Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
Investing
in our common stock involves a high degree of risk. We have described below a number of uncertainties and risks which, in addition
to uncertainties and risks presented elsewhere in this Quarterly Report, may adversely affect our business, operating results and
financial condition. The uncertainties and risks enumerated below as well as those presented elsewhere in this Quarterly
Report should be considered carefully when evaluating our company, business and the value of our securities.
Risks Related to the Merger
The Exchange Ratio is adjustable based on our net cash at
closing and LBS’s Pre-Merger Financing, so the consideration at the closing of the Merger may have a greater or lesser value
than at the time the Merger Agreement was signed.
The relative proportion of the combined company
that our stockholders will own when the Merger closes will be based on the valuations of Seneca and LBS as negotiated by the parties
and as specified in the Merger Agreement. Assuming a $22.5 million investment in LBS prior to the consummation of the Merger (“Pre-Merger
Financing”), the outstanding equity of Seneca, as calculated on an adjusted fully diluted treasury stock method basis and
after giving effect to such financing, is expected to be held as follows: equity holders of former LBS capital stock (prior to
the Pre-Merger Financing) will hold approximately 25.2%; the investor in the Pre-Merger Financing will hold approximately 16.2%;
pre-Merger Seneca equity holders will hold approximately 26.2%; and approximately 32.4% of the shares will be held in escrow to
be distributed to the investor in the Pre-Merger Financing, or to be distributed to LBS Pre-Merger Financing equity holders. These
estimates are based on the anticipated Exchange Ratio and are subject to adjustment as provided in the Merger Agreement. Prior
to the consummation of the Merger, the Exchange Ratio at the closing of the Merger may be subject to either an upward or downward
adjustment based on: (i) Seneca’s net cash, or (ii) the proceeds of the Pre-Merger Financing.
Failure to complete the Merger may result in us paying a termination
fee to LBS and could harm our common stock price and our future business and operations.
If the Merger is not completed, each of Seneca
and LBS is subject to the following risks:
·
upon termination of the Merger Agreement, LBS may be required to pay Seneca a termination fee of $1.5 million, under certain circumstances, and/or up to $250,000 in expense reimbursements;
·
upon termination of the Merger Agreement, Seneca may be required to pay LBS a termination fee of $1.5 million, under certain circumstances, and/or up to $250,000 in expense reimbursements;
·
the parties will have incurred significant expenses related to the Merger, such as legal and accounting fees, which must be paid even if the Merger is not completed; and
·
Seneca may be forced to cease its operations, dissolve and liquidate its assets.
In addition, if the Merger Agreement is terminated
and our board of directors determines to seek another business combination, there can be no assurance that we will be able to find
a partner willing to provide equivalent or more attractive consideration than the consideration to be provided in the Merger.
If the conditions to the closing of the Merger are not met,
the Merger may not occur.
Even if the change of control and related share
issuance are approved by our stockholders, specified conditions must be satisfied or waived to complete the Merger. We cannot assure
you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Merger may not occur
or will be delayed, we may lose some or all the intended benefits of the Merger.
The Merger may be completed even though material adverse changes
may result from the announcement of the Merger, industry-wide changes and/or other causes.
In general, either Seneca or LBS can refuse
to complete the Merger if there is a material adverse change affecting the other party between the date of the Merger Agreement,
and the closing of the Merger. However, certain types of changes do not permit either party to refuse to complete the Merger, even
if such change could be said to have a material adverse effect on Seneca or LBS, including:
·
general business or economic conditions generally affecting the industry in which LBS or Seneca operate;
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·
the taking of any action, or the failure to take any action, by the either party that is required to comply with the terms of Merger Agreement;
·
any natural disaster or epidemics, pandemics (including COVID-19 or other outbreaks of diseases or quarantine restrictions), or other force majeure events, or any act or threat of terrorism or war, any armed hostilities or terrorist activities; or
·
any change in, or any compliance with or action taken for the purpose of complying with, any law or GAAP (or interpretations of any law or GAAP).
If adverse changes occur and Seneca and LBS
still complete the Merger, the stock price of the combined company following the closing of the Merger may suffer. This in turn
may reduce the value of the Merger to the stockholders of Seneca, LBS or both.
Some executive officers and directors of Seneca and LBS have
interests in the Merger that are different from the respective stockholders of Seneca and LBS and that may influence them to support
or approve the Merger without regard to the interests of the respective stockholders of Seneca and LBS.
Some officers and directors of Seneca and LBS
are parties to arrangements that provide them with interests in the Merger that are different from the respective stockholders
of Seneca and LBS, including, among others, service as an officer or director of the combined company following the closing of
the Merger, severance benefits, the acceleration of equity award vesting, and continued indemnification.
Based on the terms of their respective agreements,
Seneca’s recently terminated executive officers may be entitled to receive a total value of $3,425,613 (collectively, not
individually) in connection with the consummation of the Merger, the associated termination of their employment from Seneca and
the cancelation of their stock options. Additionally, Seneca’s recently terminated senior vice president of research and
development will be entitled to receive a total value of $865,438. In addition, in connection with the Merger, the executive officers
of LBS entered into new employment agreements and are entitled to receive cash bonuses, certain executive officers are entitled
to receive equity grants, and members of the LBS Board are entitled to receive cash bonuses.
The market price of Seneca Common Stock following the Merger
may decline as a result of the Merger.
The market price of Seneca Common Stock may
decline as a result of the Merger for a number of reasons, including if:
·
investors react negatively to the prospects of the combined company’s business and prospects following the closing of the Merger;
·
the effect of the Merger on the combined company’s business and prospects following the closing of the Merger is not consistent with the expectations of financial or industry analysts; or
·
the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by stockholders or financial or industry analysts.
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LBS and Seneca securityholders will have a reduced ownership
and voting interest in, and will exercise less influence over the management of, the combined company following the closing of
the Merger as compared to their current ownership and voting interest in the respective companies.
After the completion of the Merger, the current
securityholders of LBS and Seneca will own a smaller percentage of the combined company than their ownership in their respective
companies prior to the Merger. Immediately after the Merger, it is currently estimated that the former LBS equity holders immediately
before the Merger (including the investor in the Pre-Merger Financing) are expected to hold approximately 73.8% of the capital
stock of Seneca outstanding immediately following the Merger and the equity holders of Seneca immediately before the Merger are
expected to hold approximately 26.2% of the Seneca capital stock outstanding immediately following the Merger, in each case, as
calculated on an adjusted fully diluted treasury stock method basis and after giving effect to the Pre-Merger Financing, but including
50% of the shares subject to the Equity Warrants. These estimates are based on the anticipated Exchange Ratio and are subject to
adjustment as provided in the Merger Agreement.
During the pendency of the Merger, Seneca and LBS may not
be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement,
which could adversely affect their respective businesses.
Covenants in the Merger Agreement impede the
ability of Seneca and LBS to make acquisitions, subject to specified exceptions relating to fiduciary duties, or complete other
mergers, sales of assets (other than the sale of the Seneca Legacy Technology) or other business combinations that are not in the
ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, the parties may be at
a disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally
prohibited from soliciting, initiating, encouraging or entering into specified extraordinary transactions, such as a merger, sale
of assets or other business combination, with any third party, subject to specified exceptions, even if any such transaction could
be favorable to such party’s stockholders.
Certain provisions of the Merger Agreement may discourage
third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by
the Merger Agreement.
The terms of the Merger Agreement prohibit
each of Seneca and LBS from soliciting competing proposals or cooperating with persons making unsolicited takeover proposals, except
in limited circumstances when such party’s board of directors determines in good faith, after consultation with its independent
financial advisor, if any, and outside counsel, that an unsolicited competing proposal constitutes, or would reasonably be expected
to result in, a superior competing proposal and that failure to take such action would result in a breach of the fiduciary duties
of the board of directors. In addition, if Seneca or LBS terminate the Merger Agreement under specified circumstances, including
terminating because of a decision of a board of directors to recommend a superior competing proposal, LBS may be required to pay
Seneca a termination fee of $1.5 million and/or $250,000 in expense reimbursements or Seneca may be required to pay LBS a
termination fee of $1.5 million, or up to $250,000 in expense reimbursements.
Because the lack of a public market for LBS’s capital
stock makes it difficult to evaluate the fairness of the Merger, the shareholders of LBS may receive consideration in the Merger
that is less than the fair market value of LBS’s capital stock and/or Seneca may pay more than the fair market value of LBS’s
capital stock.
The outstanding capital stock of LBS is privately
held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market
value of LBS’s capital stock. Because the percentage of Seneca equity to be issued to LBS shareholders was determined based
on negotiations between the parties, it is possible that the value of the Seneca Common Stock to be received by LBS shareholders
will be less than the fair market value of LBS’s capital stock, or Seneca may pay more than the aggregate fair market value
for LBS’s capital stock. The combined organization will incur significant transaction costs as a result of the Merger, including
investment banking, legal and accounting fees. In addition, the combined organization will incur significant operating expenses
which cannot be accurately estimated at this time. Actual transaction costs may substantially exceed the Party’s estimates
and may have an adverse effect on the combined organization’s financial condition and operating results.
If Nasdaq does not approve our listing application for the
combined company and we continue with the Merger, we may be subject to delisting.
Seneca has filed an initial listing application
with Nasdaq pursuant to Nasdaq’s “reverse merger” rules. In the event our application is not accepted by the
Nasdaq and the parties proceed with the merger, the combined company will be subject to delisting proceedings and could be delisted.
If Seneca’s shares lose their status on the Nasdaq Capital Market, Seneca believes that its shares would likely be eligible
to be quoted on the inter-dealer electronic quotation and trading system operated by Pink OTC Markets Inc., commonly referred to
as the Pink Sheets and now known as the OTCQB market. These markets are generally considered not to be as efficient as, and not
as broad as, the Nasdaq Capital Market. If Seneca’s common stock is delisted, this would, among other things, substantially
impair its ability to raise additional funds and could result in a loss of institutional investor interest and fewer development
opportunities for Seneca. Additionally, investors would find it more difficult to buy and sell shares of Seneca Common Stock.
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Risks Related to Seneca’s Capital Requirements, Finances
and Operations in the event the Merger is Not Completed
There is no assurance that the proposed Merger will be completed
in a timely manner or at all. If the Merger is not consummated, our business could suffer materially, and its stock price could
decline.
The consummation of the Merger is subject to
a number of closing conditions, including approval by Seneca’s and LBS’s respective stockholders and other customary
closing conditions. The parties are targeting a closing of the transaction in the first half of 2021, however, there can be no
assurance that the merger will be consummated within this desired timeframe, or at all.
If the Merger is not consummated, we may be
subject to a number of material risks, and our business and stock price could be adversely affected, as follows:
·
We have incurred and expect to continue to incur significant expenses related to the Merger, even if the Merger is not consummated;
·
We could be obligated to pay a $1.5 million termination fee and expense reimbursements up to $250,000 in connection with the termination of the Merger Agreement, depending on the reason for the termination;
·
The market price of our Common Stock may decline to the extent that the current market price reflects a market assumption that the Merger will be completed; and
·
Nasdaq could determine to delist our Common Stock, which could have an adverse effect on the value of our Common Stock and any future ability to raise capital.
If the Merger is not completed, we may be unsuccessful in
completing an alternative transaction on terms that are as favorable as the terms of the proposed transaction, or at all, and we
may be unable to reestablish a viable operating business.
We have generated limited revenue to date from
royalties under a settlement agreement and have not generated revenue from any product sales. Our assets currently consist primarily
of cash, cash equivalents and short-term investments, our intellectual property portfolio, a settlement agreement pursuant to which
it has received royalties, its remaining assets and its listing on The Nasdaq Stock Market. While we have entered into the Merger
Agreement, the consummation of the Merger may be delayed or may not occur at all. If the Merger is not completed, our board of
directors may elect to pursue an alternative strategic transaction which is similar to the proposed Merger. Attempting to complete
an alternative transaction will be costly and time consuming. If the Merger is not completed and our board of directors determines
to pursue an alternative transaction, the terms of any such alternative transaction may not be as favorable to Seneca and its stockholders
as the terms of the Merger. We can make no assurances that such an alternative transaction would occur at all. Further, if the
Merger is not completed, given the level of investment and time that would be required to redesign its products or pursue the development
of products and services pursuant to its collaboration agreements, it is unlikely that we would be able to obtain the funding required
to recommence its product development activities on terms favorable to its stockholders, or at all.
If the Merger is not completed, our board of directors may
decide to pursue a dissolution and liquidation of our business. In such an event, the amount of cash available for distribution
to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved
for commitments and contingent liabilities.
There can be no assurance that the Merger will
be completed. If the Merger is not completed, our board of directors may decide to pursue a dissolution and liquidation of our
assets. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of
such decision, as with the passage of time the amount of cash available for distribution will be reduced as we continue to fund
our operations. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution
and liquidation of Seneca, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to
make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to its stockholders.
As a result of this requirement, our remaining cash may need to be reserved pending the resolution of such obligations. In addition,
we may be subject to litigation or other claims related to a dissolution and liquidation of our business. If a dissolution and
liquidation were pursued, our board of directors, would need to evaluate these matters and make a determination about a reasonable
amount to reserve. Accordingly, holders of our Common Stock could lose all or a significant portion of their investment in the
event of a liquidation, dissolution or winding up.
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If we were to continue to advance our research and development
activities and pursue development of any of our pipeline products, it would require substantial additional funding. Raising additional
capital would cause dilution to our existing stockholders and may restrict our operations or require us to relinquish rights to
our technologies or to a product candidate.
We currently do not have any committed source
of funds and do not expect to generate any commercial revenue in the foreseeable future. We believe in the event the Merger is
not consummated that our existing cash, cash equivalents and marketable securities and interest thereon will be sufficient to fund
our projected operating requirements under our current operating plan through at least March 2022. We have based our estimates
on assumptions that may prove to be wrong, and it may use its available capital resources sooner than it currently expects if its
operating plans change. If the Merger is not completed and Seneca decides to pursue further research and development activities,
it will require substantial additional funding to operate, and would expect to finance these cash needs through a combination of
equity offerings, debt financings, government or other third-party funding and licensing or collaboration arrangements.
To the extent that we raise additional capital
through the sale of equity or convertible debt, the ownership interests of our stockholders will be diluted. In addition, the terms
of any equity or convertible debt that we agree to issue may include liquidation or other preferences that adversely affect the
rights of our stockholders. Convertible debt financing, if available, may involve agreements that include covenants limiting or
restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, and declaring
dividends, and may impose limitations on our ability to acquire, sell or license intellectual property rights and other operating
restrictions that could adversely impact our ability to conduct our business.
Additional funds may not be available to us
when we need them on terms that are acceptable to us, or at all. Furthermore, the novel coronavirus (“COVID-19”) pandemic
continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption
persists and deepens, we could experience an inability to access additional capital, when and if needed. If adequate funds are
not available to us on a timely basis, we may be required to curtail or cease its operations.
If the Merger is not completed, raising additional funding
through debt or equity financing could be difficult or not successful at all, would be dilutive and may cause the market price
of our Common Stock to further decline.
If the Merger is not completed, raising additional
funding through debt or equity financing could be difficult or unavailable altogether given the turbulent financial markets. To
the extent that Seneca raises additional capital through the sale of equity or convertible debt securities, the issuance of those
securities would result in substantial dilution to our current stockholders and the terms may include liquidation or other preferences
that adversely affect the rights of our current stockholders. Furthermore, the issuance of additional securities, whether equity
or debt, or the possibility of such issuance, may cause the market price of its common stock to decline further and existing stockholders
may not agree with its financing plans or the terms of such financings.
Risks Related to Seneca
We have a history of
losses.
Since
inception in 1996 through December 31, 2020, we have accumulated losses totaling approximately $238 million. As of December 31,
2020, we had a working capital surplus of approximately $10 million and stockholders’ equity of approximately $10 million.
Our net losses for the two most recent fiscal years have been approximately $16 million and $8 million for 2020 and 2019, respectively.
To date,
we have not generated any revenue from the commercial sale of our proposed products. No assurances can be given as to exactly when,
if at all, we will be able to fully develop, commercialize, market, sell and/or derive any, let alone material, revenues from our
proposed products.
We will need to raise
additional capital to continue operations.
Since our inception, we have funded our operations
through the sale of our securities, credit facilities, the exercise of options and warrants, and to a lesser degree, from grants
and research contracts and other revenue generating activities such as licensing. As of December 31, 2020, we had cash, cash equivalents
and short-term investments on hand of approximately $10.5 million. We anticipate that in the event the Merger is not consummated,
and based on our cash position at December 31, 2020, we will be able to fund our operations
beyond 12 months from this filing. We cannot assure you that we will be able to secure additional capital through financing transactions,
including issuance of debt, licensing agreements or grants. Our inability to license our intellectual property, obtain grants or
secure additional financing will materially impact our ability to fund our current and planned operations.
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We are substantially dependent on our remaining employees
and consultants to facilitate the consummation of the Merger.
As of March 17, 2021, as a result of entering
into separation agreements with four employees, including our executive chairman, chief operating officer, chief financial officer,
and Senior VP of R&D, we had only three full-time employees. Such remaining employees’ employment will be terminated
upon the closing of the Merger. While we were able to secure consulting agreements with certain recently separated employees, our
ability to successfully complete the Merger depends in large part on our ability to retain certain of our remaining personnel.
Despite our efforts to retain these employees and consultants, one or more may terminate their employment or consulting agreements
on short notice. The loss of the services of any of these employees or consultants could potentially harm our ability to consummate
the Merger, to run our day-to-day business operations, as well as to fulfill our reporting obligations as a public company.
Management transition creates uncertainties and could harm
Seneca’s business.
We have in the past, and expect to in the future,
experience significant changes in executive leadership. Changes to company strategy, which can often times occur with the appointment
of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately
be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge
of Seneca’s operations, and friction can result from changes in strategy and management style. Management transition inherently
causes some loss of institutional knowledge, which can negatively affect strategy and execution. Until we integrate new personnel,
and unless they are able to succeed in their positions, we may be unable to successfully manage and grow our business, and our
results of operations and financial condition could suffer as a result. In any event, changes in our organization as a result of
executive management transition may have a disruptive impact on our ability to implement its strategy and could have a material
adverse effect on our business, financial condition and results of operations.
The pendency of the Merger could have an adverse effect on
the trading price of Seneca’s Common Stock and Seneca’s business, financial condition and prospects.
While there have been no significant adverse
effects to date, the pendency of the Merger could disrupt Seneca’s business in many ways, including:
·
the attention of our remaining management and employees may be directed toward the completion of the Merger and related matters and may be diverted from our day-to-day business operations; and
·
third parties may seek to terminate or renegotiate their relationships with us as a result of the Merger, whether pursuant to the terms of their existing agreements or otherwise.
Should they occur, any of these matters could
adversely affect the trading price of our Common Stock or harm our business, financial condition and prospects.
We may not be able to continue as a going concern if we do
not obtain additional financing.
We have incurred losses since inception and
have not demonstrated an ability to generate revenues from the sales of our proposed products. Our ability to continue as
a going concern is dependent on raising capital from the sale of its common stock and/or obtaining debt financing. Our cash,
cash equivalents and short-term investment balance at December 31, 2020 was approximately $10.5 million. Based on our current expected
level of operating expenditures, and assuming the Merger is not consummated, we expect to be able to fund our operations beyond
12 months from this filing. Our ability to remain a going concern is wholly dependent upon our ability to continue to obtain sufficient
capital 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. In the event
that we are not able to secure funding, we may be forced to curtail operations, cease operations altogether or file for bankruptcy.
Our auditors have expressed substantial doubt about our ability
to continue as a going concern.
Our auditors’ report on our December
31, 2020 consolidated financial statements included an explanatory paragraph that expressed substantial doubt about its ability
to continue as a going concern. Our current cash level raises substantial doubt about our ability to continue as a going concern
at least through March 2022. If we do not obtain additional capital, we may no longer be able to continue as a going concern and
may cease operation or seek bankruptcy protection.
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We are involved in litigation in connection with the Merger
and insurance coverage may not be sufficient to cover all related costs and damages.
Stockholder litigation frequently follows the announcement of certain
significant business transactions, such as a business combination transaction. As of March 16, 2021, there were nine complaints
filed by purported Seneca stockholders, Sheridan v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00166 (the “Sheridan
Complaint”); Pirjamaat v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00172 (the “Pirjamaat Complaint”);
Johnson v. Seneca Biopharma, Inc., et al., Case No. 1:21-cv-00310 (the “Johnson Complaint”); Mathews v. Seneca Biopharma,
Inc., et al., Case No. 1:21-cv-00242 (the “Mathews Complaint”); Pechal v. Seneca Biopharma, Inc., et al., Case No.
1:21-cv-00585 (the “Pechal Complaint”), Curtis v. Seneca Biopharma, Inc., et al. , Case No. 1:21-cv-00292 (the
“Curtis Complaint”); Valdez v. Seneca Biopharma, Inc., et al. , Case No. 1:21-cv-00980 (the “Valdez Complaint”);
Anderson v. Seneca Biopharma, Inc., et al. , Case No. 1:21-cv-00326 (the “Anderson
Complaint”); and McIntire v. Seneca Biopharma, Inc., et al. , Case No. 1:21-cv-01869 (the “Anderson Complaint”
and, together with the Sheridan Complaint, the Pirjamaat Complaint, the Johnson Complaint, the Matthews Complaint, the Curtis Complaint,
the Valdez Complaint, and the Anderson Complaint, the “Stockholder Complaints”). The Stockholder Complaints assert
claims against us, the members of our board of directors as defendants under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated
thereunder for allegedly false and misleading statements in in the registration statement filed on Form S-4 in February 2021 and
Section 20(a) of the Exchange Act for alleged “control person” liability with respect to such allegedly false and misleading
statements. The Stockholder Complaints assert claims against Seneca, the members of the Seneca Board, and LBS as defendants under
Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder for allegedly false and misleading statements in this proxy
statement/prospectus/information statement and Section 20(a) of the Exchange Act for alleged “control person” liability
with respect to such allegedly false and misleading statements. The Johnson Complaint also asserts that the members of the Seneca
Board breached their fiduciary duties of candor/disclosure in connection with the Merger by purportedly failing to disclose material
information about the Merger.
Each of the Stockholder Complaints seek, among
other relief, injunctive relief, including enjoining the Merger unless and until the defendants disclose the allegedly omitted
material information, as well as an award of attorneys’ and experts’ fees. The Mathews Complaint also seeks to enjoin
any vote on the Merger; the Sheridan Complaint, the Johnson Complaint, and the McIntire Complaint seek damages; the Sheridan Complaint,
the Pirjamaat Complaint, the Mathews Complaint, the Curtis Complaint, the Valdez Complaint, and the Anderson Complaint, seek,
in the event the defendants consummate the merger, rescission of the Merger or an award of rescissory damages; the Pirjamaat Complaint,
the Curtis Complaint, and the Valdez Complaint seek an order directing the Seneca Board to disseminate a revised registration
statement in compliance with Sections 14(a) and/or 20(a) of the Exchange Act and Rule 14a-9; and the Pirjamaat Complaint, the
Mathews Complaint, the Curtis Complaint, the Valdez Complaint, and the Anderson Complaint seek a declaration that defendants violated
Sections 14(a) and/or 20(a) of the Exchange Act and Rule 14a-9.
We believe the allegations in the Stockholder Complaints are without
merit.
Other stockholders may file additional lawsuits challenging the
Merger, which may name us as well as members of our boards of directors and/or others as defendants. No assurance can be made as
to the outcome of such lawsuits or the Stockholder Complaints, including the amount of costs associated with defending, or any
other liabilities that may be incurred in connection with the litigation of, such claims. Litigation often is expensive and diverts
management’s attention and resources, which could adversely affect our business. At present, we are unable to estimate potential
losses, if any, related to the lawsuit.
Risks Relating to Seneca’s
Business
Seneca’s business
is dependent on the successful development of product candidates that it has yet to acquire or license.
Our business is significantly dependent on
the successful development of product candidates that we have yet to acquire or license. If we are successful in-licensing or acquiring
product candidates, the process to approve of such product candidates is time-consuming, involves substantial expenditures of resources,
and depends upon a number of factors, including the availability of alternative treatments, and the risks and benefits demonstrated
in its clinical trials. Our success will depend on our ability to achieve scientific and technological advances and to translate
such advances into FDA-approvable, commercially competitive products on a timely basis. Failure can occur at any stage of the process.
If we are not successful in our in-licensing and acquisition strategy, we will have invested substantial amounts of time and money
without developing revenue-producing products.
Any product candidate we are able to license
or acquire will likely not be commercially available for at least several years, if at all. Development schedules for future product
candidates may be affected by a variety of factors, including difficulties in identifying and in-licensing or acquiring such future
products candidates, technological difficulties, clinical trial delays or failures, regulatory hurdles, competitive products, intellectual
property challenges and/or changes in governmental regulation, many of which will not be within our control. In light of the long-term
nature of these types of projects, the technology potentially involved, and the other factors there can be no assurance that we
will be able to successfully complete the development or marketing of any product candidates.
The technologies we
intend to out-license may not be able to be commercially developed.
We have allocated most of our resources to
the development of our stem cell and small molecule technologies. These are emerging technologies which may be deemed to have limited
human application. If potential licensees or acquirors believe that these technologies have limited human applications, we may
not be able to out-license, on acceptable terms or at all, our technologies. Failure to out-license or sell our stem cell or small
molecule technologies may materially impact the value of its business.
We are unable to predict when or if we will be able to earn
significant revenues.
Given that we have yet to in-license or acquire
new technologies, it cannot predict when, or if ever, we will be able to realize revenues related to our future products. Even
if in-licensed or acquired, these products are not likely to be commercially available for at least several or more years, if ever.
Accordingly, we do not foresee generating any significant revenue during such time. As a result, we will be primarily dependent
on its ability to raise capital through the sale of its securities to fund its operations for the foreseeable future.
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We may be subject to litigation that will be costly to defend
or pursue and uncertain in its outcome.
Our business may bring us into conflict with
licensees, licensors, or others with whom we have contractual or other business relationships or with our competitors or others
whose interests differ from ours. If we are unable to resolve these conflicts on terms that are satisfactory to all parties, we
may become involved in litigation brought by or against such parties. Any litigation is likely to be expensive and may require
a significant amount of management’s time and attention, at the expense of other aspects of our business. The outcome of
litigation is always uncertain, and in some cases, could include judgments against us which could have a materially adverse effect
on our business.
We depend on a limited number of employees and consultants
for our continued operations and future success.
We are highly dependent on a limited number
of employees and outside consultants. The loss of any of our employees or consultants could adversely affect our opportunities
and materially harm our future prospects. In the event the Merger is not completed, and our board of directors elects
to continue our business, we will need additional management personnel as well as the development of additional expertise by existing
management personnel. There can be no assurance that we will be able to attract and retain the qualified personnel necessary for
the development of our business.
We have entered into employment contracts with members of
our senior management team that contain significant anti-termination provisions.
We have entered into employment agreements
with members of its senior management team. These agreements require the payment of severance in the event one of these employees
ceases to be employed. These provisions make the replacement of these employees very costly and could cause difficulty in effecting
any required changes in management or a change in control. In the event the Merger is consummated, we will be obligated to pay
members of our management team an aggregate of $4,291,051. Please see the Section of the Annual Report Entitled “Executive
Compensation.”
Business or economic disruptions, or global health concerns
could seriously harm our development efforts and increase our costs and expenses.
Broad-based business or economic disruptions
could adversely affect our planned research and development activities as well as the execution of our acquisition and/or in-licensing
strategy. For example, in December 2019 an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since
spread around the world, including to the United States. To date, this outbreak has already resulted in extended shutdowns of many
businesses around the world, including in the United States. At this time, the impact on our business has been that employees who
previously worked in our corporate office and who traveled are now limited to home office work and virtual meetings. Global health
concerns, such as coronavirus, could also result in social, economic, and labor instability in the countries in which we or the
third parties with whom we engage operate. We cannot presently predict the scope, severity and longevity of any potential business
shutdowns or disruptions, but if we or any of the third parties with whom it engages or plans to engage, including the suppliers,
clinical trial sites, regulators and other third parties with whom we conduct business or plan to conduct business, were to experience
shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned
could be materially and negatively impacted. It is also possible that global health concerns such as this one could disproportionately
impact the hospitals and clinical sites in which we may conduct any of its clinical trials, which could have a material adverse
effect on our business and results of operation and financial condition.
The increasing use of social media platforms presents
new risks and challenges.
Social media is increasingly being used to
communicate information about our products and the diseases that our therapies are designed to treat. Social media practices in
our industry continue to evolve and regulations related to such use are not always clear. This evolution creates uncertainty and
risk of noncompliance with regulations applicable to our business. For example, patients and others may use social media channels
to comment on the effectiveness of a product or to report an alleged adverse event. When such disclosures occur, we may fail to
monitor and comply with applicable adverse event reporting obligations or we may not be able to defend against political and market
pressures generated by social media due to restrictions on what we may say about our products. There is also a risk of inappropriate
disclosure of sensitive information or negative or inaccurate comments about us on any social networking website. If any of these
events were to occur or Seneca otherwise fails to comply with applicable regulations, it could incur liability, face overly restrictive
regulatory actions or incur other harm to its business.
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Risks Relating to Seneca’s
Intellectual Property
We may not be able to withstand challenges to our intellectual
property rights.
We rely on our intellectual property, including
issued and applied-for patents, as the foundation of our business. Our intellectual property rights may come under challenge. No
assurances can be given that our current and potential future patents will survive such challenges. These cases are complex, lengthy,
expensive, and could potentially be adjudicated adversely to our interests, removing the protection afforded by an issued patent.
The viability of our business would suffer if such patent protection were limited or eliminated. Moreover, the costs associated
with defending or settling intellectual property claims would likely have a material adverse effect on our business and future
prospects.
We may not be able to adequately protect against the piracy
of the intellectual property in foreign jurisdictions.
We have conducted research in countries outside
of the U.S., including through our subsidiary in the People’s Republic of China. Several of our competitors are located in
these countries and may be able to access our technology or test results. The laws protecting intellectual property in some of
these countries may not adequately protect our trade secrets and intellectual property. The misappropriation of our intellectual
property may materially impact our position in the market and any competitive advantages, if any, that it may have.
We may infringe on the intellectual property
rights of others and may not be able to obtain necessary licenses to third-party patents and other rights.
A number of companies, universities and research
institutions have filed patent applications or have received patents relating to technologies in our field. We cannot predict which,
if any, of these applications will issue as patents or how many of these issued patents will be found valid and enforceable. There
may also be existing issued patents on which we would infringe by the commercialization of our product candidates. If so, we may
be prevented from commercializing these products unless the third party is willing to grant us a license. We may be unable to obtain
licenses to the relevant patents at a reasonable cost, if at all, and may also be unable to develop or obtain alternative non-infringing
technology. If we are unable to obtain such licenses or develop non-infringing technology at a reasonable cost, our business could
be materially harmed. Any infringement lawsuits commenced against us may result in significant costs, divert its management’s
attention and result in an award against it for substantial damages, or potentially prevent it from continuing certain operations.
Risks Related to Ownership of Our Common Stock
The market price for our common shares is particularly volatile.
The market for our common shares is characterized
by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more
volatile than those of a seasoned issuer. The volatility in our share price is attributable to a number of factors. Mainly however,
we are a speculative or “risky” investment due to our limited operating history, lack of significant revenues to date
and the uncertainty of FDA approval. By way of example, in July of 2019, we completed a firm commitment underwritten public offering
of our securities. During the marketing of the offering and post-closing, the market price or our common stock decreased substantially.
As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment
in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated
securities class action litigation against a company following periods of volatility in the market price of its securities. Securities
litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
The following factors may add to the volatility
in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results; the results of
clinical trials for our product candidates; FDA’s determination with respect to filings for new clinical studies, new drug
applications and new indications; government regulations; announcements of significant acquisitions, strategic partnerships or
joint ventures; our capital commitments; offerings of our securities and additions or departures of key personnel. Many of these
factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance.
We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time,
including as to whether our common shares will sustain their current market prices, or as to what effect the sale of shares or
the availability of common shares for sale at any time will have on the prevailing market price.
If Seneca’s common stock were delisted from Nasdaq,
Seneca would be subject to the risks relating to penny stocks .
If Seneca’s common stock were to be delisted
from trading on the Nasdaq Capital Market and the trading price of its common stock were below $5.00 per share on the date its
common stock is delisted, trading in Seneca’s common stock would also be subject to the requirements of certain rules promulgated
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These rules require additional disclosure
by broker-dealers in connection with any trades involving a stock defined as a “penny stock” and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors,
generally institutions. These additional requirements may discourage broker-dealers from effecting transactions in securities that
are classified as penny stocks, which could severely limit the market price and liquidity of such securities and the ability of
purchasers to sell such securities in the secondary market. A penny stock is defined generally as any non-exchange listed equity
security that has a market price of less than $5.00 per share, subject to certain exceptions.
Future sales of our common stock could cause our stock price
to fall.
In January 2020, we completed an inducement
offering pursuant to which we reduced the exercise price of outstanding warrants in exchange for the holder exercising such warrants
for cash. As a result, we issued 5,555,554 shares of common stock, or approximately 61% of our issued and outstanding common stock.
Transactions, such as the inducement offering, that result in a large amount of newly issued shares that are readily tradable,
or other events that cause current stockholders to sell shares, could place downward pressure on the trading price of our common
stock. In addition, the lack of a robust trading market may require a stockholder who desires to sell a large number of shares
of common stock to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of Seneca’s
stock. If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, substantial
amounts of our common stock in the public market, including shares issued upon the exercise of outstanding options or warrants,
the market price of our common stock could fall. Sales of a substantial number of shares of our common stock may make it more difficult
for us to sell equity or equity-related securities on terms that we deem reasonable or appropriate.
19
Certain of our outstanding common stock purchase warrants
contain price protection provisions (anti-dilution protection) in the event that we sell securities at prices lower than the current
exercise price of such warrants.
As of December 31, 2020, we had 149,149 common
stock purchase warrants outstanding that were issued in our May 2016 registered offering, May 2016 private placement and August
2017 registered offering. All of such warrants contain price protection provisions in the event that we sell securities at a price
per share below their respective exercise prices (collectively “Price Protection Warrants”). Pursuant to our May 2020
common stock offering, the Price Protection Warrants all had their exercise prices adjusted to $0.90 per share. In the event that
Seneca sells securities at a price per share lower than the current exercise price of the Price Protection Warrants, their exercise
prices will be further reduced. Any future adjustments to the exercise prices of the Price Protection Warrants may have a negative
impact on the trading price of Seneca’s common stock. Additionally, raising additional capital with new investors may be
difficult as a result of the adjustment feature.
Certain of our outstanding common stock purchase options contain
provisions (anti-dilution protection) in the event that we issue additional securities, which may have a negative impact on its
capital structure and may result in significant dilution to our shareholders or impair our ability to raise capital.
As of December 31, 2020, we had 1,686,466 outstanding
common stock purchase options held by certain members of its senior management team. These options contain provisions which have
resulted in the adjustment of the shares underlying such options in order that the holder maintains his proportionate ownership.
Any future adjustments to the number of shares may have a negative impact on our capital structure and dilute our other shareholders.
Additionally, raising additional capital with new investors may be difficult as a result of the adjustment feature. As of the date
hereof, each of the option holders have agreed, subject to entering into definitive agreements, to cancel their respective outstanding
options in exchange for certain cash payments.
Our anti-takeover provisions may delay or prevent a change
of control, which could adversely affect the price of its common stock.
Our amended and restated certificate of incorporation
and amended and restated bylaws contain provisions that may make it difficult to remove its board of directors and management and
may discourage or delay “change of control” transactions, which could adversely affect the price of its common stock.
These provisions include, among others:
·
Our board of directors are divided into three classes, with each class serving for a staggered three-year term, which prevents stockholders from electing an entirely new board of directors at an annual meeting;
·
Advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors and propose matters to be brought before an annual meeting of our stockholders may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of Seneca; and
·
Our board of directors may, without stockholder approval, issue series of preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control.
If securities or industry
analysts do not publish research reports, or publish unfavorable research about our business, the price and trading volume of our
common stock could decline.
The trading market for our common stock will
depend in part on the research and reports that securities or industry analysts publish about us and our business. We currently
have limited research coverage by securities and industry analysts. In the event an analyst downgrades our securities, the price
of our securities would likely decline. If analysts cease to cover us or fail to publish regular reports, interest in our securities
could decrease, which could cause the price of our common stock and other securities and their trading volume to decline.
20
Our board of directors
has broad discretion to issue additional securities, which might dilute the net tangible book value per share of our common stock
for existing stockholders.
We are entitled under our certificate of incorporation
to issue up to 300,000,000 shares of common stock and 7,000,000 “blank check” shares of preferred stock. Shares of
our blank check preferred stock provide our board of directors with broad authority to determine voting, dividend, conversion,
and other rights. As of December 31, 2020, we had issued and outstanding 17,295,703 shares of common stock and 6,750,287 shares
of common stock reserved for future grants under its equity compensation plans and for issuances upon the exercise or conversion
of currently outstanding options, warrants and convertible securities. As of December 31, 2020, we had 200,000 shares of preferred
stock issued and outstanding which are convertible into 38,873 shares of common stock. Accordingly, as of December 31, 2020, we
are entitled to issue up to 275,954,010 additional shares of common stock and 6,800,000 additional shares of “blank check”
preferred stock. Our board of directors may generally issue those common and preferred shares, or convertible securities to purchase
those shares, without further approval by our shareholders. Any preferred shares we may issue will have such rights, preferences,
privileges and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting
rights, conversion rights, redemption rights and liquidation provisions. It is likely that we will be required to issue a large
amount of additional securities to raise capital in order to further its development and marketing plans. It is also likely that
we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory
grants in connection with their services, both in the form of stand-alone grants or under our various stock plans. The issuance
of additional securities may cause substantial dilution to our existing shareholders.
Unstable market and economic conditions may have serious adverse
consequences on Seneca’s business, financial condition and stock price.
From time to time, including recently as a
result of the COVID-19 pandemic, global credit and financial markets have experienced extreme volatility and disruptions, including
severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases
in unemployment rates and uncertainty about economic stability. Seneca’s general business strategy may be adversely affected
by any such economic downturn, volatile business environment and continued unpredictable and unstable market conditions. If the
equity and credit markets deteriorate it may make any necessary debt or equity financing more difficult to complete, more costly,
and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse
effect on Seneca’s growth strategy, financial performance and stock price and could require Seneca to delay or abandon clinical
development plans. In addition, there is a risk that one or more of Seneca’s current service providers, manufacturers and
other partners may not survive an economic down-turn, which could directly affect Seneca’s ability to attain Seneca’s
operating goals on schedule and on budget.
Risks Related to Government Regulation
and Approval of Therapeutic Product Candidates.
The regulatory approval processes
of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and our products may not
receive regulatory approval.
The time required to obtain approval by the FDA and comparable foreign
authorities is inherently unpredictable but typically takes many years following the commencement of clinical trials and depends
upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations,
or the type and amount of clinical data necessary to gain approval may change during the course of a drug candidate’s clinical
development and may vary among jurisdictions and countries.
If we are successful in in-licensing or acquiring therapeutic drug candidates, we could
fail to receive regulatory approval for many reasons, including the following:
• the
FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
• we
may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate
is safe and effective for its proposed indication;
• the
results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory
authorities for approval;
• we
may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
• the
FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical
trials;
• the
data collected from clinical trials of our product candidates may not be sufficient to support the submission of a BLA, NDA or
other submission or to obtain regulatory approval in the United States or elsewhere;
21
• the
FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third-party
manufacturers with which we contract for clinical and commercial supplies; or
• the
approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval.
We cannot assure you that we will successfully
in-license or acquire any technologies or complete any clinical trials in connection with such technologies. Further,
we cannot predict when we might first submit any product license application (NDA or BLA) for FDA approval or whether any such
product license application will be granted on a timely basis, if at all. Any delay in obtaining, or failure to obtain,
such approvals could have a material adverse effect on the marketing of our products and our ability to generate product revenue.
Development of therapeutics product
candidates is subject to extensive government regulation.
The process of obtaining FDA and other
necessary regulatory approvals is lengthy, expensive and uncertain. FDA and other legal and regulatory requirements applicable
to our proposed products, both in the U.S. and in foreign countries could substantially change. We may fail to obtain the necessary
approvals to commence clinical testing or to manufacture or market our potential products in reasonable time frames, if at all.
In addition, the U.S. Congress and other legislative bodies may enact regulatory reforms or restrictions on the development of
new therapies that could adversely affect the regulatory environment in which we operate or the development of any products we
may develop.
Noncompliance with applicable regulatory
requirements can subject us, our third party suppliers and manufacturers and our other collaborators to administrative and judicial
sanctions, such as, among other things, warning letters, fines and other monetary payments, recall or seizure of products, criminal
proceedings, suspension or withdrawal of regulatory approvals, interruption or cessation of clinical trials, total or partial suspension
of production or distribution, injunctions, limitations on or the elimination of claims we can make for our products, refusal of
the government to enter into supply contracts or fund research, or government delay in approving or refusal to approve new drug
applications.
We cannot predict if or when we will be able to commercialize
our products due to regulatory constraints.
Federal, state and local governments and
agencies in the U.S. (including the FDA) and governments in other countries have significant regulations in place that govern many
of our activities. We are, or may become, subject to various federal, state and local laws, regulations and recommendations
relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal
of hazardous or potentially hazardous substances used in connection with its research and development work. The preclinical testing
and clinical trials of our proposed products are subject to extensive government regulation that may prevent us from creating commercially
viable products. In addition, our sale of any commercially viable product will be subject to government regulation from several
standpoints, including manufacturing, advertising, marketing, promoting, selling, labeling and distributing. If, and
to the extent that, we are unable to comply with these regulations, our ability to earn revenues, if any, will be materially and
negatively impacted.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.