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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-27578
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SUNPHARM CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware F593097048
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4651 Salisbury Road, Suite 205
Jacksonville, Florida 32256
(Address of principal executive offices)
Issuer's telephone number: (904) 296-3320
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Number of shares of the issuer's Common Stock
outstanding as of November 14, 1996:3,363,096
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and notes disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to these rules and regulations. However, the Company
believes that the disclosures made herein are adequate, and accordingly, the
Company believes the information presented is not misleading. These financial
statements should be read in conjunction with the financial statements for the
year ended December 31, 1995 included in the Company's 1995 Form 10-KSB filed
pursuant to Section 15(d) of the Securities Exchange Act of 1934.
2
SUNPHARM CORPORATION
(A Development Stage Company)
BALANCE SHEETS
Pro Forma
September 30,
December 31, September 30, 1996 (unaudited)
1995 1996 (unaudited) (See Note 3)
---------------- ---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 331,069 $1,435,544 $3,224,994
Investments............................................. 1,290,464 -- --
Prepaid expenses and other current assets............... 159,857 24,708 24,708
------- ------
Total current assets................................ 1,781,390 1,460,252 3,249,702
--------- --------- ---------
Receivable from stockholder................................... 13,114 11,843 11,843
Other assets.................................................. 14,237 12,436 12,436
------ ------ ------
$ 1,808,741 $1,484,531 $3,273,981
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $360,722 $522,567 $522,567
Accrued liabilities..................................... 177,483 386,507 571,507
Accrued legal fees...................................... 300,000 30,000 30,000
Notes payable........................................... 87,834 10,027 10,027
------ ------ ------
Total current liabilities............................ 926,039 949,101 1,134,101
======= ======= =========
Commitments and contingencies
Stockholders' equity:
Undesignated series preferred stock,
$.001 par value, 2,500,000 shares authorized,
none issued and outstanding............................. -- -- --
Commonstock, $.0001 par value 25,000,000 shares
authorized, 2,884,535, 3,339,683 (unaudited)
and 3,665,037 (pro forma) issued and outstanding,
respectively............................................ 288 334 365
Additional paid-in capital.................................... 9,642,434 11,134,068 12,738,487
Deficit accumulated during development stage.................. (8,760,020) (10,598,972) (10,598,972)
---------- ----------- -----------
Total stockholders' equity ......................... 882,702 535,430 2,139,880
------- ------- ---------
$ 1,808,741 $1,484,531 $3,273,981
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
3
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
September 30,
-------------
1995 1996
---- ----
Interest Income................................ $ 40,476 $ 21,609
------- -------
Expenses:
Research and development................... 374,103 313,379
General and administrative................. 433,718 365,971
Royalty.................................... -- --
------- -------
Total expenses..................... 807,821 679,350
------- -------
Net loss....................................... $ (767,345) $ (657,741)
============== =============
Net loss per share............................. $ (0.27) $ (0.20)
============== =============
Shares used in computing loss per share........ $ 2,884,535 $ 3,231,655
============== =============
The accompanying notes are an integral part of these financial statements.
4
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
For the Period
from Inception
For the Nine Months Ended (May 3, 1990)
September 30, Through
------------- September 30,
1995 1996 1996
---- ---- ----
Sponsored research/sublicensing revenues................ $ __ $ 500,000 $ 2,385,000
Interest income......................................... 133,461 47,385 210,042
------- ------ -------
Total revenues..................... 133,461 547,385 2,595,042
------- ------- ---------
Expenses:
Research and development............................ 1,214,422 1,012,770 6,681,002
General and administrative.......................... 2,038,769 1,373,567 6,303,012
Royalty............................................. -- -- 210,000
--------- --------- ----------
Total expenses.............................. 3,253,191 2,386,337 13,194,014
--------- --------- ----------
Net loss................................................ $ (3,119,730) $ (1,838,952) $ (10,598,972)
============== ============ =============
Net loss per share...................................... $ ( 1.11) $ (0.61)
============== ============
Shares used in computing loss per share................. $ 2,814,869 $ 3,003,094
============== ============
The accompanying notes are an integral part of these financial statements.
5
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Period
from Inception
(May 3, 1990)
For the Nine Months Ended Through
September 30, September 30 ,
1995 1996 1996
---- ---- ----
Cash flows from operating activities:
Net loss............................................ $(3,119,730) $ (1,838,952) $(10,598,972)
Adjustments to reconcile net loss to net
cash used in operating activities -
Depreciation and amortization................... 2,579 1,800 71,706
Expenses related to issuance
of stock for services......................... -- -- 43,750
Compensation expense related to options
and warrants issued........................ 50,000 -- 865,246
Offering costs incurred in connection with
10% Convertible Secured Notes................. 775,000 -- 775,000
Write-off of patents............................. -- -- 70,120
(Increase) decrease in receivable from
stockholder............................ (657) 1,271 (11,843)
(Increase) decrease in prepaid expenses
and other assets............................. 51,993 135,562 (36,232)
Increase (decrease) in accounts payable......... (819,477) 161,849 522,567
Increase (decrease) in accrued liabilities...... (335,735) 209,024 386,507
-------
Increase in accrued legal fees................... -- (270,000) 30,000
-------- -------- ------
Total adjustments............................. (276,297) 239,506 2,716,821
-------- ------- ---------
Net cash used in operating activities.................. (3,396,027) (1,599,446) (7,882,151)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of short-term investments................ (2,316,837) -- (3,324,062)
Sale of short-term investments.................... -- 1,290,464 3,324,062
Purchases of office equipment..................... (2,876) (416) (17,614)
Payment of patent costs........................... -- -- (67,424)
------- ------- -------
Net cash (used in) provided by investing
activities............................... (2,319,713) 1,290,048 (85,038)
---------- --------- -------
Cash flows from financing activities:
Payments of notes payable......................... (1,582,459) (77,807) (89,973)
Decrease in deferred offering costs............... -- -- (597,348)
Issuance of Series A redeemable
convertible preferred stock................... -- -- 513,525
Issuance of Series B redeemable
convertible preferred stock................... -- -- 450,000
Issuance of common stock.......................... 7,634,849 1,491,680 9,126,529
Proceeds from payable to stockholders............. 25,000 -- 542,500
Repayment of payable to stockholders.............. (200,000) -- (542,500)
-------- -------- --------
Net cash provided by
financing activities.................... 5,877,390 1,413,873 9,402,733
--------- --------- ---------
Net change in cash..................................... 161,650 1,104,475 1,435,544
Cash at beginning of period............................ -- 331,069 --
-------- -------- ---------
Cash at end of period.................................. $ 161,650 $1,435,544 $1,435,544
=========== ========== ==========
Supplemental information:
Cash paid for interest............................ $ 13,514 $ 2,962 $ 164,871
Deferred compensation for stock $ 94,000 -- --
appreciation rights........................
The accompanying notes are an integral part of these financial statements.
6
SUNPHARM CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
The balance sheet at September 30, 1996 and the related statements of
operations for the three month and nine month periods ended September 30, 1996
and 1995 and the period from inception (May 3, 1990) through September 30, 1996
and statements of cash flows for the nine month periods ended September 30, 1996
and 1995 and the period from inception (May 3, 1990) through September 30, 1996
are unaudited. These interim financial statements should be read in conjunction
with the December 31, 1995 financial statements and related notes. The unaudited
interim financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the interim periods
presented and all such adjustments are of a normal recurring nature. Interim
results are not necessarily indicative of results for a full year.
NET LOSS PER SHARE
Net loss per share is computed based on the weighted average shares of
common stock outstanding for the period.
PATENT COSTS
The Company reimburses the University of Florida Research Foundation, Inc.
(UFRI), for direct expenses relating to the Company's patents. Patent costs
consist of legal fees and other direct costs incurred in obtaining patents.
These costs are charged to research and development expense or general and
administrative expense when incurred.
RESEARCH AND DEVELOPMENT
Sponsored research revenue is recognized as revenue when the payments are
earned or received and the research has been performed. Research and development
expenses are charged to operations when incurred. Research and development
expenses include, among other things, consulting fees and cost reimbursements to
UFRI.
PRO FORMA BALANCE SHEET
The unaudited pro forma balance sheet at September 30, 1996 gives effect to
the private placement and the exercise and issuance of warrants described in
Note 2 and the adjustments described in Note 3. The pro forma information should
be read together with the Financial Statements including the Notes thereto.
2. STATUS OF FINANCINGS
In April 1996, the Company received notice from The Nasdaq Stock Market
("Nasdaq") that the Company's total assets and capital and surplus as of
December 31, 1995, did not meet the minimum requirements for continued listing
on the Nasdaq Small Cap Market and that the Company's Common Stock, Warrants and
Units were subject to delisting. Nasdaq requested that the Company provide a
specific plan demonstrating how the Company will achieve ongoing compliance with
Nasdaq's minimum requirements of $2,000,000 of total assets and $1,000,000 of
capital and surplus. The Company provided a plan to Nasdaq
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SUNPHARM CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
which contemplated cash inflows to the Company through the private placement of
equity and other sources in an amount sufficient to bring the Company into
compliance by June 15, 1996, the date established by Nasdaq for final
determination. On June 17, 1996, the Company filed a Current Report on Form 8-K
which established that the Company had met the minimum requirements on such date
for continued listing on Nasdaq, as a result of the following events:
(i) the receipt in escrow of $370,480 of proceeds in connection with the
offering of Common Stock and warrants in the private placement; (ii) the
exercise of outstanding warrants from certain current warrantholders and the
issuance of additional warrants to such individuals, in an amount equal to
$468,301; (iii) payment of $500,000 from Warner-Lambert as a progress payment on
the Phase I clinical trials of DENSPM for cancer; and (iv) the settlement of a
lawsuit with Dean L. Rider, M.D. ("Rider Settlement") pursuant to which the
Company issued to Rider 50,000 shares of Common Stock. After the filing of the
Current Report on Form 8-K, the Company received additional proceeds and
conducted an initial closing on July 19, 1996, in which the Company received an
aggregate of $623,605 of proceeds (including the amount previously held in
escrow). Since the initial closing, the Company has received an additional
$2,092,190 of proceeds ($1,789,450 of which was received subsequent to September
30, 1996) from the private placement and $24,535 of proceeds from the exercise
of warrants. Based on all of the above, there can be no assurance that the
Company will be successful in maintaining its continued listing on the Nasdaq
Small Cap Market. In the event that the Company's securities are delisted, the
market value of such securities may be adversely affected.
3. PRO FORMA BALANCE SHEET
The pro forma Balance Sheet as of September 30, 1996, reflects the receipt
of private placement proceeds of $1,789,450 and assumes the issuance of
securities by the Company in exchange therefor. Such proceeds were received by
the Company during October and November 1996. Additionally, the pro forma
balance sheet reflects the $185,000 of fees incurred in connection with the
private placement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. The Quarterly Report on Form 10-QSB contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors. For a discussion of important factors that could
affect the Company's results, please refer to the discussions below, and to the
discussions in the Company's 1995 Annual Report on Form 10-KSB under the caption
"Item 1. Business - Risk Factors."
OVERVIEW
Since its inception in May 1990, SunPharm has devoted substantially all of
its efforts and resources to research and development conducted on its own
behalf and through collaborations with clinical institutions. The Company's drug
development strategy emphasizes conducting most of its research and clinical
activities at the University of Florida. Consequently, the Company believes that
its research and development expenditures have been lower than other comparable
development stage pharmaceutical companies. The Company has incurred cumulative
net losses of $10,598,972 from its inception through September 30, 1996. The
Company expects to incur additional significant operating losses for at least
the next several years principally as a result of its continuing anticipated
research and development and clinical trial expenditures.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1995 and 1996
The Company's research and development expenses decreased $61,000 from
$374,000 in the three months ended September 30, 1995 to $313,000 in the
comparable 1996 period. These expenses consisted of expenditures for research
and development conducted by Dr. Bergeron at the University of Florida, the cost
of human clinical trials and costs related to other tests and studies performed
in connection with the Company's pharmaceutical compounds. Although research and
development expenses decreased from period to period, the Company expects its
research and development expenses to increase during the remainder of 1996 and
1997, reflecting anticipated increased expenses related to ongoing research,
preclinical studies and Phase I and Phase II human clinical trials.
General and administrative expenses decreased from $434,000 in the three
months ended September 30, 1995 to $366,000 in the comparable 1996 period. The
decrease in the three months ended September 30, 1996 is attributable to a
reduction in legal and administrative expenses.
Nine Months Ended September 30, 1995 and 1996
The Company recorded licensing revenues of $500,000 from Warner-Lambert
during the nine months ended September 30, 1996.
The Company's research and development expenses decreased $201,000 from
$1,214,000 in the nine months ended September 30, 1995 to $1,013,000 in the
comparable 1996 period. This decrease results from the toxicology studies
performed in 1995.
General and administrative expenses decreased from $2,039,000 in the nine
months ended September 30, 1995 to $1,374,000 in the comparable 1996 period. The
decrease is primarily attributable to issuance costs of $775,000 ($600,000 of
which were non-cash costs) incurred in connection with the issuance in 1994 of
the 10% Convertible Secured Notes, which were expensed in 1995 upon the
repayment of such notes and
9
other costs incurred in the 1995 period which related to the Company's initial
public offering, offset by the costs associated with the Rider Settlement in the
1996 period.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through collaborative research and sublicense agreements with its strategic
alliance partners and the issuance of debt and equity securities. Through
December 31, 1995 the Company had received $1,885,000 of cumulative sponsored
research and sublicensing revenues, approximately $1,000,000 in consideration of
the private placement of equity securities, and $1,697,500 in consideration of
the placement of debt securities. On January 12, 1995, the Company completed an
initial public offering (the "Offering") of 1,100,000 units ("Unit") at $7.00
per Unit. Each Unit consists of one share of the Company's Common Stock and one
Redeemable Common Stock Purchase Warrant ("Warrant"), which entitles the holder
to purchase one share of Common Stock at $8.75 per share. Additionally, on
February 16, 1995, the Representative exercised an option to purchase an
additional 165,000 Units at $7.00 per Unit. Proceeds from the Offering were
approximately $7,200,000 of cash, net of underwriting costs and other Offering
costs of $1,655,000. Of such net proceeds, approximately $1,793,000 was used to
repay the outstanding indebtedness (including accrued interest and certain fees)
of the Company. On July 12, 1996, the Company received a $500,000 payment from
Warner-Lambert in connection with the Phase I DENSPM human clinical trials. Such
payment was accrued as licensing revenues for the period ended June 30, 1996.
During the nine month period ended September 30, 1996, the net cash used in
operating activities was $1,600,000. During the comparable 1995 period, cash
used by operating activities was $3,396,000. The decrease in cash used in
operations is primarily attributable to the payment in the 1995 period of
$700,000 of accounts payable and $210,000 of royalties both of which were
delayed until the completion of the Company's initial public offering. At
September 30, 1996, the Company had cash and cash equivalents of $1,436,000. The
Company had net working capital of $511,000 at September 30, 1996. The Company
will require substantial funds for research and development performed by the
University of Florida and to perform preclinical testing and clinical trials of
its potential products.
In April 1996, the Company received notice from The Nasdaq Stock Market
("Nasdaq") that the Company's total assets and capital and surplus as of
December 31, 1995, did not meet the minimum requirements for continued listing
on the Nasdaq Small Cap Market and that the Company's Common Stock, Warrants and
Units were subject to delisting. Nasdaq requested that the Company provide a
specific plan demonstrating how the Company will achieve ongoing compliance with
Nasdaq's minimum requirements of $2,000,000 of total assets and $1,000,000 of
capital and surplus. The Company provided a plan to Nasdaq which contemplated
cash inflows to the Company through the private placement of equity and other
sources in an amount sufficient to bring the Company into compliance by June 15,
1996, the date established by Nasdaq for final determination. On June 17, 1996,
the Company filed a Current Report on Form 8-K which established that the
Company had met the minimum requirements on such date for continued listing on
Nasdaq, as a result of the following events:
(i) the receipt in escrow of $370,480 of proceeds in connection with the
offering of Common Stock and warrants in the private placement; (ii) the
exercise of outstanding warrants from current warrantholders and the issuance of
additional warrants to such individuals, in an amount equal to $468,301; (iii)
payment of $500,000 from Warner-Lambert as a progress payment on the Phase I
clinical trials of DENSPM for cancer; and (iv) the settlement of a lawsuit with
Dean L. Rider, M.D. ("Rider Settlement") pursuant to which the Company issued to
Rider 50,000 shares of Common Stock. After the filing of the Current Report on
Form 8-K, the Company received additional proceeds and conducted an initial
closing on July 19, 1996, in which the Company received an aggregate of $623,605
of proceeds (including the amount previously held in
10
escrow). Since the initial closing, the Company has received an additional
$2,092,190 of proceeds of which $1,789,400 was received subsequent to September
30, 1996, from the private placement and $24,535 of proceeds from the exercise
of warrants. Based on all of the above, there can be no assurance that the
Company will be successful in maintaining its continued listing on the Nasdaq
Small Cap Market. In the event that the Company's securities are delisted, the
market value of such securities may be adversely affected.
On a pro forma basis, the Company had $3,274,000 of total assets,
$2,140,000 of equity, $3,225,000 of cash and $2,116,000 of working capital at
September 30, 1996 (see Pro Forma Balance Sheet and Note 3 to unaudited interim
financial statements).
The Company will require significant levels of additional capital, which it
intends to raise through additional equity or debt financing, additional
arrangements with corporate partners or from other sources. No assurance can be
given that the Company can obtain financing to fund its development activities
on acceptable terms or at all. If adequate funds are not available from
operations or additional sources of financing, the Company's business will be
materially and adversely affected.
The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1995, the Company had
net operating loss ("NOL") and tax credit carryforwards for income tax purposes
of approximately $6,458,000 and $260,000, respectively, which may be available
to reduce future taxable income and future tax liabilities. These carryforwards
begin to expire in 2008. The Tax Reform Act of 1986 provides for an annual
limitation on the use of NOL and credit carryforwards (following certain
ownership changes) that could significantly limit the Company's ability to
utilize these carryforwards. The Company has made no determination concerning
whether there has been such a cumulative change in ownership. It is possible
that such a change in ownership occurred following the completion of the
Offering and exercise of the Representative's over-allotment option or as a
result of the Company's 1996 private placement. Accordingly, the Company's
ability to utilize the aforementioned carryforwards to reduce future taxable
income and tax liabilities may be limited. Additionally, because United States
tax laws limit the time during which these carryforwards may be applied against
future taxes, the Company may not be able to take full advantage of these
attributes for federal income tax purposes.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Exhibit
- ------ -------
4.1 Form of Stock Purchase Warrant relating to Redeemable Common Stock
Purchase Warrants.
4.2 Subscription Agreement relating to May 1996 Offering of Units
consisting of one share of Common Stock and one Warrant.
11.1 Statement of computation of net loss per share
27. Financial Data Schedule
(b) Reports on Form 8-K.
None
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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.
SUNPHARM CORPORATION
Date: November 14, 1996 By: /s/ Stefan Borg
------------------------------
President and Chief Executive Officer
(Principal Executive, Financial and
Accounting Officer)
13