Page | | | PART I – FINANCIAL INFORMATION | | | | | Item 1. | Financial Statements.Statements | 3 | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations | 1413
| Item 3. | Quantitative and Qualitative Disclosure About Market Risk.Risk | 1918
| Item 4. | Controls and Procedures.Procedures | 1918
| | | | PART II – OTHER INFORMATION | | | | Item 1. | Legal Proceedings.Proceedings | 2019
| Item 1A. | Risk Factors.Factors | 2019
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds | 2019
| Item 3. | Defaults Upon Senior Securities.Securities | 2019
| Item 4. | Mine Safety Disclosures.Disclosures | 2019
| Item 5. | Other Information.Information | 2019
| Item 6. | Exhibits.Exhibits
| 2119
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PART I – FINANCIAL INFORMATION Item 1.
| Financial Statements.
|
Item 1. Financial Statements. Sun BioPharma, Inc. Condensed Consolidated Balance Sheets (In thousands, except share amounts) | | June 30, 2018 | | | | | | | (Unaudited) | | | December 31, 2017 | | ASSETS | | | | | | | | | Current Assets: | | | | | | | | | Cash | | $ | 905 | | | $ | 152 | | Prepaid expenses and other current assets | | | 85 | | | | 195 | | Income tax receivable | | | 506 | | | | 420 | | Total current assets | | | 1,496 | | | | 767 | | Other noncurrent assets | | | 55 | | | | - | | Total Assets | | $ | 1,551 | | | $ | 767 | | LIABILITITES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | | Current Liabilities: | | | | | | | | | Accounts payable | | $ | 936 | | | $ | 1,196 | | Accrued expenses | | | 139 | | | | 1,254 | | Convertible notes payable, net | | | 25 | | | | 1,525 | | Term debt, current portion | | | 300 | | | | 14 | | Accrued interest | | | 41 | | | | 181 | | Total current liabilities | | | 1,441 | | | | 4,170 | | | | | | | | | | | Long-term liabilities: | | | | | | | | | Term debt, noncurrent portion | | | - | | | | 286 | | Total long-term liabilities | | | - | | | | 286 | | | | | | | | | | | Stockholders' equity (deficit): | | | | | | | | | | | | | | | | | | Preferred stock, $0.001 par value; 10,000,000 authorized; no shares issued or outstanding as of June 30, 2018 and December 31, 2017 | | | - | | | | - | | Common stock, $0.001 par value; 100,000,000 authorized; 5,060,594 and 3,841,652 shares issued and outstanding, as of June 30, 2018 and December 31, 2017, respectively | | | 5 | | | | 4 | | Additional paid-in capital | | | 33,494 | | | | 25,625 | | Accumulated deficit | | | (33,393 | ) | | | (29,153 | ) | Accumulated comprehensive income (loss) | | | 4 | | | | (165 | ) | Total stockholders' equity (deficit) | | | 110 | | | | (3,689 | ) | Total liabilities and stockholders' equity (deficit) | | $ | 1,551 | | | $ | 767 | |
| | June 30, 2019 | | | December 31, 2018 | | ASSETS | | (Unaudited) | | | | | | Current assets: | | | | | | | | | Cash | | $ | 721 | | | $ | 1,405 | | Prepaid expenses and other current assets | | | 93 | | | | 110 | | Income tax receivable | | | 474 | | | | 332 | | Total current assets | | | 1,288 | | | | 1,847 | | Other noncurrent assets | | | 51 | | | | 51 | | Total assets | | $ | 1,339 | | | $ | 1,898 | | | | | | | | | | | LIABILITITES AND STOCKHOLDERS' (DEFICIT) EQUITY | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 289 | | | $ | 1,064 | | Accrued expenses | | | 192 | | | | 212 | | Convertible notes payable, net of debt discounts | | | - | | | | 64 | | Term debt, current portion | | | 232 | | | | 286 | | Accrued interest | | | 1 | | | | 4 | | Total current liabilities | | | 714 | | | | 1,630 | | Unsecured promissory note payable | | | 742 | | | | - | | Total liabilities | | | 1,456 | | | | 1,630 | | | | | | | | | | | | | | | | | | | | Stockholders' (deficit) equity: | | | | | | | | | Preferred stock, $0.001 par value; 10,000,000 authorized; no shares issued or outstanding as of June 30, 2019 and December 31 2018 | | | - | | | | - | | Common stock, $0.001 par value; 100,000,000 authorized; 5,722,099 and 5,077,483 shares issued and outstanding, as of June 30, 2019 and December 31, 2018, respectively | | | 6 | | | | 5 | | Additional paid-in capital | | | 38,487 | | | | 35,038 | | Accumulated deficit | | | (38,910 | ) | | | (35,058 | ) | Accumulated comprehensive income | | | 300 | | | | 283 | | Total stockholders' (deficit) equity | | | (117 | ) | | | 268 | | Total liabilities and stockholders' (deficit) equity | | $ | 1,339 | | | $ | 1,898 | |
See accompanying notes to condensed consolidated financial statements. Sun BioPharma, Inc. Condensed Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share amounts) (Unaudited) | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | | | | | | | | | | | | | | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | General and administrative | | $ | 654 | | | $ | 487 | | | $ | 1,312 | | | $ | 1,737 | | | $ | 580 | | | $ | 654 | | | $ | 883 | | | $ | 1,312 | | Research and development | | | 442 | | | | 675 | | | | 1,024 | | | | 1,419 | | | | 508 | | | | 442 | | | | 858 | | | | 1,024 | | Operating loss | | | (1,096 | ) | | | (1,162 | ) | | | (2,336 | ) | | | (3,156 | ) | | | (1,088 | ) | | | (1,096 | ) | | | (1,741 | ) | | | (2,336 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | | | | | | Other (expense) income: | | | | | | | | | | | | | | | | | | Grant income | | | 12 | | | | 83 | | | | 22 | | | | 83 | | | | - | | | | 12 | | | | - | | | | 22 | | Interest expense | | | (1,288 | ) | | | (473 | ) | | | (1,761 | ) | | | (672 | ) | | | (1,152 | ) | | | (1,288 | ) | | | (2,184 | ) | | | (1,761 | ) | Loss on induced debt conversions | | | - | | | | - | | | | - | | | | (3,696 | ) | | Other (expense) income | | | (192 | ) | | | 26 | | | | (273 | ) | | | 189 | | | Other (expense) | | | | (101 | ) | | | (192 | ) | | | (68 | ) | | | (273 | ) | Total other expense | | | (1,468 | ) | | | (364 | ) | | | (2,012 | ) | | | (4,096 | ) | | | (1,253 | ) | | | (1,468 | ) | | | (2,252 | ) | | | (2,012 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loss before income tax benefit | | $ | (2,564 | ) | | $ | (1,526 | ) | | $ | (4,348 | ) | | $ | (7,252 | ) | | | (2,341 | ) | | | (2,564 | ) | | | (3,993 | ) | | | (4,348 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax benefit | | | 79 | | | | 112 | | | | 108 | | | | 264 | | | | 70 | | | | 79 | | | | 141 | | | | 108 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | (2,485 | ) | | | (1,414 | ) | | | (4,240 | ) | | | (6,988 | ) | | | (2,271 | ) | | | (2,485 | ) | | | (3,852 | ) | | | (4,240 | ) | Foreign currency translation adjustment gain (loss) | | | 101 | | | | (22 | ) | | | 169 | | | | (184 | ) | | | | | | | | | | | | | | | | Foreign currency translation adjustment | | | | 49 | | | | 101 | | | | 17 | | | | 169 | | Comprehensive loss | | $ | (2,384 | ) | | $ | (1,436 | ) | | $ | (4,071 | ) | | $ | (7,172 | ) | | $ | (2,222 | ) | | $ | (2,384 | ) | | $ | (3,835 | ) | | $ | (4,071 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic and diluted net loss per share | | $ | (0.54 | ) | | $ | (0.39 | ) | | $ | (1.00 | ) | | $ | (2.03 | ) | | $ | (0.45 | ) | | $ | (0.54 | ) | | $ | (0.76 | ) | | $ | (1.00 | ) | | | | | | | | | | | | | | | Weighted average shares outstanding - basic and diluted | | | 4,570,601 | | | | 3,662,313 | | | | 4,248,603 | | | | 3,441,206 | | | | 5,070,341 | | | | 4,570,601 | | | | 5,071,378 | | | | 4,248,603 | |
See accompanying notes to condensed consolidated financial statements. Sun BioPharma, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (In thousands) (Unaudited) | | Common Stock | | | Additional Paid-In | | | Accumulated | | | Accumulated Other Comprehensive | | | Total Stockholders' | | | | Shares | | | Amount | | | Capital | | | Deficit | | | Gain (Loss) | | | Equity (Deficit) | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances at January 1, 2018 | | | 3,842 | | | $ | 4 | | | $ | 25,625 | | | $ | (29,153 | ) | | $ | (165 | ) | | $ | (3,689 | ) | Sale of common stock and warrants | | | 468 | | | | - | | | | 2,341 | | | | - | | | | - | | | | 2,341 | | Charge for fair market value of beneficial conversion feature | | | - | | | | - | | | | 121 | | | | - | | | | - | | | | 121 | | Conversion of convertible notes payable and accrued interest into common stock | | | 104 | | | | - | | | | 350 | | | | - | | | | - | | | | 350 | | Conversion of convertible notes payable and accrued interest into common stock and warrants | | | 647 | | | | 1 | | | | 2,907 | | | | - | | | | - | | | | 2,908 | | Stock based compensation | | | - | | | | - | | | | 2,150 | | | | - | | | | - | | | | 2,150 | | Net loss | | | - | | | | - | | | | - | | | | (4,240 | ) | | | - | | | | (4,240 | ) | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 169 | | | | 169 | | Balances at June 30, 2018 | | | 5,061 | | | $ | 5 | | | $ | 33,494 | | | $ | (33,393 | ) | | $ | 4 | | | $ | 110 | |
| | For the Six Months Ended June 30, 2018 | | | | Common Stock | | | Additional Paid-In | | | Accumulated | | | Accumulated Other Comprehensive | | | Total Stockholders' | | | | Shares | | | Amount | | | Capital | | | Deficit | | | Gain (Loss) | | | Equity (Deficit) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of January 1, 2018 | | | 3,842 | | | $ | 4 | | | $ | 25,625 | | | $ | (29,153 | ) | | $ | (165 | ) | | $ | (3,689 | ) | Sale of common stock and warrants | | | 252 | | | | - | | | | 1,261 | | | | - | | | | - | | | | 1,261 | | Stock-based compensation | | | - | | | | - | | | | 1,792 | | | | - | | | | - | | | | 1,792 | | Net loss | | | - | | | | - | | | | - | | | | (1,753 | ) | | | - | | | | (1,753 | ) | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 69 | | | | 69 | | Balances as of March 31, 2018 | | | 4,094 | | | $ | 4 | | | $ | 28,678 | | | $ | (30,906 | ) | | $ | (96 | ) | | $ | (2,320 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Sale of common stock and warrants | | | 216 | | | | - | | | | 1,080 | | | | - | | | | - | | | | 1,080 | | Beneficial conversion feature | | | - | | | | - | | | | 121 | | | | - | | | | - | | | | 121 | | Conversion of convertible notes payable and accrued interest into common stock and warrants | | | 751 | | | | 1 | | | | 3,257 | | | | - | | | | - | | | | 3,258 | | Stock-based compensation | | | - | | | | - | | | | 358 | | | | - | | | | - | | | | 358 | | Net loss | | | - | | | | - | | | | - | | | | (2,487 | ) | | | - | | | | (2,487 | ) | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 100 | | | | 100 | | Balances as of June 30, 2018 | | | 5,061 | | | $ | 5 | | | $ | 33,494 | | | $ | (33,393 | ) | | $ | 4 | | | $ | 110 | |
| | For the Six Months Ended June 30, 2019 | | | | Common Stock | | | Additional Paid-In | | | Accumulated | | | Accumulated Other Comprehensive | | | Total Stockholders' | | | | Shares | | | Amount | | | Capital | | | Deficit | | | Gain (Loss) | | | Equity (Deficit) | | Balances as of January 1, 2019 | | | 5,077 | | | $ | 5 | | | $ | 35,038 | | | $ | (35,058 | ) | | $ | 283 | | | $ | 268 | | Beneficial conversion feature on convertible notes payable | | | - | | | | - | | | | 353 | | | | - | | | | - | | | | 353 | | Warrants issued with sale of convertible notes payable | | | - | | | | - | | | | 419 | | | | - | | | | - | | | | 419 | | Common stock converted into convertible notes payable | | | (7 | ) | | | - | | | | (25 | ) | | | - | | | | - | | | | (25 | ) | Stock-based compensation | | | - | | | | - | | | | 10 | | | | - | | | | - | | | | 10 | | Net loss | | | - | | | | - | | | | - | | | | (1,581 | ) | | | - | | | | (1,581 | ) | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | (32 | ) | | | (32 | ) | Balances as of March 31, 2019 | | | 5,070 | | | $ | 5 | | | $ | 35,795 | | | $ | (36,639 | ) | | $ | 251 | | | $ | (588 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of convertible notes payable and accrued interest into common stock | | | 652 | | | | 1 | | | | 2,280 | | | | - | | | | - | | | | 2,281 | | Stock-based compensation | | | - | | | | - | | | | 412 | | | | - | | | | - | | | | 412 | | Net loss | | | - | | | | - | | | | - | | | | (2,271 | ) | | | - | | | | (2,271 | ) | Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 49 | | | | 49 | | Balances at June 30, 2019 | | | 5,722 | | | $ | 6 | | | $ | 38,487 | | | $ | (38,910 | ) | | $ | 300 | | | $ | (117 | ) |
See accompanying notes to condensed consolidated financial statements. Sun BioPharma, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) | | Six Months Ended June 30, | | | | | 2018 | | | 2017 | | | Six Months Ended June 30, | | | | | | | | | | | | 2019 | | | 2018 | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | Net loss | | $ | (4,240 | ) | | $ | (6,988 | ) | | $ | (3,852 | ) | | $ | (4,240 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | Loss on induced debt conversions | | | - | | | | 3,696 | | | Stock-based compensation | | | 1,056 | | | | 1,024 | | | | 422 | | | | 1,056 | | Amortization of debt discount | | | 1,687 | | | | 534 | | | | 2,061 | | | | 1,687 | | Amortization of debt issuance costs | | | 9 | | | | 49 | | | | 12 | | | | 9 | | Non-cash interest expense | | | 43 | | | | 48 | | | | 102 | | | | 43 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | Income tax receivable | | | (106 | ) | | | (262 | ) | | | (144 | ) | | | (106 | ) | Prepaid expenses and other current assets | | | 53 | | | | 43 | | | | 17 | | | | 53 | | Accounts payable | | | (67 | ) | | | (810 | ) | | | (12 | ) | | | (67 | ) | Accrued liabilities | | | (20 | ) | | | 308 | | | | (20 | ) | | | (20 | ) | Net cash used in operating activities | | | (1,585 | ) | | | (2,358 | ) | | | (1,414 | ) | | | (1,585 | ) | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | Net proceeds from the sale of convertible promissory notes | | | - | | | | 3,059 | | | Proceeds from sale of common stock and warrants | | | 2,341 | | | | | | | Proceeds from the exercise of stock options | | | - | | | | 28 | | | Proceeeds from exercise of stock purchase warrants | | | - | | | | 19 | | | Proceeds from the sale of convertible promissory notes and warrants, net of debt issuance costs of $7 | | | | 810 | | | | - | | Proceeds from sale of common stock and warrants, net of offering costs of $27 | | | | - | | | | 2,341 | | Repayment of demand note | | | | (25 | ) | | | - | | Repayments of term debt | | | | (55 | ) | | | - | | Net cash provided by financing activities | | | 2,341 | | | | 3,106 | | | | 730 | | | | 2,341 | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (3 | ) | | | 8 | | | | - | | | | (3 | ) | Net increase in cash | | | 753 | | | | 756 | | | | | | | | | | | | | Net change in cash | | | | (684 | ) | | | 753 | | Cash at beginning of period | | | 152 | | | | 438 | | | | 1,405 | | | | 152 | | Cash at end of period | | $ | 905 | | | $ | 1,194 | | | $ | 721 | | | $ | 905 | | | | | | | | | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | | | | Cash paid during period for interest | | $ | 22 | | | | - | | | $ | 8 | | | $ | 22 | | | | | | | | | | | | | | | | | | | Supplemental disclosure of non-cash transactions: | | | | | | | | | | | | | | | | | | | | | | | | Beneficial conversion feature on convertible notes | | | $ | 353 | | | $ | 121 | | Warrants issued with convertible notes | | | $ | 419 | | | $ | - | | Common stock converted into convertible notes payable | | | $ | 25 | | | | | | Conversion of convertible notes payable and accrued interest into common stock and warrants | | | $ | - | | | $ | 2,908 | | Conversion of convertible notes payable and accrued interest into common stock | | $ | 350 | | | $ | 2,888 | | | $ | 2,281 | | | $ | 350 | | Conversion of convertible notes payable and accrued interest into common stock and warrants | | $ | 2,908 | | | $ | - | | | Intrinsic value of beneficial conversion feature in convertible notes | | $ | 121 | | | $ | 2,954 | | | Conversion of demand notes into common stock | | $ | - | | | $ | 250 | | | | | | | | | | | | | Issuance of unsecured promissory note in exchange for vendor accounts payable | | | $ | 742 | | | $ | - | | Options granted in exchange for release from contingent payment obligations | | $ | 1,094 | | | $ | - | | | $ | - | | | $ | 1,094 | |
See accompanying notes to condensed consolidated financial statements. Sun BioPharma, Inc. Notes to Condensed Consolidated Financial Statements Sun BioPharma, Inc. andtogether with its wholly-owned subsidiary Sun BioPharma Australia Pty Ltd. (collectively “we,” “us,” “our,” and the “Company”) exist, exists for the primary purpose of advancing the commercial development of a proprietary polyamine analogue (the “compound”) for the treatment of patients with pancreatic cancer and for a potential second indication infor the treatment of patients with chronic and recurrent acute pancreatitis. We have exclusively licensed the worldwide rights to this compound, which has been designated as SBP-101, from the University of Florida Research Foundation, Inc. (“UFRF”). Effective November 7, 2017, we implemented a 1-for-10 reverse split of our common stock. All references to share and per share amounts included in these Condensed Consolidated Financial Statements have been retroactively restated to reflect the reverse split.
2. | Risks and Uncertainties |
The Company operates in a highly regulated and competitive environment. The development, manufacturing and marketing of pharmaceutical products require approval from, and are subject to ongoing oversight by, the Food and Drug Administration (“FDA”) in the United States, the Therapeutic Goods Administration (“TGA”) in Australia, the European Medicines Agency (“EMA”) in the European Union, and comparable agencies in other countries. Obtaining approval for a new pharmaceutical product is never certain, may take many years, and is normally expected to involve substantial expenditures. We have incurred losses of $33.4$38.9 million since our inception in 2011. For the six months ended June 30, 2018,2019, we incurred a net loss of $4.2$3.9 million, which includes the amortization of discount on debt of $1.7$2.1 million. We also incurred negative cash flows from operating activities of $1.6$1.4 million forduring this period. During this same period, we raised $2.3$0.8 million from the sale of equity securities,convertible promissory notes and had a non-cash conversion of promissorywarrants to purchase common stock, as discussed in Note 4 titled “Liquidity and Business Plan”. These notes, sold in January 2019, and notes sold in December 2018 converted into common stock totaling $3.3 million in principal and accrued interest. We expect to incur substantial losses for the foreseeable future, which will typically generate negative net cash flows from operating activities, ason June 30, 2019. As we continue to pursue development activities and seek to commercializecommercialization of our initial product candidate, SBP-101.SBP-101, we expect to incur substantial losses, which are likely to generate negative net cash flows from operating activities. As of June 30, 2018,2019, we had cash of $0.9$0.7 million, working capital (current assets less current liabilities) of $0.1$0.6 million and stockholders’ equitydeficit of $0.1 million. The Company’s principal sources of cash have historically included the issuance of convertible debt and equity securities. The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts of liabilities that might result from the outcome of these uncertainties. Our current independent registered public accounting firm included a paragraph emphasizing this going concern uncertainty in their audit report regarding our 20172018 financial statements dated March 21, 2018.22, 2019. Our ability to continue as a going concern, realize the carrying value of our assets and discharge our liabilities in the ordinary course of business is dependent upon a number of factors, including our ability to obtain additional financing, the success of our development efforts, our ability to obtain marketing approval for our SBP-101 product candidate in the United States, Australia, the European Union or other markets and ultimately our ability to market and sell our SBP-101 product candidate. These factors, among others, raise substantial doubt about our ability to continue operations as a going concern. See Note 4 titled “Liquidity and Management’s Plans.Business Plan.” We have prepared the accompanying interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim condensed consolidated financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly our consolidated financial position, consolidated results of operations and consolidated cash flows for the periods and as of the dates presented. Our fiscal year ends on December 31. The condensed consolidated balance sheet as of December 31, 20172018 was derived from audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in our most recent filed Annual Report on Form 10-K and our othersubsequent filings with the SEC. The nature of our business is such that the results of any interim period may not be indicative of the results to be expected for the entire year. Recently Adopted Accounting Pronouncements In May 2014,June 2018, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles-based and provides a five-step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The Company has evaluated the impact of this revised guidance on its financial statements and determined it had no material impact. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2017. The Company has evaluated the impact of this revised guidance on its financial statements and determined it had no material impact.
Recently Issued Accounting Pronouncements
In June 2018, the FASB issued (“ASU”) 2018-07, “Compensation – Stock Compensation (Topic 718).” ASU 2018-07 simplifies the accounting for nonemployee stock-based payment transactions. This ASU iswas adopted by the Company effective for public entities for interim and annual reporting periodsthe fiscal year beginning after December 15, 2018.January 1, 2019. Historically, the ultimate stock-based compensation related to non-employee common stock options would fluctuate based on changes in the underlying option pricing model as the awards vest. Under the new guidance, the total compensation cost of non-employee options is determined at grant date. The Company is currently evaluatinghas evaluated the potential impact of this new guidance on its financial statements and at this time does not believehas determined that it will havehas affected how the Company records stock-based compensation related to common stock options and other equity-based compensation, if any, granted to non-employees.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which created a new Topic, Accounting Standards Codification (“ASC”) Topic 842 and established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities to make lease payments, that arise from leases. For leases with a term of 12 months or less, a lessee is permitted to make an election under which such assets and liabilities would not be recognized, and lease expense would be recognized generally on a straight-line basis over the lease term. This standard was adopted by the Company for the year beginning January 1, 2019. The Company has evaluated the impact of this revised guidance on its financial statements and determined it had no material impact, onas the Company’s financial statementsCompany has no leasing arrangements with terms greater than one year. 4. | Liquidity and Management PlansBusiness Plan |
We will need to obtain additional funds to continue our operations and execute our current business plans. We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually. Between March 1, 2016In closings occurring in December 2018 and SeptemberJanuary 2019 the Company sold $2.2 million principal amount of unsecured convertible promissory notes (the “Notes”) and warrants to purchase up to 1,243,498 shares of common stock (the “Warrants”) in a private placement to certain investors pursuant to a Securities Purchase Agreement. On June 30, 2017, we2019 the principal balance and accrued a portioninterest of cash base salaries for all senior employees in an effort to conserve cash. In lieu$105,000 converted into 651,758 shares of a portion of base salary,common stock per the affected employees were entitled to receive a cash payment in an amount equal to the foregone salary. The cash payment would have become due upon a change of control or the issuance of equity securities resulting in cash gross proceeds of $10 million or more. As of December 31, 2017, the contingent payments under these arrangements totaled $1.1 million. On February 27, 2018, eachterms of the affected employees agreed to waive their rights to receive the contingent payments in exchange for common stock options.Notes at a conversion rate of $3.50. See Note 6 titled “Employment agreement amendments and waiver“Indebtedness” for a detailed discussion of contingent payment rights.”
On February 20, 2018, we entered into a Securities Purchase Agreement (the “2018 Purchase Agreement”) with certain accredited investors and completed an initial closing on the same date. Pursuant tomaterial terms of the initial closing, we sold a total of 168,000 shares of common stock and warrants to purchase an aggregate of up to the same number of additional shares of common stock.Notes. The warrants issued under the 2018 Purchase Agreement will beWarrants are exercisable for a period of threefive years from the date of issuance at an initial exercise price of $5.00 per share. On March 16, 2018 and May 16, 2018, we completed additional closings under the 2018 Purchase Agreement, resulting in the sale of an additional 84,200 and 216,000, respectively, shares of common stock and warrants to purchase up to the same number of additional shares of common stock. We have received aggregate gross proceeds totaling $2.3 million pursuant to private placements under the 2018 Purchase Agreement, of which $125,000 was received from directors and officers of the Company or its subsidiary. The 2018 Purchase Agreement contemplates subsequent closings that could result in up to an additional 885,521 units (each consisting of one share of common stock and a warrant to purchase one additional share of common stock).
On May 16, 2018, as the result of receiving aggregate gross proceeds exceeding $2.0 million for the sale equity securities, under terms of the convertible debt, the Company completed the conversion of previously outstanding debt. Debt totaling $330,500 and accrued interest totaling approximately $19,500 was converted into 104,463 shares of common stock. Debt totaling approximately $2.7 million and accrued interest totaling approximately $163,500 was converted into 646,279 units (each consisting of a share of common stock and a warrant to purchase one additional share of common stock). The units were available through the 2018 Purchase Agreement.$4.50.
If we are unable to obtain additional financing when needed, we believe that will need to reduce our operations by taking actions that may include, among other things, reducing use of outside professional service providers, reducing staff or further reducing staff compensation, significantly modifying or delaying the development of our SBP-101 product candidate, licensing rights to third parties, including the right to commercialize our SBP-101 product candidate for pancreatic cancer, recurrent acute and/or chronic pancreatitis or other applications that we would otherwise seek to pursue, or discontinuing operations entirely. Our future success is dependent upon our ability to obtain additional financing, the success of our development efforts, our ability to obtain marketing approval for our SBP-101 product candidate in the United States or other markets and ultimately our ability to market and sell our SBP-101 product candidate. If we are unable to obtain additional financing when needed, if our clinical trials are not successful or if we are unable to obtain marketing approval, we would not be able to continue as a going concern and would be forced to cease operations and liquidate our company. There can be no assurances that we will be able to obtain additional financing on commercially reasonable terms, or at all. The sale of additional convertible debt or equity securities would likely result in dilution to our current stockholders. 5. | Summary of Significant Accounting Policies |
Principles of consolidation The accompanying condensed consolidated financial statements include the assets, liabilities and expenses of Sun BioPharma, Inc. and our wholly-owned subsidiary, Sun BioPharma Australia Pty Ltd.the Company. All significant intercompany transactions and balances have been eliminated in consolidation. Use of estimates The preparation of condensed consolidated financial statements 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 condensed consolidated financial statements and the reported amount of expenses during the reporting period. Actual results could differ from those estimates. Beneficial conversion featureconversion features For convertible debt where the rate of conversion is below fair market value for our common stock, the Company records a "beneficialbeneficial conversion feature" ("BCF")feature and related debt discount that is presented as a direct deduction from the carrying amount of the related debt and as an increase to additional paid-in capital. The debt discount is amortized through interest expense over the life of the related debt. Debt issuance costs Costs associated with the issuance of debt instruments are capitalized and presented as a direct deduction from the carrying amount of the related debt liability. These costs are amortized through interest expense over the life of the related debt. Research and development costs Research and development costs include expenses incurred in the conduct of our second Phase 1 human clinical trial, for third-party service providers performing various testing and accumulating data related to our preclinical studies; sponsored research agreements; developing and scaling the manufacturing process necessary to produce sufficient amounts of the SBP-101 compound for use in our pre-clinical studies and human clinical trials; consulting resources with specialized expertise related to execution of our development plan for our SBP-101 product candidate; personnel costs, including salaries, benefits and share-based compensation; and costs to license and maintain our licensed intellectual property. We charge research and development costs, including clinical trial costs, to expense when incurred. Our human clinical trials are, and will be, performed at clinical trial sites and are administered jointly by us with assistance from contract research organizations (“CROs”). Costs of setting up clinical trial sites are accrued upon execution of the study agreement. Expenses related to the performance of clinical trials generally are accrued based on contracted amounts and the achievement of agreed upon milestones, such as patient enrollment, patient follow-up, etc. We monitor levels of performance under each significant contract, including the extent of patient enrollment and other activities through communications with the clinical trial sites and CROs, and adjust the estimates, if required, on a quarterly basis so that clinical expenses reflect the actual effort expended at each clinical trial site and by each CRO. All material CRO contracts are terminable by us upon written notice and we are generally only liable for actual effort expended by the CROs and certain non-cancelable expenses incurred at any point of termination. We expense costs associated with obtaining licenses for patented technologies when it is determined there is no alternative future use of the intellectual property subject to the license. Stock-basedStock-based compensation
In accounting for stock-based incentive awards, we measure and recognize the cost of employee and non-employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards.awards on the grant date. Calculating stock-based compensation expense requires the input of highly subjective assumptions, which represent our best estimates and involve inherent uncertainties and the application of management’s judgment. Compensation cost is recognized ratably using the straight-line attribution method over the vesting period, which is considered to be the requisite service period. The performance date for non-employee awards is generally not met until the individual award vests. Accordingly, we re-measure the current fair value each quarter until the award vests. Compensation expense for performance-based stock option awards is recognized when “performance” has occurred or is probable of occurring. The fair value of stock-based awards is estimated at the date of grant using the Black-Scholes option pricing model. The determination of the fair value of stock-based awards is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. Risk free interest rates are based upon U.S. Treasury rates appropriate for the expected term of each award. Expected volatility rates are based primarily on the volatility rates of a set of guideline companies, which consist of public and recently public biotechnology companies. The assumed dividend yield is zero, as we do not expect to declare any dividends in the foreseeable future. The expected term of options granted is determined using the “simplified” method. Under this approach, the expected term is presumed to be the mid-point between the average vesting date and the end of the contractual term. Forfeitures of unvested stock options are recognized as they occur. Foreign currency translation adjustments The functional currency of Sun BioPharma Australia Pty Ltd is the Australian Dollar (“AUD”).Dollar. Accordingly, assets and liabilities, and equity transactions of Sun BioPharma Australia Pty Ltd are translated into U.S. dollars at period-end exchange rates. Revenues and expenses are translated at the average exchange rate in effect for the period. The resulting translation gains and losses are recorded as a component of accumulated comprehensive loss presented within the statements of stockholders’ equity (deficit). During the six-month periods ended June 30, 20182019 and 2017,2018, any reclassification adjustments from accumulated other comprehensive loss to operations were inconsequential. Comprehensive loss Comprehensive loss consists of our net loss and the effects of foreign currency translation. Net loss per share Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is based on the weighted-averageweighted average of common shares outstanding during the period plus dilutive potential common shares calculated using the treasury stock method. Such potentially dilutive shares are excluded when the effect would be anti-dilutive or reduce a net loss per share. The Company’s potential dilutive shares, which include convertible debt, outstanding common stock options, and warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive. The following table sets forth the potential shares of common stock that were not included in the calculation of diluted net loss per share as their effects would have been anti-dilutive:anti-dilutive as of: | | Three and Six Months Ended June 30, | | | | 2018 | | | 2017 | | Employee and non employee stock options | | | 1,137,960 | | | | 683,960 | | Common shares issuable upon conversion of notes payable and accrued interest | | | 2,222 | | | | 310,287 | | Common shares issuable under common stock purchase warrants | | | 1,265,979 | | | | 351,550 | |
| | June 30, | | | | 2019 | | | 2018 | | Employee and non-employee stock options | | | 1,552,211 | | | | 1,137,960 | | Estimated common shares issuable upon conversion of notes payable and accrued interest | | | - | | | | 2,222 | | Common stock issuable under common stock purchase warrants | | | 2,509,477 | | | | 1,265,979 | | | | | 4,061,688 | | | | 2,406,161 | |
6.6.
| Employment agreement amendments and waiver of contingent payment rightsIndebtedness
|
Effective February 27, 2018, we enteredNotes
On June 30, 2019, all $2.2 million aggregate principal balance of Notes outstanding plus $105,000 of accrued interest was converted at a conversion rate of $3.50 per share of common stock into waivers and third amendments (collectively,651,758 shares of common stock per the “Amendments”) to the previously disclosed employment agreements, as amended (the “Agreements”), with our Executive Chairman, Michael T. Cullen, M.D., M.B.A., our President and Chief Executive Officer, David B. Kaysen, and our former Chief Financial Officer, Scott Kellen, each of whom was an executive officerterms of the Company (collectively,Notes. The Notes were issued in December 2018 and January 2019 and bore interest at a rate of 10.0% per year. Both the “Executives”), and our Chief Medical Officer, Suzanne Gagnon, M.D. (together with the Executives, the “Employees”). Dr. Cullen, Mr. Kaysen and Dr. Gagnon are also current membersrelative value of the Company’s Board of Directors. For eachWarrants and the beneficial conversion feature of the Employees, the Amendments waived the contingent cash payment and/or equity payments that had been established by the amendments to the Agreements dated October 1, 2017, each of which could have become due upon a change of control or the Company’s completion of an underwritten public offering of its common stock before June 30, 2018. The potential payments waived by the Employees totaled $1.1 million at the time of the amendments and wasNotes were recorded as a reductiondebt discount at the times the Notes were sold which was presented as a direct deduction from the carrying value of the Notes. The discount was fully amortized through interest expense immediately prior to the conversion on June 30, 2019.
Term debt Effective April 5, 2019 the terms of our unsecured loan (the “Term Debt”) payable to the Institute for Commercialization of Public Research, Inc. (the “Institute”) were amended to extend the maturity date from May 1, 2019 to December 31, 2019. The Institute agreed to the amendment in salary expense. The Amendments also entitled Dr. Cullen, Mr. Kaysen, Mr. Kellen and Dr. Gagnon to grants of new non-qualified stock optionsexchange for a warrant to purchase up to 100,000 shares, 50,000 shares, 25,000 shares and 95,0005,555 shares of Company common stock respectively, at an exercise price equal toof $4.50. The warrant expires five years from issuance. The fair market value as of the datewarrant was nominal and as such has not been given any accounting treatment. The amendment requires the continuation of grant. These options vested upon grantmonthly payments of principal and have option terms of 10 years.interest totaling $10,000. The options were granted underunpaid principal balance at June 30, 2019 was $232,000. Unsecured Promissory Notes On May 17, 2019 the Company executed an unsecured promissory note with a vendor that relieved the Company’s 2016 Omnibus Incentive Plan effectiveimmediate obligation to pay the outstanding vendor invoices. The outstanding vendor invoices totaling approximately $742,000 were removed from the Company’s accounts payable as consideration for the promissory note. The promissory note is unsecured, does not bear interest and the balance is payable in full on the earlier of February 27, 2018 and had(1) December 31, 2020 or (2) the date the Company’s stock is registered on a fair value of approximately $1.3 million which was recorded as stock-based compensation expense.national exchange. 7. | Stockholders’ Equity (Deficit) |
Private PlacementShares
During the six months ended June 30, 2018, we issued an aggregate of 468,200 shares of our common stock and warrants to purchase an aggregate of up to the same number of additional shares of common stock pursuant to closings under the 2018 Purchase Agreement. Total proceeds from the salereserved for future issuance were as follows as of common stock and warrants was $2.3 million. Pursuant to the 2018 Purchase Agreement, we may be required to file a registration statement with the SEC covering the resale of the shares issued and/or warrant shares issuable thereunder. See Note 4, titled “Liquidity and Management’s Plans.”
Debt ConversionJune
During the six months ended June 30, 2018, the Company issued 104,463 shares of common stock as the result of the conversion of previously outstanding debt totaling $330,500 and accrued interest totaling approximately $19,500. Also during the six months ended June 30, 2018, the Company issued 646,279 units (each consisting of a share of common stock and a warrant to purchase one additional share) as the result of the conversion of previously outstanding debt totaling approximately $2.7 million and accrued interest totaling approximately $163,500. The units were issued to note holders selecting an alternative conversion from units made available under the 2018 Purchase Agreement. The conversion occurred under the original terms of the convertible debt.
Shares reserved 30, 2019:
| | | Total Reserved | | Shares of common stock reserved for future issuance are as follows:Stock options outstanding
| | | | | | | June 30, 2018
| | Common stock issuable under outstanding common stock options
| | | 1,137,9601,552,211 | | Shares available for grant under eqityequity incentive plan | | | 656,400 | | Estimated common shares issuable upon conversion of notes payable
| | | 2,222212,149 | | Common shares issuable under outstanding common stock purchase warrants | | | 1,265,9792,509,477 | | Total
| | | 3,062,5614,273,837 | |
8. | Stock-based Compensation |
2016 Omnibus Incentive Plan The Sun BioPharma, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) was adopted by our Board of Directors in March 2016 and approved by our stockholders in May 2016. The 2016 Plan permits the granting of incentive and non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other stock awards to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the 2016 Plan at no less than the fair market value of the underlying common stock as of the date of grant. Options granted under the 2016 Plan have a maximum term of ten years. Under the 2016 Plan, a total of 1,500,000 shares of common stock were initially reserved for issuance. As of June 30, 2018,2019, options to purchase 843,6001,285,711 shares of common stock were outstanding under the 2016 Plan and 656,400212,149 shares remained available for future awards. 2011 Stock Option Plan Our Board of Directors ceased making awards under the Sun BioPharma, Inc. 2011 Stock Option Plan (the “2011 Plan”) upon the receipt of stockholder approval for the 2016 Plan. Awards outstanding under the 2011 Plan remain outstanding in accordance with and pursuant to the terms thereof. Options granted under the 2011 Plan have a maximum term of ten years and generally vest over zero to two years for employees. As of June 30, 2018,2019, options to purchase 294,360266,500 shares of common stock remained outstanding under the 2011 Plan. Stock-based Compensation Expense General and administrative (“G&A”) and research and development (“R&D”) expenses include non-cash stock-based compensation expense as a result of our issuance of stock options. The terms and vesting schedules for stock-based awards vary by type of grant and the employment status of the grantee. The awards granted through June 30, 20182019 vest based upon time-based and performance conditions. We expect to record additional non-cashThere was approximately $0.6 million unamortized stock-based compensation expense in the future, which may be significant.related to options granted to employees and non-employees as of June 30, 2019. Stock-based compensation expense for each of the periods presented is as follows (in thousands): Stock Based Compensation (in thousands) | | | | | | | | Six Months Ended June 30, | | | | 2018 | | | 2017 | | Research and development | | $ | 835 | | | $ | 178 | | General and administrative | | | 1,315 | | | | 846 | | Total Stock based compensation | | $ | 2,150 | | | $ | 1,024 | |
| | Six Months Ended June 30, | | | | 2019 | | | 2018 | | General and Administrative | | $ | 260 | | | $ | 1,315 | | Research and Development | | | 162 | | | | 835 | | | | $ | 422 | | | $ | 2,150 | |
A summary of stock option activity for the six months ended June 30, 2019 is as follows: | | Shares Available for Grant | | | Shares Underlying Options | | | Weighted Average Exercise Price per Share | | | Aggregate Intrinsic Value | | Balances at December 31, 2017 | | | 1,060,400 | | | | 733,960 | | | $ | 9.79 | | | $ | 2,121,985 | | Granted | | | (404,000 | ) | | | 404,000 | | | | 7.40 | | | | | | Excercised | | | | | | | | | | | | | | | | | Cancelled | | | | | | | | | | | | | | | | | Balances at June 30, 2018 | | | 656,400 | | | | 1,137,960 | | | $ | 8.94 | | | $ | 1,266,415 | |
| | Shares Available for Grant | | | Shares Underlying Options | | | Weighted Average Exercise Price Per Share | | | Aggregate Intrinsic Value | | Balance at December 31, 2018 | | | 732,149 | | | | 1,032,211 | | | $ | 8.90 | | | $ | 169,495 | | Granted | | | (540,800 | ) | | | 540,800 | | | | 2.95 | | | | | | Exercised | | | - | | | | - | | | | - | | | | | | Cancelled | | | - | | | | - | | | | - | | | | | | Forfeitures | | | 20,800 | | | | (20,800 | ) | | | 15.10 | | | | | | | | | | | | | | | | | | | | | | | Balance at June 30, 2019 | | | 212,149 | | | | 1,552,211 | | | $ | 6.75 | | | $ | 32,195 | |
Information about stock options outstanding, vested and expected to vest as of June 30, 2018,2019, is as follows: | | | | Outstanding, Vested and Expected to Vest | | | Options Vested and Excercisable | | | | | | Outstanding, Vested and Expected to Vest | | | Options Vested and Excercisable | | Per Share Exercise Price | Per Share Exercise Price | | | Shares | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Options Excercisable | | | Weighted Average Remaining Contractual Life (Years) | | Per Share Exercise Price | | Shares | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Options Excercisable | | | Weighted Average Remaining Contractual Life (Years) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $0.875 | - | $1.10 | | | | 38,360 | | | | 4.34 | | | $ | 1.00 | | | | 38,360 | | | | 4.34 | | - | $1.10 | | | | 26,360 | | | | 3.50 | | | $ | 0.875 | | | | 26,360 | | | | 3.50 | | $2.275 | - | $2.50 | | | | 42,000 | | | | 5.62 | | | | 2.47 | | | | 42,000 | | | | 5.62 | | - | $2.50 | | | | 38,000 | | | | 4.62 | | | $ | 2.464 | | | | 38,000 | | | | 4.62 | | | $3.175 | | | | | 214,000 | | | | 6.68 | | | | 3.18 | | | | 214,000 | | | | 6.68 | | | $2.950 | | | | | | | 540,800 | | | | 9.89 | | | $ | 2.950 | | | | 198,125 | | | | 9.89 | | $3.175 | | | | | | | 200,000 | | | | 5.68 | | | $ | 3.175 | | | | 200,000 | | | | 5.68 | | $5.75 | - | $8.10 | | | | 404,000 | | | | 8.49 | | | | 7.40 | | | | 350,500 | | | | 8.64 | | - | $8.10 | | | | 379,000 | | | | 7.75 | | | $ | 7.488 | | | | 349,000 | | | | 7.69 | | $10.00 | - | $10.10 | | | | 54,000 | | | | 9.06 | | | | 10.01 | | | | 52,000 | | | | 9.27 | | - | $10.10 | | | | 54,000 | | | | 8.06 | | | $ | 10.007 | | | | 54,000 | | | | 8.06 | | $15.10 | | | | | | | 314,051 | | | | 6.91 | | | $ | 15.100 | | | | 307,051 | | | | 7.01 | | | $15.10 | | | | | 385,600 | | | | 8.01 | | | | 15.10 | | | | 326,089 | | | | 8.21 | | | | | | | | | | | | | | | | | | | | | | | | | | Totals | | | | | 1,137,960 | | | | 7.77 | | | $ | 8.94 | | | | 1,022,949 | | | | 7.84 | | | Totals | | Totals | | | | 1,552,211 | | | | 7.92 | | | $ | 6.746 | | | | 1,182,536 | | | | 7.37 | |
Nonemployee stock-based compensation
We account for stock options granted to nonemployees in accordance with FASB Accounting Standards Codification Topic 505. In connection with stock options granted to nonemployees, we recorded $0.3 million and $0.4 million for nonemployee stock-based compensation during the six months ended June 30, 2018 and 2017, respectively. These amounts were based upon the fair values of the vested portion of the grants. Amounts expensed during the remaining vesting period will be determined based on the fair value at the time of vesting.
Key assumptions The estimated grant-date fair values of the stock options were calculated using the Black-Scholes valuation model, based on the following assumptions for the sixthree months ended June 30, 2018 and 2017:2019: | 2018 | | 2017 | | | 2019 | | Common stock fair value | $5.75 | - | $6.75 | | 10.10 | - | 29.80 | | | $ | 2.95 | | Risk-free interest rate | 2.27% | - | 2.74% | | 1.43% | - | 1.93% | | | | 2.25% | | Expected dividend yield | | 0% | | | | 0% | | | | | 0% | | Expected Option life (in years) | 1.75 | - | 5.75 | | 2.50 | - | 5.0 | | | | 5.50 | | Expected stock price volatility | | 72.0% | | | 75.0% | - | 78.0% | | | | 72% | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion contains various forward-lookingThis Quarterly Report and other publicly available documents, including any documents incorporated herein and therein byreference contain, and our officers and representatives may from time to time make, “forward-looking statements,” including within the meaning of the safe harbor provisions of Section 27A of the U.S. Private Securities Litigation Reform Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.1995. When used in the following discussion, the words “anticipates,“anticipates,” “intends,” “believes,” “expects,” “intends,” “plans,” “estimates””seeks,” “estimates,” “likely,” “may,” “would,” “will,” and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. TheseExamples of forward-looking statements include, among others, statements we make regarding (i) our plans to complete Phase 1b; and (ii) our estimates of additional funds that may be required to complete Phase 1b and obtain necessary approvals.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to numerousinherent uncertainties, risks and uncertaintieschanges in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially and adversely from the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those anticipated. Factorsindicated in the forward-looking statements include, among others, the following: (i) our ability to obtain additional funding to complete Phase 1 clinical trial; (ii) progress and success of our Phase 1 clinical trial; (iii) our ability to demonstrate the safety and effectiveness of our SBP-101 product candidate; (iv) our ability to obtain regulatory approvals for our SBP-101 product candidate in the United States, the European Union or other international markets; (v) the market acceptance and level of future sales of our SBP-101 product candidate; (vi) the cost and delays in product development that could cause actual resultsmay result from changes in regulatory oversight applicable to differ materially from those anticipated, certainour SBP-101 product candidate; (vii) the rate of which are beyond our control, are set forth hereinprogress in establishing reimbursement arrangements with third-party payors; (viii) the effect of competing technological and market developments; (ix) the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims; and (x) such other factors as discussed in Part I, Item 1A under the caption “Risk Factors” in our most recent Annual Report Report on Form 10-K.10-K, any additional risks presented in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. Our actual results, performance or achievements could differ materially from those expressed in, or impliedAny forward-looking statement made by forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the cautions and risks describedus in this documentQuarterly Report is based on information currently available to us and to refrain from attributing undue certainty to any forward-looking statements, which speakspeaks only as of the date of the document inon which they appear.it is made. We do not undertake no obligation to publicly update any forward-looking statement.statement or reasons why actual results would differ from those anticipated in any such forward-looking statement, whether written or oral, whether as a result of new information, future developments or otherwise.
Overview Sun BioPharma, Inc., and its wholly-owned subsidiary, Sun BioPharma Australia Pty Ltd. (collectively “we,” “us,” “our,” and the “Company”) existThe Company exists for the primary purpose of advancing the commercial development of a proprietary polyamine analogue for pancreatic cancer and for a potential second indication in chronic and recurrent acute pancreatitis. We have exclusively licensed the worldwide rights to this compound, which has been designated as SBP-101, from the University of Florida Research Foundation, Inc. (“UFRF”).UFRF.
In August 2015, the U.S. FDA granted an Investigational New Drug (“IND”) approval for our SBP-101 product candidate fromcandidate. From January 2016 through September 2017, we enrolled twenty-nine patients into six cohorts, or groups, in the dose-escalation phase of our currenta Phase 1 trial.safety trial and published results in the Spring of 2018. The Company’s second trial, a Phase 1a/1b combination of SBP-101 with gemcitabine and nab-paclitaxel in patients previously untreated for metastatic pancreatic ductal adenocarcinoma (“PDA”), began dosing patients in June of 2018. The Phase 1a portion of this study will have a total of 3 dosing levels, cohorts, and determine a recommended dose of SBP-101 to be given in combination with standard treatment. The Company completed enrollment of an expanded cohort 2 during the quarter ended June 30, 2019. Following review by the Data Safety Monitoring Board (“DSMB”) of cohort 2 data, approval was received to advance to the third and final planned dose level of SBP-101. Enrollment in cohort 3 began in the middle of July 2019. Encouraging signals of efficacy were noted in the second cohort. Six of 6 subjects (100%) had significant decreases in Tumor Marker CA19-9 levels during treatment, with changes from baseline ranging from 75% to 95%. The CA19-9 level changes were accompanied by Response Evaluation Criteria in Solid Tumors (“RECIST”) tumor assessments of 4 partial responses and 2 subjects with stable disease. Subsequent to the review of cohort 2 data by the DSMB a new RECIST tumor assessment on one of the 6 subjects was moved from stable disease to partial response, resulting in interim efficacy RECIST tumor assessments of 5 partial responses and 1 subject with stable disease at dose level 2. The next phase is planned to be an expansion at the recommended dose of SBP-101 to guide SBP-101’s subsequent development for patients with PDA. We estimate that completion of our current Phase 1 clinical trial in pancreatic cancer and the completion of necessary preclinical development work and initiation of a Phase 1 clinical trial in pancreatitis,PDA will require additional funding of at least $10approximately $4 to $8 million. Additional clinical trials will likely be required for FDA or other similar approvals if the results of the firstcurrent clinical trial of our SBP-101 product candidate are positive. The cost and timing of additional clinical trials are highly dependent on the nature and size of the trials. However, it is positive. We estimateestimated that the additional timenext steps in the approval process could cost between $25 and cost$30 million. In the six months ended June 30, 2019 the Company initiated a preclinical study related to obtain FDAa potential second indication for SBP-101, the treatment of patients with chronic and European Medicines Agency (“EMA”) approval andrecurrent acute pancreatitis. The Company has not estimated incremental costs, beyond the current study, to bring our SBP-101 product candidate to market in these two indications will be 6 to 7 years with related costs up to $200 million.pursue this indication. Financial Overview We have incurred losses of $33.4$38.9 million since inception. For the six months ended June 30, 2018,2019, we incurred a net loss of $4.2$3.9 million, which included amortization of debt discount of $2.1 million. We also incurred negative cash flows from operating activities of $1.6$1.4 million for this period. We expect to continue to incur substantial losses, which will generate negative net cash flows from operating activities, as we continue to pursue research and development activities and commercialize our SBP-101 product candidate. Our cash was $0.9approximately $0.7 and $1.4 million as of June 30, 2018, compared to $0.2 million as of2019 and December 31, 2017.2018, respectively. The increasedecrease of $0.7 million in cash for the six months ended June 30, 2019 was primarily due to negative cash flow from operations of $1.4 million offset in part by $0.8 million net proceeds from the sales of shares of equity securities in a private placement to accredited investors pursuant to closings under the Securities Purchase Agreement (the “2018 Purchase Agreement”) dated February 20, 2018. Between March 1, 2016Notes and September 30, 2017, we accrued a portion of cash base salaries for all senior employees in an effort to conserve cash. As of December 31, 2017, the contingent payments under these arrangements totaled $1.1 million, which was reflected as accrued compensation expense. On February 27, 2018, each of the affected employees agreed to waive their rights to receive the contingent payments in exchange for common stock options.Warrants.
We will need to obtain additional funds to continue our operations and execute our current business plans, including completing our current Phase 1 clinical trial, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually. If we are unable to obtain additional financing when needed, we will likely need to reduce our operations by taking actions that may include, among other things, reducing use of outside professional service providers, reducing staff or further reducing staff compensation, significantly modifying or delaying the development of our SBP-101 product candidate, licensing rights to third parties, including the right to commercialize our SBP-101 product candidate for pancreatic cancer, acute pancreatitis or other applications that we would otherwise seek to pursue, or discontinue operations entirely. Results of Operations Comparison of the results of operations (in thousands): | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | 2018 | | | 2017 | | | Percent Change | | | 2018 | | | 2017 | | | Percent Change | | | 2019 | | | 2018 | | | Percent Change | | | 2019 | | | 2018 | | | Percent Change | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | General and administrative | | $ | 654 | | | $ | 487 | | | | 34.3 | % | | $ | 1,312 | | | $ | 1,737 | | | | -24.5 | % | | $ | 580 | | | $ | 654 | | | | -11.3 | % | | $ | 883 | | | $ | 1,312 | | | | -32.7 | % | Research and development | | | 442 | | | | 675 | | | | -34.5 | % | | | 1,024 | | | | 1,419 | | | | -27.8 | % | | | 508 | | | | 442 | | | | 14.9 | % | | | 858 | | | | 1,024 | | | | -16.2 | % | Total Operating expenses | | | 1,096 | | | | 1,162 | | | | -5.7 | % | | | 2,336 | | | | 3,156 | | | | -26.0 | % | | Operating loss | | | | 1,088 | | | | 1,096 | | | | -0.7 | % | | | 1,741 | | | | 2,336 | | | | -25.5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other Income (expenses), net | | | (1,468 | ) | | | (364 | ) | | | 303.3 | % | | | (2,012 | ) | | | (4,096 | ) | | | -50.9 | % | | Other expenses, net | | | | (1,253 | ) | | | (1,468 | ) | | | -14.6 | % | | | (2,252 | ) | | | (2,012 | ) | | | 11.9 | % | Income tax benefit | | | 79 | | | | 112 | | | | -29.5 | % | | | 108 | | | | 264 | | | | -59.1 | % | | | 70 | | | | 79 | | | | -11.4 | % | | | 141 | | | | 108 | | | | 30.6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net Loss | | $ | (2,485 | ) | | $ | (1,414 | ) | | | 75.7 | % | | $ | (4,240 | ) | | $ | (6,988 | ) | | | -39.3 | % | | $ | (2,271 | ) | | $ | (2,485 | ) | | | -8.6 | % | | $ | (3,852 | ) | | $ | (4,240 | ) | | | -9.2 | % |
ResearchGeneral and administrative (“G&A”) expenses and research and development and general and administrative(“R&D”) expenses include non-cash share-based compensation expense because of our issuance of stock options. We expense the fair value of equity awards over their vesting periods. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. The awards granted through June 30, 20182019 vest upon performance and time-based conditions. We expect to record additional non-cash share-based compensation expense in the future, which may be significant.
The following table summarizes the stock-based compensation expense in our statements of comprehensive loss for the six months ended June 30, 20182019 and June 30, 20172018 (in thousands): | | Six Months Ended June 30, | | | | 2018 | | | 2017 | | Research and development | | $ | 835 | | | $ | 178 | | General and Administrative | | | 1,315 | | | | 846 | | Total | | $ | 2,150 | | | $ | 1,024 | |
| | Six Months Ended June 30, | | | | 2019 | | | 2018 | | General and administative | | $ | 260 | | | $ | 1,315 | | Research and Development | | | 162 | | | | 838 | | Total Stock based compensation | | $ | 422 | | | $ | 2,153 | |
General and administrative expense Our general and administrative (“G&A”)&A expenses increased 34.3%decreased 11.3% to $0.6 million in the second quarter of 2019 down from $0.7 million in the second quarter of 2018 up from $0.5 million in the second quarter of 2017.2018. G&A decreased 24.5%32.7% to $1.3$0.9 million in the six months ended June 30, 2018,2019, down from $1.7$1.3 in the six months ended June 30, 2017.2018. The increasedecrease in the quarter ended June 30, 20182019 is primarily associated with an increase in stock compensation expensereduced headcount versus the same quarter in the prior year. For the six-months ended June 30, 20182019 the decrease is due to a combination of lower salary expense and lower stock compensation expense. Research and development expense Our research and development (“R&D”)&D expenses decreased 34.5%increased 14.9% to $0.5 million in the second quarter of 2019 up from $0.4 million in the second quarter of 2018 down from $0.72018. R&D decreased 16.2% to $0.9 million in the second quarter of 2017. R&D decreased 27.8% tosix months ended June 30, 2019, down from $1.0 million in the six months ended June 30, 2018, down from $1.4 million in the six months ended June 30, 2017.2018. The decreaseincrease in the quarter ended June 30, 20182019 was due primarily to decreased salary expenseincremental expenses associated with fewer employees and other expenses reduced due to the completion of the Company’s dose escalation phase 1 clinicala preclinical study in late 2017 offset by modest spending on the Company’s new Phase 1a study which was initiated in the quarter.a second indication and higher stock compensation expense. The decrease in the six-months ended June 30, 20182019 was due primarily to the reduced clinical and manufacturing study work completed in the quarter versus the same period in the prior year.stock compensation expense. Other expense, net Other income and expense, net, was a net expense of $2.0$2.3 million and $4.1$2.0 million for the six months ended June 30, 2019 and 2018, and 2017, respectively. Other expensesThe increase in the quarter ended June 30, 2018 were primarily the write offother expense is due to higher interest of $0.9 million of the outstanding debt discount when the $3.1 million of the Company’s convertible promissory notes were converted to equity securities, as well asexpense resulting from the amortization of that discount to interest of $0.2 for the portion of the quarter prior to the conversion. In the quarter ended March 31, 2017 other expense includes a non-cash charge of $3.7 million related to the induced conversions of $2.9 million of convertible promissory notes, including accrued but unpaid interest and $250,000 aggregate principal amount of demand notes.debt discount. Income tax benefit Income tax benefit decreased to $79,000 for the three-months ended June 30, 2018 down from $112,000 during the three-months ended June 30, 2017. The income tax benefitwas $141,000 for the six months ended June 30, 2018 decreased 59.1% to 108,000 from $264,000 in2019 versus $108,000 during the period endingsix months ended June 30, 2017.2018. Our income tax benefit is derived primarily from refundable tax credits associated with our R&D activities conducted in Australia and was reduced due to decreased R&D activities in the first half of 2018.Australia. Liquidity and Capital Resources The following table summarizestables summarize our liquidity and capital resources as of June 30, 20182019 and December 31, 20172018 and our cash flow data for the six months ended June 30, 2019 and 2018 and 2017 and isare intended to supplement the more detailed discussion that follows (in thousands): Liquidity and Capital Resources | | June 30, 2018 | | | December 31, 2017 | | | | | | | | | | | | | June 30, 2019 | | | December 31, 2018 | | Cash | | $ | 905 | | | $ | 152 | | | $ | 721 | | | $ | 1,405 | | Working capital (deficit) | | $ | 55 | | | $ | (3,403 | ) | | Working capital (deficiency)* | | | $ | 574 | | | $ | (1,073 | ) |
| | Six Months Ended June 30, | | Cash Flow Data | | 2018 | | | 2017 | | Cash (used in) provided by: | | | | | | | | | Operating activities | | $ | (1,585 | ) | | $ | (2,358 | ) | Financing activities | | | 2,341 | | | | 3,106 | | Effect of exchange rate changes on cash and cash equivalents | | | (3 | ) | | | 8 | | Net increase in cash | | $ | 753 | | | | 756 | |
* exludes $1,289 of unamortized debt discount at December 31, 2018 Cash Flow Data | | | | | | Six Months Ended June 30, | | | | 2019 | | | 2018 | | Cash Provided by (Used in): | | | | | | | | | Operating Activities | | $ | (1,414 | ) | | $ | (1,585 | ) | Investment Activities | | | - | | | | - | | Financing Activities | | | 730 | | | | 2,341 | | Effect of exchange rate changes on cash | | | - | | | | (3 | ) | Net (decrease) increase in cash | | $ | (684 | ) | | $ | 753 | |
Working Capital Our total cash was $0.9$0.7 million and $1.4 million as of June 30, 2018, compared to $0.2 million as of2019 and December 31, 2017.2018 respectively. We had $1.4$0.7 million in current liabilities and working capital of $0.1$0.6 million as of June 30, 2018,2019, compared to $4.2$1.6 million in current liabilities and a working capital deficit of $3.4$1.1 million (excluding $1.3 million of unamortized debt discount) as of December 31, 2017.2018. The decrease in current liabilities was due to the reduction in vendor payables of $742,000 which were moved to an unsecured, non-interest-bearing promissory note payable which is due on December 31, 2020 and is therefore classified as a long-term liability. The unamortized debt discount as of December 31, 2018 was fully amortized as of June 30, 2019 just prior to the conversion of that debt into common stock of the company. Cash Flows Net Cash Used in Operating Activities Net cash used in operating activities was $1.4 million in the six months ended June 30, 2019 compared to $1.6 million in the six-monthssix months ended June 30, 2018 compared to $2.4 million in the six-months ended June 30, 2017.2018. The net cash used in each of these periods primarily reflects the net loss for these periods and is partially offset by the effects of changes in operating assets and liabilities. In the six months ended June 30, 2017, the net loss is also offset by a non-cash charge of $3.7 million related to the induced conversions of $2.9 million of convertible promissory notes, including accrued but unpaid interest, and $250,000 aggregate principal amount of demand notes. Net Cash Provided by Financing Activities Net cash provided by financing activities was $2.3$0.7 million and $3.1$2.3 million for the six-monthssix months ended June 30, 20182019 and June 30, 2017,2018, respectively. The cash provided for the six months ended June 30, 2019 represents the gross proceeds from the sale of the Notes during the first quarter of 2019 offset in part by payments made on a demand note and term debt. The cash provided in the six-monthssix months ended June 30, 2018 represents $2.3 million net proceeds from sales of equity securities pursuant to the February, March and May closings under the 2018 Purchase Agreement. The cash provided in the six-months ended June 30, 2017 primarily represents net proceeds from the sale of 2017 Notes.warrants. Capital Requirements As we continue to pursue our operations and execute our business plan, including the completion of our current Phase 1 clinical trial for our initial product candidate, SBP-101, in pancreatic cancer, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets, we expect to continue to incur substantial and increasing losses, which will continue to generate negative net cash flows from operating activities. Our future capital uses and requirements depend on numerous current and future factors. These factors include, but are not limited to, the following: | ● | the progress of clinical trials required to support our applications for regulatory approvals, including our Phase 11a /1b clinical trial, a human clinical trial in Australia and the United States; |
| ● | our ability to demonstrate the safety and effectiveness of our SBP-101 product candidate; |
| ● | our ability to obtain regulatory approval of our SBP-101 product candidate in the United States, the European Union or other international markets; |
| ●
| the market acceptance and level of future sales of our SBP-101 product candidate;
|
| ●
| the rate of progress in establishing reimbursement arrangements with third-party payors;
|
| ●
| the effect of competing technological and market developments;
|
| ● | the cost and delays in product development that may result from changes in regulatory oversight applicable to our SBP-101 product candidate; |
| ● | the market acceptance and level of future sales of our SBP-101 product candidate; |
| ● | the rate of progress in establishing reimbursement arrangements with third-party payors; |
| ● | the effect of competing technological and market developments; and |
| ● | the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims. |
To date, we have used primarily convertible debt and equity financings to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future. Our cash was $0.9 million as of June 30, 2018, compared to $0.2 million as of December 31, 2017. We expect that we will increase our projected expenditures once we have additional capital on hand in order to continue our efforts to grow our business and complete our Phase 1a / 1b clinical trial for our SBP-101 product candidate. Accordingly, we expect to make additional expenditures in performing our Phase 1a /1b clinical trial and related support activities. With sufficient capital, we also expect to invest in research and developmentadditional R&D efforts of follow-on products.products or secondary indications. However, we do not have any definitive plans as to the exact amounts or particular uses at this time, and the exact amounts and timing of any expenditure may vary significantly from our current intentions.
We will likely need to obtain additional funds to continue our operations and execute our business plans, including completing our current Phase 1 clinical trial, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually. As of June 30, 2018,2019, we did not have any existing credit facilities under which we could borrow funds. We historically have financed our operations principally from the sale of convertible debt and equity securities. Pursuant to closings under the 2018 Purchase Agreement on February 20, March 16, and May 16, 2018, we have sold a total of 468,200 shares of common stock and warrants to purchase an aggregate of up to the same number of additional shares of common stock for aggregate gross proceeds totaling $2.3 million. The warrants are exercisable for a period of three years from the date of issuance at an exercise price of $5.00 per share. The 2018 Purchase Agreement contemplates subsequent closings that could result in up to an additional 885,521 units (each consisting of one share of common stock and a warrant to purchase one additional share of common stock).
If we are unable to obtain additional financing when needed, we will likely need to reduce our operations by taking actions which may include, among other things, reducing use of outside professional service providers, reducing staff or further reducereducing staff compensation, significantly modifying or delaying the development of our SBP-101 product candidate, licensing rights to third parties, including the right to commercialize our SBP-101 product candidate for patients with pancreatic cancer, recurrent acute and/or chronic pancreatitis or other applications that we would otherwise seek to pursue, or discontinuing operations entirely. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the interests of our current shareholdersstockholders would be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our current shareholders.stockholders. If we issue preferred stock, it could affect the rights of our shareholdersstockholders or reduce the value of our common stock. Specific rights granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. 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 or declaring dividends. Any of these events could adversely affect our ability to achieve our regulatory approvals and commercialization goals and harm our business. Our future success is dependent upon our ability to obtain additional financing, the success of our current Phase 1 clinical trial and required future trials, our ability to obtain marketing approval for our SBP-101 product candidate in the United States, the European Union and other international markets. If we are unable to obtain additional financing when needed, if our Phase 1 clinical trial is not successful, if we do not receive regulatory approval required for future trials or if once these studies are concluded, we do not receive marketing approval for our SBP-101 product candidate, we would not be able to continue as a going concern and would be forced to cease operations. The interim financial statements included in this report have been prepared assuming that we will continue as a going concern and do not include any adjustments relating to the recoverability or classification of assets or the amounts of liabilities that might result from the outcome of these uncertainties. Indebtedness As of June 30, 2018,2019, we had $325,000 principal amount of$1.0 million indebtedness outstanding. As of December 31, 2017,2018, the Company had $3.4$1.6 million aggregate principal amount of indebtedness outstanding. The change in the balancesix months ended June 30, 2019 was due to the conversion of $3.1$2.2 million aggregate principal amount of convertible promissory notes (the “2017 Notes”) into equity securities on May 16, 2018 as the resultand $105,000 of a qualified financing event that exceeded $2.0 million. Before conversion, the 2017 Notes accrued interest at 5.0% per year.to common stock on June 30, 2019 and a new unsecured promissory note payable entered into for the resolution of the balance owed a single vendor previously reflected in Accounts Payable. One $25,000 convertible promissory note (the “2013 Note”) remained outstanding at June 30, 2018. The 2013 Note accrues interest of 5% per year, payable quarterly, and is convertible into common stock at $11.25 per share. It is scheduled to maturewas paid in full on December 31, 2018.January 4, 2019. We also had $300,000Included in the $1.0 million of indebtedness is $232,000 outstanding in an unsecured loan that accrues interest of 4.125% per year and is scheduled to mature on May 1,December 31, 2019. In accordance with the terms of this loan we commenced with monthly payments of $10,000 on May 1, 2018.
Critical Accounting Policies and Estimates Our significant accounting policies are set forth in the notes accompanying the condensed consolidated financial statements included in this document. The accounting policies used in preparing our interim fiscal 20182019 condensed consolidated financial statements are the same as those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), that have or are reasonably likely to have a material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements. Item 3. | Quantitative and Qualitative Disclosure About Market Risk. |
As a smaller reporting company, we are not required to provide disclosure pursuant to this item. Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. As of the date of this filing, management has not identified any material weaknesses, but believes that it does have a significant deficiency in that it has insufficient personnel resources within the accounting function to fully segregate the duties over financial transaction processing and reporting. Management has mitigated this deficiency primarily through greater involvement in the review and monitoring of financial transaction processing and reporting by executive and senior management. We believe that our internal control system provides reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even effective internal controls over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time. As of the end of the period covered by this quarterly report, wethe Company’s management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2018,2019, our disclosure controls and procedures were effective in ensuring that information relating to the Company required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes to Internal Control Over Financial Reporting We have not identified any change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II – OTHER INFORMATION Item 1. | Legal Proceedings. |
None There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
All unregistered salesOn June 30, 2019, we issued 651,758 shares of common stock upon the conversion of unsecured convertible promissory notes totaling approximately $2.3 million principal and accrued interest at a conversion rate of $3.50 per share per the terms of the notes. The notes provided for a mandatory conversion into common stock on the earlier of (1) June 30, 2019 or (2) the date the Company received gross proceeds of at least $6.0 million from the sale of equity securities during the period covered by this report were reported on(subject to certain exclusions) and bore interest at a previous current report on Form 8-K.rate of 10.0% per year.
The shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act as securities exchanged by an issuer with existing security holders where no commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange. Item 3.Defaults Upon Senior Securities. | Defaults Upon Senior Securities.
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None. Item 4. | Mine Safety Disclosures. |
Not applicable. Item 5. | Other Information. |
None. Unless otherwise indicated, all documents incorporated into this quarterly report on Form 10-Q by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 000-55242. Exhibit No. | | Description | | Manner of Filing | 3.1 | | Restated Certificate of Incorporation, as amended through May 12, 2016November 8, 2017 (incorporated by reference to Exhibit 3.1 to quarterlycurrent report on Form 10-Q for the quarter ended June 30, 2016)8-Kfiled November 15, 2017) | | Incorporated by Reference | | | | | | 3.2 | | Bylaws, as amended through May 12, 2016 (incorporated by reference to Exhibit 3.2 to quarterly report on Form 10-Q for the quarter ended June 30, 2016) | | Incorporated by Reference | | | | | | 10.1
| | Form of Securities Purchase Agreement, dated February 20, 2018 (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed February 26, 2018)
| | Incorporated by Reference
| | | | | | 10.210.3
| | Form of Warrant issued April 2, 2019 (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed February 26, 2018) | | Incorporated by Reference
| | | | | | 10.3 | | Employment Agreement with Susan Horvath, effective as of April 17, 2018 (incorporated by reference to Exhibit 10.4 to quarterly report on Form 10-Q for the quarter ended March 31,2018)31, 2019)
| | Incorporated by Reference |
Exhibit No. | | Description | | Manner of Filing | 31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) Under the Securities Exchange Act of 1934, as Amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed Electronically | | | | | | 31.2 | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) Under the Securities Exchange Act of 1934, as Amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed Electronically | | | | | | 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed Electronically | | | | | | 32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed Electronically | | | | | | 101 | | Financial statements from the quarterly report on Form 10-Q of Sun BioPharma, Inc. for the quarter ended June 30, 2018,2019, formatted in XBRL: (i) the Balance Sheets, (ii) the Statements of Operations and Comprehensive Loss, (iii) the Statements of Stockholders’ Equity (Deficit), (iv) the Statements of Cash Flows, and (iv)(v) the Notes to Financial Statements. | | Filed Electronically |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | SUN BIOPHARMA, INC. | | | Date: August 13, 20182019 | /s/ David B. Kaysen Michael T. Cullen, MD | | David B. KaysenMichael T. Cullen, MD, MBA
President and Chief Executive Officer | | (Principal ExecutiveDuly Authorized Officer) | | | Date: August 13, 20182019 | /s/ Susan Horvath | | Susan Horvath Chief Financial Officer | | (Principal Financial Officer and Principal Accounting Officer) |
2221
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