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, 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.
These factors include, but are not limited to, risks relating to our: ability to conduct and obtain successful results from ongoing
pre-clinical and clinical trials, commercialize our technology, obtain regulatory approval for our product candidates, contract
with third parties to adequately test and manufacture our proposed therapeutic products, protect our intellectual property rights
and obtain additional financing to continue our operations. 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
(June 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 six-month
periods ended June 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 six-month periods ended June 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. In early 2019, we
also began an in-licensing and acquisition strategy by which we are evaluating novel therapeutics that could benefit from our development
experience with the goal of developing such technologies for commercialization as well as an out-licensing initiative 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.
In-licensing and Acquisition Strategy
We have initiated an in-licensing and/or
acquisition strategy to expand our product pipeline. Our in-licensing strategy consists of evaluating novel therapeutics that could
benefit from our development experience 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.
Existing Clinical Programs
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. At this
time we are focused on the out-licensing or sale of these assets as well as winding down our ongoing development efforts.
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 is taking 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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1.
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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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2.
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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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3.
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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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4.
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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 June 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 consist primarily of clinical trial expenses, including payments to clinical trial sites that
perform our clinical trials and clinical research organizations (CROs) that help us manage our clinical trials, manufacturing of
small molecule drugs and stem cells for both human clinical trials and for pre-clinical studies and research, personnel costs for
research and clinical personnel, and other costs including research supplies and facilities. Our 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 will 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 $51,000 at June 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 business
shutdowns continue, 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 has had a negative impact on the capital markets and accordingly,
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 six-month periods ended June 30, 2020 and 2019, no significant 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 June 30, 2020 and 2019
Revenue
During
each of the three months ended June 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. In addition, during the three months ended June 30, 2019, we recognized
$5,400 of royalty revenue related to a settlement of a prior patent infringement case.
Operating
Expenses
Operating
expenses for the three months ended June 30 were as follows:
|
|
Three Months Ended June 30,
|
|
Increase (Decrease)
|
|
|
2020
|
|
2019
|
|
$
|
|
%
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
446,032
|
|
|
$
|
954,453
|
|
|
$
|
(508,421
|
)
|
|
|
(53
|
%)
|
General and administrative expenses
|
|
|
1,503,822
|
|
|
|
971,822
|
|
|
|
532,000
|
|
|
|
55
|
%
|
Total operating expenses
|
|
$
|
1,949,854
|
|
|
$
|
1,926,275
|
|
|
$
|
23,579
|
|
|
|
1
|
%
|
Research and Development Expenses
The
decrease of approximately $508,000 or 53% 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
$532,000 or 55%. 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 ($4,000) and $481,000 for the three months ended June 30, 2020 and 2019, respectively.
Other
income, net in 2020 consisted primarily of interest income partially offset by interest expense.
Other
income, net in 2019 consisted primarily of approximately $436,000 of non-cash gains related to the fair value adjustment of our
liability classified stock purchase warrants, $35,000 of sublease income and $11,000 of interest income.
Comparison
of Six Months Ended June 30, 2020 and 2019
Revenue
During
each of the six months ended June 30, 2020 and 2019 we recognized revenue of $5,000 related to ongoing fees pursuant to certain
licenses of our intellectual property to third parties. In addition, during the six months ended June 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 six months ended June 30 were as follows:
|
|
Six Months Ended June 30,
|
|
Increase (Decrease)
|
|
|
2020
|
|
2019
|
|
$
|
|
%
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
$
|
1,142,921
|
|
|
$
|
2,468,916
|
|
|
$
|
(1,325,995
|
)
|
|
|
(54
|
%)
|
General and administrative expenses
|
|
|
2,803,417
|
|
|
|
1,916,424
|
|
|
|
886,993
|
|
|
|
46
|
%
|
Total operating expenses
|
|
$
|
3,946,338
|
|
|
$
|
4,385,340
|
|
|
$
|
(439,002
|
)
|
|
|
(10
|
%)
|
Research and Development Expenses
The
decrease of approximately $1,326,000 or 54% 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
$887,000 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
expense, net totaled approximately ($5,588,000) and ($176,000) for the six months ended June 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
$22,000 of non-cash gains related to the fair value adjustment of our liability classified warrants.
Other
expense, net in 2019 consisted primarily of approximately a $368,000 loss related to the write-off of a related party receivable
partially offset by a $96,000 of non-cash gain related to the fair value adjustment of our liability classified stock purchase
warrants, $59,000 of sublease income and $40,000 of interest income.
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 $16 million at June 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
|
|
Six Months ended June 30,
|
|
Favorable (Unfavorable)
|
|
|
2020
|
|
2019
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(3,745,172
|
)
|
|
$
|
(3,309,508
|
)
|
|
$
|
(435,664
|
)
|
|
|
(13
|
%)
|
Net cash provided by investing activities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
%
|
Net cash provided by financing activities
|
|
$
|
14,465,916
|
|
|
$
|
(195,869
|
)
|
|
$
|
14,661,785
|
|
|
|
7486
|
%
|
Net
Cash Used in Operating Activities
Cash
used in operating activities for the six months ended June 30, 2020, of approximately $3,745,000 reflects our $9,526,000 loss for
the period adjusted for certain non-cash items including: (a) $5,620,000 of expense related to our warrant inducement transaction,
(ii) $192,000 of net cash inflows related to changes in operating assets and liabilities, (iii) $317,000 of share-based compensation.
Net
Cash (Used in) Provided by Investing Activities
There
were no investing activities in either of the six months ended June 30, 2020 or 2019.
Net
Cash Used in by Financing Activities
For
the six months ended June 30, 2020, cash provided by financing activities consisted of $10.3 million of net proceeds generated
from the exercise of warrants and $4.4 million of net proceeds from the sale of our common stock partially offset by payments under
our short-term debt used to finance insurance premiums.
For
the six months ended June 30, 2019, cash used in financing activities consisted solely of payments on 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 June 23, 2017, our shelf
registration statement (Registration No. 333-218608), 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 June 30, 2020 we have sold approximately $17.6 million of securities under our shelf 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, if we are not able to raise additional funds when needed,
there would continue 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.