ITEM 2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, 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. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions
to these forward-looking statements except as required by law.
We urge you to
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 “Seneca” refers to Seneca Biopharma, Inc. and its
subsidiary. Also, any reference to “common shares” or “common stock,” refers to our $.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. The information contained herein is current as of the date of this Quarterly Report (September 30, 2020), unless
another date is specified. On July 17, 2019, we completed a 1-for-20 reverse stock split of our common stock. All share and per
share information in this report have been adjusted to reflect the reverse stock split. We prepare our interim financial statements
in accordance with U.S. GAAP. Our financials and results of operations for the three- and nine-month periods ended September 30,
2020 are not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal
year ending December 31, 2020. The interim financial statements presented in this Quarterly Report as well as other information
relating to our Company contained in this Quarterly Report should be read in conjunction and together with the reports, statements
and information filed by us 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. Our MD&A is organized as follows:
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Executive
Overview — Discussion of our business and overall analysis of financial and
other items affecting the Company in order to provide context for the remainder of MD&A
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Trends
& Outlook — Discussion of what we view as the overall trends affecting
our business and overall strategy.
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Critical
Accounting Policies — Accounting policies that we believe are important to
understanding the assumptions and judgments incorporated in our reported financial results
and forecasts.
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Results
of Operations — Analysis of our financial results comparing the three- and
nine-month periods ended September 30, 2020 to the comparable period of 2019.
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Liquidity
and Capital Resources — An analysis of cash flows and discussion of our financial
condition and future liquidity needs.
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Executive Overview
Historically, we have been primarily focused
on the research and development of nervous system therapies based on our proprietary human neural stem cells and our small molecule
compounds. We are also undertaking an out-licensing/sale initiative.
In-licensing and Acquisition Strategy
In early 2019, we initiated an in-licensing
and/or acquisition strategy to expand our product pipeline. Our in-licensing strategy consists of evaluating novel therapeutics
that could synergistic to us with the goal of developing such candidates for commercialization. We believe that this element of
our corporate strategy could provide new opportunities for product development and diversify risks inherent in focusing on a limited
product portfolio and therapeutic areas, thus potentially increasing our probability of commercial success.
Out-Licensing and Sales Strategy
Historically, we have devoted our efforts and financial resources
primarily to the pre-clinical and clinical development of our small molecule compounds and our stem cell therapeutics. Based on
our review of existing clinical programs, including required capital and time to market, we have initiated an out-licensing and
sales strategy to find partners or interested parties to acquire or license NSI-566 (neural stem cell) and NSI-189 (small molecule
compounds) and their respective clinical and pre-clinical programs and development. As part of this strategy, we have begun winding
down our ongoing development efforts, pre-clinical and clinical stage studies.
NSI - 566 (Stem Cells)
The human central nervous system (CNS)
has limited capacity for regeneration following injury or the onset of disease. Traditional therapies have mainly focused on minimizing
the progression or symptoms of CNS disease or injury but have not been effective at repairing the underlying cause of such disease.
The goal of our cell therapy initiatives is the regeneration of neural function which has been lost to disease or injury. We believe
that neuroprotection, neuroregeneration, and/or bridging of damaged neural circuitry may be accomplished by implantation of NSI-566
at the injury site.
Our proprietary technology enables the
isolation and large-scale expansion of regionally specific neural stem cells from all areas of the developing human brain and
spinal cord and enables the generation of commercially useful quantities of highly characterized allogeneic human neural stem
cells that can be transplanted into patients to mitigate the consequences of CNS diseases or injury. We have developed and optimized
processes that allow us to manufacture these cells under current Good Manufacturing Practices (cGMP) compliant conditions as required
by the United States Food and Drug Administration or FDA for use in clinical trials and have generated cell banks which we believe
are sufficient to provide material to meet our requirements through completion of Phase 3 studies. We have exclusive licenses
for the manufacturing and use of the surgical platform and cannula that enable administration of the cells to the spinal cord
for treatment. Based on our preclinical data, we believe that our human neural stem cells will differentiate into neurons and
glia after grafting into the patient and will provide neuroprotection and stimulate neuroregeneration.
Our lead stem cell program is the spinal
cord-derived neural stem cell line, NSI-566, which is being tested for treatment of paralysis due to amyotrophic lateral sclerosis
(ALS, or Lou Gehrig’s disease), ischemic stroke, and spinal cord injury (SCI). To date we have completed Phase 1 and Phase
2 safety and dose escalation studies in subjects with ALS and a Phase 1 safety and dose escalation study in subjects with motor
deficits due to ischemic stroke. Each of these studies are currently in their long-term follow-up stage. In August 2018, we initiated
a non-GCP (Good Clinical Practice) compliant randomized, double-blind, placebo-controlled Phase 2 trial in subjects with chronic
ischemic stroke. We are also conducting a Phase 1 open label study to evaluate the safety of implanting NSI-566 in subjects with
chronic SCI.
Motor Deficits Due to Ischemic Stroke
Over 700,000 individuals suffer stroke
each year in the US, the majority of whom experience long-term functional deficits. Ischemic stroke, which accounts for about
75% of all strokes, occurs as a result of an obstruction within a vessel supplying blood to the brain. Post-stroke motor deficits
include paralysis or weakness in arms and legs and speech impairment and can be permanent. In the US, approximately 1.8 million
people live with paralysis due to stroke. We believe that NSI-566 may provide an effective treatment for restoring motor deficits
resulting from ischemic stroke by creating new circuitry in the area of injury and promoting regeneration of neural tissue damaged
by the ischemic event.
Amyotrophic Lateral Sclerosis
Amyotrophic lateral sclerosis (“ALS”)
is a disease of the nerve cells in the brain and spinal cord that control voluntary muscle movement. In 2018, the United States
Centers for Disease Control and Prevention reported that between 16,000 and 17,000 Americans have ALS, a prevalence of 5.2 cases
per 100,000 people. In ALS, nerve cells (motor neurons) waste away or die and can no longer send messages to muscles. This eventually
leads to muscle weakening, twitching, and an inability to move the arms, legs, and body. As the condition progresses, muscles
in the chest area stop working, making it difficult or impossible to breathe. NSI-566 is under development as a potential treatment
for ALS by providing cells designed to nurture and protect the patient’s remaining motor neurons. We received orphan designation
by the FDA for NSI-566 in ALS.
Chronic Spinal Cord Injury
SCI may result from trauma or disease
affecting the spinal cord, and is in many cases a long term, chronic and disabling neurological condition. In the US, it is estimated
that there are over17,000 new cases of SCI per year, with a prevalence of 250,000-368,000 people. Chronic spinal cord injury (cSCI)
refers to the window after recovery has plateaued, beginning approximately 6-12 months after injury. We believe that NSI-566 may
provide an effective treatment for cSCI by “bridging the gap” in the spinal cord circuitry created following traumatic
spinal cord injury and providing new cells to help transmit the signal from the brain to points at or below the point of injury.
Clinical Experience with NSI-566
Ischemic Stroke
In 2013, we commenced an open label, non-GCP
compliant, Phase I safety and dose escalation study to test transplantation of NSI-566 in human subjects for the treatment of
motor deficits due to ischemic stroke. The trial was conducted at BaYi Brain Hospital in Beijing, China and sponsored by Suzhou
Neuralstem, a wholly-owned subsidiary of Seneca in China. This study was intended to evaluate the safety of direct injections
of NSI-566 into the brain and to determine the maximum safe tolerated dose. We completed dosing the final cohort, for a total
of nine subjects, in March 2016. Subjects were monitored through a 24-month observational follow-up period. Delivery of NSI-566
cells in this population appeared to be safe and well tolerated at all doses. There were no deaths or serious adverse events related
to the treatment (Zhang et al., Stem Cells Transl Med 2019, 8(10):999-1007).
In August 2018, we initiated a non-GCP
compliant Phase 2 trial which is designed as a randomized, double-blind, placebo-controlled study. A total of 22 subjects were
randomized to receive NSI-566 stem cells (72 million cells) or sham-surgery at a 1:1 ratio. All operations were conducted at BaYi
Brain Hospital, the site of the Phase 1 study, and all follow-up assessments are being conducted by blinded, independent neurologists
at Beijing Rehabilitation Hospital. The final subject was enrolled in this study in August 2019.
Amyotrophic Lateral Sclerosis
In January 2010, we commenced a Phase
1 trial of NSI-566 in ALS at Emory University in Atlanta, Georgia. The purpose of the trial was to evaluate the safety of our
proposed treatment and procedure in a total of 15 subjects. The dosing of subjects in the Phase 1 trial, as designed, was completed
in August of 2012. We commenced a Phase 2 multisite clinical trial in subjects suffering from ALS in September of 2013 to further
test the feasibility and safety of the treatment and procedure, and maximum tolerated dose of cells. The Phase 2 dose escalation
trial enrolled 15 ambulatory subjects in five different dosing cohorts.
In June 2017, 24-month Phase 2 results
and combined Phase 1 and Phase 2 data from our ALS trials were presented at the International Society for Stem Cell Research (ISSCR)
Annual Meeting, Approaches to Treating ALS, Boston, Massachusetts, by principal investigator Eva Feldman, MD, PhD, Russell N.
DeJong Professor of Neurology and Director of Research of the ALS Clinic at the University of Michigan Health. The data showed
that the intraspinal transplantation of the cells was safe and well tolerated. Subjects from both the Phase 1 and Phase 2 continue
to be monitored for long-term follow-up evaluations.
Chronic Spinal Cord Injury
In 2013, we received authorization from
the FDA to commence a Phase 1 clinical trial to treat chronic spinal cord injury. The trial, which took place at The University
of California, San Diego or UCSD, commenced in 2014 and the first subject was treated in October 2014. The study enrolled four
AIS A classification thoracic spinal cord injury subjects (motor and sensory complete), one to two years’ post-injury at
the time of stem cell treatment. In January of 2016, we reported six-month follow-up data on all four subjects. The stem cell
treatment was found to be safe and well-tolerated by the subjects enrolled and there were no serious adverse events. In April
of 2018, we enrolled the first subject in the second cohort of the trial, which included patients with AIS-A complete, quadriplegic,
cervical injuries involving C5-C7 of their spinal cord. The final patient of this cohort was enrolled in March 2019.
In June 2018, the study investigators
published the results of the first cohort in the journal Cell Stem Cell. The results support the potential of transplanted NSI-566
to benefit patients with cSCI. At 18 months to 27 months after surgery, the analysis of motor and sensory function and electrophysiology
showed changes in three of the four patients after NSI-566 transplantation. There was no evidence of serious adverse events, suggesting
the procedure is well-tolerated.
Pre-Clinical Experience with NSI-566
and other candidates in our stem cell pipeline
Our preclinical studies with NSI-566 have
served to provide the foundation for our ongoing clinical trials by demonstrating performance and efficacy of this cell line in
animal models for ALS (Hefferan et al., PLoS One 2012, 7(8):e42614; Xu et al., Transplantation 2006, 82(7):865-875;
Xu et al., J Comp Neurol 2009, 514(4):297-309; Xu et al., Neurosci Lett 2011, 494(3):222-226; Yan et al., Stem
Cells 2006, 24(8):1976-1985), spinal cord injury (Cizkova et al., Neuroscience 2007, 147(2):546-560; Lu et al., Cell
2012, 150(6):1264-1273; van Gorp et al., Stem Cell Res Ther 2013, 4(3):57), and ischemic stroke (Tajiri et al., PLoS
One 2014, 9(3):e91408), and demonstrated safety in large animals (Raore et al., Spine 2011, 36(3):E164-E171; Usvald
et al., Cell Transplant 2010, 19(9):1103-1122). Additional studies involving NSI-566 or other proprietary cell lines are
directed at identifying new therapeutic candidates. These include: 1) an ongoing collaboration with investigators at the Miami
Project to Cure Paralysis to evaluate the application of NSI-566 in preclinical animal models for traumatic brain injury (Spurlock
et al., J Neurotrauma 2017, 34(11):1981-1995), and 2) evaluation of the ability of NSI-532.IGF1, a human neural stem cell
line engineered to express the trophic factor IGF1, to reverse the cognitive impact of neurodegeneration in a mouse model of Alzheimer’s
Disease (McGinley et al., Sci Rep 2018, 8(1):14776).
NSI-189 (Small Molecule Pharmaceutical
Compound)
NSI-189 represents a new chemical entity
that works through what appears to be a novel mechanism of action to stimulate neurogenesis of stem cells in the hippocampus,
as well as generation of new synapses. Because impaired hippocampal neurogenesis has been linked with depression, we conducted
clinical trials to evaluate the safety and effectiveness of NSI-189 in patients suffering from Major Depressive Disorder or MDD.
Major Depressive Disorder (MDD)
Major depressive disorder (also known
as recurrent depressive disorder, clinical depression, major depression, unipolar depression, or unipolar disorder) is a mental
disorder characterized by episodes of all-encompassing low mood accompanied by low self-esteem and loss of interest or pleasure
in normally enjoyable activities. According to the World Health Organization, MDD is the leading cause of disability in the U.S.
for persons age 15 to 44. In 2017, an estimated 17.3 million adults in the United States had at least one major depressive episode
in the prior year. This number represented 7.1% of all adults in the US. (https://www.nimh.nih.gov/health/statistics/prevalence/major-depression-among-adults.shtml).
Treatment of MDD is characterized by a high level of patient turnover due to low efficacy and high side effects. It is estimated
that 67% of patients will fail their first line therapy, 75% will then fail their second line prescription and 80% will then fail
their third line prescription (Rush et al., Control Clin Trials 2004, 25(1):119-142).
Clinical Experience with NSI-189
In 2011, we commenced a Phase 1A clinical
trial to evaluate the safety and pharmacokinetics of NSI-189 in healthy volunteers. The study enrolled 41 healthy male and female
subjects into a single ascending dose phase. No dose-limiting toxicity was observed, and no serious adverse events (AE) were noted.
This study was followed in 2012 with a Phase 1B randomized, double-blind, placebo-controlled, multiple-dose escalation study to
evaluate safety, tolerability, pharmacokinetic (PK), and pharmacodynamic (PD) effects of NSI-189 phosphate in subjects with MDD.
Trial data were presented in June 2014 at the American Society of Clinical Psychopharmacology Annual Meeting (ASCP) and published
in the journal Molecular Psychiatry (Fava et al., Mol Psychiatry 2016, 21(10):1372-1380). NSI-189 was well tolerated and
there were no serious adverse events.
In May of 2016, we initiated an exploratory
Phase 2 randomized, placebo-controlled, double-blind clinical trial for the treatment of MDD in an outpatient setting. The study
randomized 220 subjects into three cohorts: NSI-189 40 mg twice daily (BID), NSI-189 40 mg once daily (QD), or placebo, and was
conducted under the direction of study principal investigator (PI) Maurizio Fava, MD, Executive Vice Chair, Department of Psychiatry
and Executive Director, Clinical Trials Network and Institute, Massachusetts General Hospital. The study did not meet its primary
efficacy endpoint of a statistically significant reduction in depression symptoms on the Montgomery-Asberg Depression Rating Scale
(MADRS), compared to placebo. Both doses were well-tolerated with no serious adverse events reported.
On December 5, 2017, we presented an updated
analysis – including reports on all secondary scales – from the Phase 2 study of NSI-189 in MDD at the 56th American
College of Neuropsychopharmacology (ACNP) Annual Meeting. Three additional patient reported outcomes showed statistically significant
improvements in depressive and cognitive symptoms; all three patient reported outcome scales (SDQ, CPFQ, and QIDS-SR) NSI-189
reached statistical significance over placebo.
In addition, we presented data on NSI-189’s effect on
cognition as measured by computer-administered objective tests of cognition in the MDD patients. Two different test methods were
used: Cogstate® and CogScreen®. Cogstate did not yield statistically significant results. In CogScreen® test, NSI-189
40 mg showed statistically significant improvement (p<0.05) on objective measures of executive functioning, attention, working
memory, and memory.
NSI-189 appeared to be safe and well tolerated with no serious
adverse events. There were no clinically meaningful changes in body weight or BMI, or in sexual function inventory. The study
results have been published (Papakostas et al., Mol Psychiatry 2019, doi: 10.1038/s41380-018-0334-8).
Preclinical Experience with NSI-189
NSI-189 has shown promise in preclinical
studies evaluating its impact in animal models for a number of different disease indications, including:
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Ischemic stroke—in 2017 Tajiri and colleagues published a manuscript reporting that NSI-189 ameliorated motor and neurological deficits in a rodent model of ischemic stroke (Tajiri et al., J Cell Physiol 2017, 232(10):2731-2740)
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Radiation-induced cognitive dysfunction—in 2018 Allen and colleagues published a manuscript reporting that NSI-189 treatment could reverse cognitive deficits in rats caused by cranial irradiation, a model of cranial radiotherapy in the treatment of brain tumors (Allen et al., Radiat Res 2018, 189(4):345-353).
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Angelman syndrome—in 2019 Liu and colleagues published a manuscript reporting that NSI-189 reversed impairments in cognitive and motor deficits in a rodent model of Angelman syndrome and increased synaptic strength in sections of brains taken from these animals (Liu et al., Neuropharmacology 2019, 144:337-344). Angelman syndrome (AS) is a rare congenital genetic disorder caused by a lack of function in the UBE3A gene on the maternal 15th chromosome. It affects approximately one in 15,000 people - about 500,000 individuals globally. Symptoms of AS include developmental delay, lack of speech, seizures, and walking and balance disorders.
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Diabetes-associated peripheral neuropathy—in 2019 Jolivalt and colleagues published a manuscript reporting that NSI-189 mitigated or reversed disease-associated central and peripheral neuropathy in two rodent models of diabetes (Jolivalt et al., Diabetes 2019, (11):2143-2154). Improvements resulting from NSI-189 treatment were seen on multiple sensory and cognitive indices.
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A common theme emerging from these and
other preclinical studies has been the ability of NSI-189 to promote synaptogenesis as well as hippocampal neurogenesis, along
with its neuroprotective properties. Due to the favorable safety profile seen in the Phase I and II clinical studies of NSI-189
and the impact on cognitive measures observed in the Phase II trial in MDD patients, we feel that this asset may have potential
in treatment of one or more diseases including those described above. On August 9, 2018, NSI-189 received orphan designation for
the treatment of Angelman syndrome.
Our Technologies
Stem Cells
From a therapeutic
perspective, our stem cell-based technology enables the isolation and large-scale expansion of regionally specific, human neural
stem cells from all areas of the developing human brain and spinal cord thus enabling the generation of physiologically relevant
human neurons of different types. We believe that our stem cell technology will enable the replacement or supplementation of malfunctioning
or dead cells thereby creating a neurotrophic environment that offers protection to neural tissue as a way to treat disease and
injury. Many significant and currently untreatable human diseases arise from the loss or malfunction of specific cell types in
the body. Our focus is the development of effective methods to generate replacement cells from neural stem cells. We believe that
creating a neurotrophic environment by replacing damaged, malfunctioning or dead neural cells with fully functional ones may be
a useful therapeutic strategy in treating many diseases and conditions of the central nervous system.
Our Proprietary and Novel Screening Platform
Our human neural stem cell lines form
the foundation for functional cell-based assays used to screen for small molecule compounds that can impact biologically relevant
outcomes such as neurogenesis, synapse formation, and protection against toxic insults. We have developed over 300 unique stem
cell lines representing multiple different regions of the developing brain and spinal cord at multiple different time points in
development, enabling the generation of physiologically relevant human neural cells for screening, target validation, and mechanism-of-action
studies. This platform provides us with a unique and powerful tool to identify new chemical entities to treat a broad range of
nervous system conditions.
Small Molecule Pharmaceutical Compounds.
Utilizing our proprietary stem cell-based
screening capability, we have discovered and patented a series of small molecule compounds that includes NSI-189. We believe our
low molecular weight organic compounds can efficiently cross the blood/brain barrier. In mice, research indicated that the small
molecule compounds both stimulate neurogenesis of the hippocampus and increase its volume. We believe the small molecule compounds
may promote synaptogenesis and neurogenesis in the human hippocampus thereby potentially providing therapeutic benefits in indications
such as MDD and may also provide clinical benefit in indications such as Angelman Syndrome, Diabetic Neuropathy, Cognition, Stroke
and Radiation Induced Cognitive Deficit.
Research and Development
Historically, substantial resources have
been devoted to our research and development programs. Based upon our in-licensing and/or acquisition strategy as well as our
out-licensing strategy, we have significantly curtailed our research and development efforts. We are currently limiting these
efforts to winding down our ongoing pre-clinical and clinical activities, the maintenance of our intellectual property portfolios
and the evaluation of new technologies for in-licensing and/or acquisition. We anticipate that if successful in our in-licensing
and/or acquisition strategy, our research and development effort will increase as we commence development of such technologies
or assets.
Intellectual Property
We have developed and maintain a portfolio
of patents and patent applications that form the proprietary base for our research and development efforts. We own or exclusively
license 17 United States issued and pending patents and over 77 foreign issued and pending patents in the field of regenerative
medicine, related to our stem cell technologies as well as our small molecule compounds. Our issued patents have expiration dates
ranging from 2023 through 2038.
When appropriate, we seek patent protection
for inventions in our core technologies and in ancillary technologies that support our core technologies or which we otherwise
believe will provide us with a competitive advantage. We accomplish this by filing patent applications for discoveries we make,
either alone or in collaboration with scientific collaborators and strategic partners. Typically, although not always, we file
patent applications both in the United States and in select international markets. In addition, we plan to obtain licenses or
options to acquire licenses to patent filings from other individuals and organizations that we anticipate could be useful in advancing
our research, development and commercialization initiatives and our strategic business interests.
In addition to patenting our technologies,
we also rely on confidential and proprietary information and take active measures to control access to that information, including
the use of confidentiality agreements with our employees, consultants and certain of our contractors.
Our policy is to require our employees,
consultants and significant scientific collaborators and sponsored researchers to execute confidentiality and assignment of invention
agreements upon the commencement of an employment or consulting relationship with us. These agreements generally provide that
all confidential information developed or made known to the individual by us during the course of the individual's or entity’s
relationship with us, is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case
of employees and consultants, the agreements generally provide that all inventions conceived by the individual or entity in the
course of rendering services to us shall be our exclusive property.
Employees
As of September 30, 2020, we had seven
(7) full-time employees. We also use the services of several outside consultants in business and scientific matters.
Our Corporate Information
We were incorporated in Delaware in 2001.
On October 28, 2019, we changed our name from Neuralstem, Inc. to Seneca Biopharma, Inc. Our principal executive offices are located
at 20271 Goldenrod Lane, Germantown, Maryland 20876, and our telephone number is (301) 366-4841. Our website is located at www.senecabio.com.
We have not incorporated by reference
into this report the information in, or that can be accessed through, our website and you should not consider it to be a part
of this report.
Trends &Outlook
Revenue
We generated no revenues from the sale
of our proposed therapies for any of the periods presented.
We have historically generated minimal
revenue from the licensing of our intellectual property to third parties as well as payments under a settlement agreement.
On a long-term basis, we anticipate that
our revenue will be derived primarily from licensing fees and sales of our products. Because we are at such an early stage in
the clinical trials process, we are not yet able to accurately predict when we will have a product ready for commercialization,
if ever.
Research and Development Expenses
Our research and development expenses
have consisted primarily of clinical trial expenses, including payments to clinical trial sites that perform our clinical trials
and clinical research organizations (CROs) that help us manage our clinical trials, manufacturing of small molecule drugs and
stem cells for both human clinical trials and for pre-clinical studies and research, personnel costs for research and clinical
personnel, and other costs including research supplies and facilities. Our 2019 research and development expenses reflect the
costs of the technical evaluation of our internal programs as well as the evaluation of certain potential assets we considered
for acquisition.
We focus on the development of therapies
with potential uses in multiple indications and use employee and infrastructure resources across several projects. Accordingly,
many of our costs are not attributable to a specifically identified product and we do not account for internal research and development
costs on a project-by-project basis.
We expect that research and development
expenses, which include expenses related to our ongoing ischemic stroke clinical trial, will decrease in the future as we seek
partners to further the clinical development of our therapeutic programs. This could change if we are successful in our in-licensing
and acquisition strategy in which we are evaluating novel therapeutics, our research and development expenditures will be primarily
devoted to advancing the acquired programs towards or through later stage clinical trials.
We have a wholly-owned subsidiary in the
People’s Republic of China that primarily oversees our current clinical trial to treat motor deficits due to ischemic stroke.
In August 2017, we were awarded a Small
Business Innovation Research (“SBIR”) grant by the National Institutes of Health (“NIH”) to evaluate in
preclinical studies the potential of NSI-189, a novel small molecule compound, for the prevention and treatment of diabetic neuropathy.
The award of approximately $1 million was to be paid over a two-year period, if certain conditions are met at mid-term. The award
performance period was extended through July 31, 2020 to complete the data collection and report writing. The grant balance was
approximately $50,000 at September 30, 2020, we anticipate receiving this amount over the extended performance period. In June
2018, we were awarded a Department of Defense grant related to our efforts involving stem cell therapy for severe traumatic brain
injury. The award of approximately $150,000 was received in 2019. The proceeds from the awards are recorded as a reduction of
our gross research and development expenses, based on the terms and conditions of the grants.
General and Administrative Expenses
General and administrative expenses are
primarily comprised of salaries, benefits and other costs associated with our operations including, finance, human resources,
information technology, public relations and costs associated with maintaining a public company listing, legal, audit and compliance
fees, facilities and other external general and administrative services.
Going Concern
Our auditors’
report issued in connection with our December 31, 2019 financial statements expressed an opinion that due to recurring losses
from operations and an accumulated deficit, there is substantial doubt about our ability to continue as a going concern. Our current
cash level raises substantial doubt about our ability to continue as a going concern substantially beyond the end of 2021. If
we do not obtain additional capital by such time, we may no longer be able to continue as a going concern and may cease operation
or seek bankruptcy protection.
COVID-19
The COVID-19
pandemic has resulted in quarantines, restrictions on travel and other business and economic disruptions. We have evaluated the
impact of the pandemic on our 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. Given our present level of operations and liquidity, along with our planned and ongoing clinical
trials, we believe it is still too early to predict whether COVID-19 will have a material impact on our short-term operations.
From a medium to long term perspective, if we were to initiate additional clinical trials or complete an in-licensing transaction,
we may be required to raise additional capital and engagement with third party vendors, CROs and CMOs. If the present curtailment
of business activities continues, we may find it difficult to engage such vendors and the cost of such trials, as well as the
time to conduct them, may greatly increase as a result of the inefficiencies inherent in virtual meetings, increases in general
costs and a decrease in the number of qualified vendors. Additionally, the pandemic will likely impact our ability to raise additional
capital with which to fund our operations. Although still too early to predict, we believe the mid and long-term effects of COVID-19
may materially impact our business.
Critical Accounting
Policies
Our unaudited
consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated
financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein
describes the significant accounting policies used in the preparation of the condensed consolidated financial statements. Certain
of these significant accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting
policy is defined as one that is both material to the presentation of our condensed consolidated financial statements and requires
management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and
results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to
make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could
reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial
condition or results of operations.
Estimates and
assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience
and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change
as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically
been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of
our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management
believes that our condensed consolidated financial statements are fairly stated in accordance with U.S. GAAP and present a meaningful
presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect
our more significant estimates and assumptions used in the preparation of our consolidated financial statements:
Use of
Estimates - The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The condensed
consolidated financial statements include significant estimates for the expected economic life and value of our licensed technology
and related patents, our net operating loss and related valuation allowance for tax purposes, the fair value of our liability
classified warrants and our share-based compensation related to employees and directors, consultants and advisors, among other
things. Because of the use of estimates inherent in the financial reporting process, actual results could differ significantly
from those estimates.
Long Lived
Intangible Assets - Our long-lived intangible assets consist of our intellectual property patents including primarily
legal fees associated with the filings and in defense of our patents. The assets are amortized on a straight-line basis over the
expected useful life which we define as ending on the expiration of the patent group. These assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. We assess this
recoverability by comparing the carrying amount of the asset to the estimated undiscounted future cash flows to be generated by
the asset. If an asset is deemed to be impaired, we estimate the impairment loss by determining the excess of the asset’s
carrying amount over the estimated fair value. These determinations use assumptions that are highly subjective and include a high
degree of uncertainty. During the nine-month periods ended September 30, 2020 and 2019, no impairment losses were recognized.
Fair Value Measurements -
The fair value of our short-term financial instruments, which primarily include cash and cash equivalents, trade and other receivables,
accounts payable and accrued expenses, approximate their carrying values due to their short maturities. The fair values of our
liability classified warrants are estimated using Level 3 unobservable inputs.
Share-Based Compensation
- We account for share-based compensation at fair value; accordingly, we expense the estimated fair value of share-based awards
over the requisite service period. Share-based compensation cost for stock options and warrants is generally determined at the
grant date using an option pricing model. Option pricing models require us to make assumptions, including expected volatility
and expected term of the options. If any of the assumptions we use in the model were to significantly change, share-based compensation
expense may be materially different. Share-based compensation cost for restricted stock and restricted stock units is generally
determined at the grant date based on the closing price of our common stock on that date. The value of the award is generally
recognized as expense on a straight-line basis over the requisite service period.
RESULTS OF
OPERATIONS
Comparison of Three Months September
30, 2020 and 2019
Revenue
During each of
the three months ended September 30, 2020 and 2019 we recognized revenue of $2,500 related to ongoing fees pursuant to certain
licenses of our intellectual property to third parties.
Operating Expenses
Operating expenses for the three months
ended September 30 were as follows:
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
|
2020
|
|
2019
|
|
$
|
|
%
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
466,014
|
|
|
$
|
825,486
|
|
|
$
|
(359,472
|
)
|
|
|
(44
|
%)
|
General and administrative expenses
|
|
|
1,880,122
|
|
|
|
1,301,189
|
|
|
|
578,933
|
|
|
|
44
|
%
|
Total operating expenses
|
|
$
|
2,346,136
|
|
|
$
|
2,126,675
|
|
|
$
|
219,461
|
|
|
|
10
|
%
|
Research and Development Expenses
The decrease
of approximately $359,000 or 44% in research and development expenses was primarily attributable to the continued wind down of
clinical activities for our stem cell and small molecule programs in 2020. In 2019, we incurred expenses related to external consulting
services engaged in the technical evaluation of our internal programs as well as the evaluation of certain potential assets we
considered for acquisition. We expect that research and development expenses, which include expenses related to our ongoing stroke
clinical trial, will decrease in the future as we seek partners to further the clinical development. This could change if we are
successful in our in-licensing and acquisition strategy in which we are evaluating novel therapeutics, our research and development
expenditures will be primarily devoted to advancing the acquired programs towards or through later stage clinical trials. As disclosed
previously in the report (see Note 7), the Company is in negotiations with an interested third party for the sale of all of its
assets and liabilities related to its neural stem cell program (NSI-566). Although the Company believes the sale will be consummated
and the parties have conceptually agreed on terms, no binding agreements have been entered into and there can be no assurance
that the sale will ultimately be consummated or on what terms and conditions.
General and Administrative Expenses
G&A
expenses increased approximately $579,000 or 44%. As noted above, we have shifted the Company’s strategy and focus from
the development of the stem cell assets and initiated an out-licensing effort to partner these programs while seeking to in
license or acquire novel therapeutics with the potential to be complimentary to our current technologies or that could
benefit from our development experience with the goal of developing such technologies for commercialization. Associated with
this shift in strategic focus our G&A expenses in the 2020 period reflect an enhanced internal management structure
including the engagement of two executive officers.
Other income (expense)
Other income
(expense), net totaled approximately $22,000 and $361,000 for the three months ended September 30, 2020 and 2019, respectively.
Other income,
net in 2020 consisted primarily of non-cash gains related to the fair value adjustment of our liability classified stock purchase
warrants and interest income partially offset by interest expense.
Other income, net in 2019 consisted
primarily of approximately $321,000 of non-cash gains related to the fair value adjustment of our liability classified stock purchase
warrants, $27,000 of sublease income and $15,000 of interest income.
Comparison of Nine Months Ended
September 30, 2020 and 2019
Revenue
During each of
the nine months ended September 30, 2020 and 2019 we recognized revenue of $7,500 related to ongoing fees pursuant to certain
licenses of our intellectual property to third parties. In addition, during the nine months ended September 30, 2020 and 2019
we recognized $3,500 and $5,400 of royalty revenue related to a settlement of a prior patent infringement case.
Operating Expenses
Operating expenses for the nine months
ended September 30 were as follows:
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
|
|
|
2020
|
|
2019
|
|
$
|
|
%
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
1,608,935
|
|
|
$
|
3,294,402
|
|
|
$
|
(1,685,467
|
)
|
|
|
(51
|
%)
|
General and administrative expenses
|
|
|
4,683,539
|
|
|
|
3,217,613
|
|
|
|
1,465,926
|
|
|
|
46
|
%
|
Total operating expenses
|
|
$
|
6,292,474
|
|
|
$
|
6,512,015
|
|
|
$
|
(219,541
|
)
|
|
|
(3
|
%)
|
Research and Development Expenses
The decrease of approximately $1,685,000
or 51% in research and development expenses was primarily attributable to the continued wind down of clinical activities for our
stem cell and small molecule programs in 2020. In 2019, we incurred expenses related to external consulting services engaged in
the technical evaluation of our internal programs as well as the evaluation of certain potential assets we considered for acquisition.
We expect that research and development expenses, which include expenses related to our ongoing stroke clinical trial, will decrease
in the future as we seek partners to further the clinical development. This could change if we are successful in our in-licensing
and acquisition strategy in which we are evaluating novel therapeutics, our research and development expenditures will be primarily
devoted to advancing the acquired programs towards or through later stage clinical trials.
General and
Administrative Expenses
G&A
expenses increased approximately $1,466,000 or 46%. As noted above, we have shifted the Company’s strategy and focus
from the development of the stem cell assets and initiated an out-licensing effort to partner these programs while seeking to
in license or acquire novel therapeutics with the potential to be complimentary to our current technologies or that could
benefit from our development experience with the goal of developing such technologies for commercialization. Associated with
this shift in strategic focus our G&A expenses in the 2020 period reflect an enhanced internal management structure
including individual consultants in key roles as well as the engagement of two executive officers in the second quarter of
2020.
Other income (expense)
Other income
(expense), net totaled approximately ($5,567,000) and $185,000 for the nine months ended September 30, 2020 and 2019, respectively.
Other expense,
net in 2020 consisted primarily of a non-cash warrant inducement charge of approximately $5,620,000 partially offset by $40,000
of non-cash gains related to the fair value adjustment of our liability classified warrants.
Other income,
net in 2019 consisted primarily of approximately a $417,000 of non-cash gain related to the fair value adjustment of our liability
classified stock purchase warrants, $86,000 of sublease income and $55,000 of interest income partially offset by a $368,000 loss
related to the write-off of a related party receivable.
Liquidity and
Capital Resources
Financial Condition
Since our inception, we have
financed our operations through the sales of our securities, issuance of long-term debt, the exercise of investor warrants, and
to a lesser degree from grants and research contracts as well as the licensing of our intellectual property to third parties.
We had cash and
cash equivalents of approximately $12.7 million at September 30, 2020. In January 2020, we raised approximately $6.7 million of
net proceeds from the exercise of certain common stock purchase warrants pursuant to an inducement offer and in May 2020, we raised
approximately $4.4 million of net proceeds through the sale of our common stock as well as approximately $3.5 million from the
exercise of warrants issued in the January inducement offer.
Based on our expected operating
cash requirements, we anticipate our current cash and investments on hand will be sufficient to fund our operations, for more
than 12 months after this filing. However, we will require additional capital to execute our acquisition and/or in-licensing strategy
as well as out-licensing initiatives and to fund our operations. Despite our ability to secure capital in the past, there can
be no assurance that additional equity or debt financing will be available to us when needed or that we may be able to secure
funding from any other sources. Consequently, as explained in Note 1 to our condensed consolidated financial statements, management
has determined that there is substantial doubt about our ability to continue as a going concern.
We will require additional capital
to pursue our acquisition and in-licensing strategy and continue our pre-clinical and clinical development plans. To continue
to fund our operations and the development of our product candidates we anticipate raising additional cash through the private
and public sales of equity or debt securities, collaborative arrangements, licensing agreements, asset sales or a combination
thereof. Although management believes that such funding sources will be available, there can be no assurance that any such collaborative
arrangement will be entered into or that financing will be available to us when needed in order to allow us to continue our operations,
or if available, on terms acceptable to us. If we do not raise sufficient funds in a timely manner, we may be forced to curtail
operations, delay or stop our ongoing clinical trials, cease operations altogether, or file for bankruptcy. We currently do not
have commitments for future funding from any source. We cannot assure you that we will be able to secure additional capital or
that the expected income will materialize. Several factors will affect our ability to raise additional funding, including, but
not limited to market conditions, interest rates and, more specifically, our progress in our exploratory, preclinical and future
clinical development programs.
Cash Flows – 2020
compared to 2019
|
|
Nine Months ended September 30,
|
|
Favorable (Unfavorable)
|
|
|
2020
|
|
2019
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(6,830,548
|
)
|
|
$
|
(5,206,748
|
)
|
|
$
|
(1,623,800
|
)
|
|
|
(31
|
%)
|
Net cash provided by investing activities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
–
|
%
|
Net cash provided by financing activities
|
|
$
|
(14,465,916
|
)
|
|
$
|
6,726,232
|
|
|
$
|
(21,192,148
|
)
|
|
|
315
|
%
|
Net Cash Used in Operating Activities
Cash used in
operating activities for the nine months ended September 30, 2020, reflects our $11,848,000 loss for the period adjusted for certain
non-cash items including: (a) $5,620,000 of expense related to our warrant inducement transaction, (ii) $1,169,000 of net cash
inflows related to changes in operating assets and liabilities, (iii) $524,000 of share-based compensation.
Net Cash (Used in) Provided
by Investing Activities
There were no
investing activities in either of the nine months ended September 30, 2020 or 2019.
Net Cash Used in by Financing
Activities
For the nine
months ended September 30, 2020, cash provided by financing activities consisted of $11.2 million of net proceeds generated from
the sale of our common stock and and $3.5 million of net proceeds from the exercise of warrants partially offset by payments under
our short-term debt used to finance insurance premiums.
For the nine
months ended September 30, 2019, cash used in financing activities consisted of $6.6 million of net proceeds generated from the
sale of our common stock and warrants coupled with borrowings and payments under our short-term debt used to finance insurance
premiums.
Future
Liquidity and Needs
We have incurred
significant operating losses and negative cash flows since inception. We have not been able to generate significant revenues nor
achieved profitability and may not be able to do so in the future. We do not expect to be profitable in the next several years,
but rather expect to incur additional operating losses. We have limited liquidity and capital resources and must obtain significant
additional capital resources in order to sustain our product development efforts, for acquisition of technologies and intellectual
property rights, for preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals, acquisition
of capital equipment, laboratory and office facilities, establishment of production capabilities, for general and administrative
expenses and other working capital requirements. We have relied on cash balances and the proceeds from the offering of our securities,
exercise of outstanding warrants and grants to fund our operations.
We intend to
pursue opportunities to obtain additional funds through the out-license or sale of our existing clinical programs in addition
to financing in the future through the sale of our securities and additional research grants. On September 23, 2020, our shelf
registration statement (Registration No. 333-248848), which replaced our prior expiring shelf registration statement, was declared
effective by the SEC. Under such replacement shelf registration statement, we can offer and sell up to $100 million of our securities.
Through September 30, 2020 we have not sold any securities under this registration statement. Based on our current market capitalization,
we are limited to the use of our shelf registration statement by Item I.B.6 of Form S-3.
In July 2019, we completed a firm commitment
underwritten public offering of our securities. The offering resulted in net proceeds of approximately $6.6 million, after deducting
underwriting discounts and commissions and offering expenses. The securities in this offering were sold pursuant to a registration
statement on Form S-1 (file no. 333- 232273).
In January 2020, pursuant to the terms
of an inducement offer, certain holders of 5,555,554 of our common stock purchase warrants exercised their warrants at an exercise
price of $1.36 per share generating approximately $6.7 million of net proceeds.
In May 2020, we completed an offering
5,000,000 shares of our common stock. The offering resulted in net proceeds of approximately $4.4 million, after deducting placement
agent discounts and commissions and offering expenses. The common stock was offered and sold pursuant to our shelf registration
statement on Form S-3 (file no. 333-218608).
In May 2020, we received approximately
$3.5 million from the exercise of 2,871,296 outstanding common stock warrants at an exercise price of $1.23 per share.
As explained
in the notes to our condensed consolidated financial statements, there continues to be substantial doubt as to our ability to
continue as a going concern. The source, timing and availability of any future financing will depend principally upon market conditions,
interest rates and, more specifically, current and future progress in our exploratory, preclinical and clinical development programs.
Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us, among
other things, to delay, scale back or eliminate some or all of our research and product development programs, planned clinical
trials, and/or our capital expenditures or to license our potential products or technologies to third parties.