capacity. There have been no claims to date, and the Company has a directors and officers liability insurance policy that may enable it to recover a portion of any amounts paid for future claims.

12. Related Party Transactions

Unsecured Related Party Notes

The Yuma Regional Medical Center (“YRMC”) is an equity investor in the Company and is considered a related party. As discussed in Note 6, on October 16, 2020, the Company entered into an unsecured promissory note of $500,000 with YRMC. This unsecured promissory note was amended in May 2021. For details surrounding this promissory note, see Note 6.

Director stipends

Unpaid cash stipends owed to our directors for their annual board service are recorded on the Company’s condensed consolidated balance sheets within accrued liabilities. These liabilities were $85,000 and $759,000 as of June 30, 2021, and December 31, 2020, respectively.

13. Subsequent Events

The Company has evaluated subsequent events through the date of issuance of the condensed consolidated financial statements. 

Effective July 21, 2021 (the “Effective Date”), a holder of the Company’s common stock warrants that are subject to periodic price resets entered into a Waiver and Amendment Agreement with the Company (the “Waiver Agreement”). Pursuant to the Waiver Agreement, the Investor and the Company agreed to waive certain rights, waive the reset provisions with respect to the exercise price and number of shares subject to the outstanding warrants, eliminate certain financing restrictions, and accelerate registration rights for the shares underlying the warrants. As consideration for the foregoing, pursuant to the Waiver Agreement, the Company issued Investor an additional warrant to purchase up to 1,100,000 shares of the Company’s common stock (the “July 2021 Warrant”). Immediately prior to the Effective Date, the May 2021 Warrants and the Senior Secured Promissory Note Warrants were exercisable for an aggregate of 5,303,568 and 858,892 shares of common stock of the Company, respectively, each at an exercise price of $3.88 per share.  Pursuant to the Waiver Agreement, the holder agreed to waive the reset provisions in the outstanding warrants such that the number of shares and exercise price in effect immediately prior to the Effective Date (as described above) shall no longer be subject to price-based resets. The July 2021 Warrant is exercisable beginning six months following the date on which the underlying shares are registered for resale and for five years thereafter. The exercise price for the July Warrant is $3.631, subject to certain adjustments. 

Private Equity Investment

On August 19, 2021, YRMC purchased approximately 1.5 million unregistered common shares at a purchase price of $3.45 per share, for a total investment of approximately $5.2 million (the “YRMC Investment”). As part of the YRMC Investment, the Company also issued to YRMC a warrant to purchase 377,474 additional shares at an exercise price of $3.45 per share. The warrant is exercisable for five years.