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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 MARCH 31, 1999
[ ] 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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
THE VERANDA, SUITE 301
814 HIGHWAY A1A
PONTE VEDRA BEACH, FL 32082
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
ISSUER'S TELEPHONE NUMBER: (904) 394-2800
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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 April
26, 1999: 6,914,728
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STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-QSB contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). 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 results of SunPharm Corporation (the "Company"), please refer to the
discussions herein and to those contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998 (the "1998 Form 10-KSB") under the
caption "Item 1. Description of Business - Risk Factors."
PART 1. 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, that
the information presented is not misleading. These financial statements should
be read in conjunction with the financial statements and notes for the year
ended December 31, 1998, which are included in the 1998 Form 10-KSB.
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SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(Unaudited)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
Current Assets:
Cash ......................................... $ 1,041,893 $ --
Short-term investments ....................... 348,293 1,699,200
Prepaid expenses and other ................... 137,427 162,734
------------ ------------
Total current assets .................... 1,527,613 1,861,934
Receivable from stockholder ....................... 127,235 124,865
Property and equipment, net ....................... 55,293 57,933
Other assets ...................................... 9,275 9,275
------------ ------------
Total assets ........................... $ 1,719,416 $ 2,054,007
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................. $ 306,087 $ 213,627
Accrued liabilities .......................... 140,382 135,580
Notes payable ................................ 73,204 102,706
------------ ------------
Total current liabilities ............... 519,673 451,913
Stockholders' Equity:
Undesignated preferred stock, par value $.001
per share; 2,000,000 shares authorized;
0 shares issued and outstanding ......... -- --
Series A preferred stock, par value $.001 per
share; 300,000 shares authorized; 300,000
shares issued and outstanding ........... 300 300
Series B preferred stock, par value $.001 per
share; 200,000 shares authorized; 66,667
and 0 shares issued and outstanding ..... 67 --
Common stock, par value $.0001 per share;
25,000,000 shares authorized; 6,914,728
and 6,621,395 shares issued and
outstanding ............................. 691 662
Additional paid-in capital ................... 21,438,293 20,871,578
Accumulated deficit during development stage . (20,239,608) (19,270,446)
------------ ------------
Total stockholders' equity .............. 1,199,743 1,602,094
------------ ------------
Total liabilities and
stockholders' equity .................. $ 1,719,416 $ 2,054,007
============ ============
The accompanying notes are an integral part of these financial statements.
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SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(Unaudited)
FROM INCEPTION
(MAY 3, 1990)
THREE MONTHS ENDED MARCH 31, THROUGH
1999 1998 MARCH 31, 1999
------------ ------------ --------------
REVENUES:
Sponsored research/sublicensing revenue $ -- $ -- $ 3,115,729
Interest income ....................... 18,963 48,939 697,396
------------ ------------ ------------
Total revenues ................... 18,963 48,939 3,813,125
EXPENSES:
Research and development .............. 583,402 549,181 13,079,203
General and administrative ............ 404,723 538,884 10,483,530
Royalty expense ....................... -- -- 490,000
------------ ------------ ------------
Total expenses ................... 988,125 1,088,065 24,052,733
------------ ------------
NET LOSS ................................... $ (969,162) $ (1,039,126) $(20,239,608)
============ ============ ============
NET LOSS PER SHARE ......................... $ (0.15) $ (0.18)
============ ============
SHARES USED IN COMPUTING LOSS PER SHARE .... 6,677,210 5,747,049
============ ============
The accompanying notes are an integral part of these financial statements.
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SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Deficit
Accumulated
Redeemable Convertible Preferred Stock: Additional During
Series A Series B Common Stock: Paid-In Development
Shares Amount Shares Amount Shares Amount Capital Stage
---------------------------------------- --------------------- ----------------------------
Balance at December 31, 1998 ... 300,000 $ 300 -- -- 6,621,395 $ 662 $ 20,871,578 $(19,270,446)
Issuance of Common Stock ....... -- -- -- -- 293,333 29 300,114 --
Issuance of Preferred Stock .... -- -- 66,667 $ 67 -- -- 266,601 --
Net Loss ....................... -- -- -- -- -- -- -- (969,162)
---------------------------------------- --------------------- ---------------------------
Balance at March 31, 1999 ...... 300,000 $ 300 66,667 $ 67 6,914,728 $ 691 $ 21,438,293 $(20,239,608)
======================================== ===================== ===========================
The accompanying notes are an integral part of these financial statements.
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SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
FROM INCEPTION
(MAY 3, 1990)
THREE MONTHS ENDED MARCH 31, THROUGH
1999 1998 MARCH 31, 1999
------------ ------------ --------------
OPERATING ACTIVITIES
Net loss ........................................ $ (969,162) $ (1,039,126) $(20,239,608)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 2,640 1,962 88,320
Compensation expense related to options,
warrants and stock appreciation rights -- -- 999,016
Amortization of deferred offering costs
incurred in connection with
issuance of Bridge Notes .............. -- -- 775,000
Write-off of patents ..................... -- -- 70,120
(Increase) decrease in receivable
from stockholder ...................... (2,370) 1,316 (127,235)
Decrease (increase) in prepaid expenses
and other assets ...................... 25,307 (3,410) (145,093)
Increase in accounts payable ............. 92,460 31,159 306,087
Increase (decrease) in accrued liabilities 4,802 (22,555) 446,632
------------ ------------ ------------
Total adjustments ..................... 122,839 8,472 2,412,847
------------ ------------ ------------
Net cash used in operating activities .............. (846,323) (1,030,654) (17,826,761)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of short-term investments ............. -- (3,575,313) (26,488,831)
Sales and maturities of short-term investments .. 1,350,907 4,550,000 26,140,538
Purchases of property and equipment ............. -- (3,984) (79,918)
Payment of patent costs ......................... -- -- (67,424)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,350,907 970,703 (495,635)
------------ ------------ ------------
FINANCING ACTIVITIES
Repayments of notes payable ..................... (29,502) (65,965) (26,796)
Issuance of Series A preferred stock ............ -- -- 1,673,225
Issuance of Series B preferred stock ............ 266,668 -- 716,668
Issuance of common stock ........................ 300,143 10,590 17,598,540
Stock offering costs ............................ -- -- (597,348)
Proceeds from payable to shareholders ........... -- -- 542,500
Repayment of payable to shareholders ............ -- -- (542,500)
------------ ------------ ------------
Net cash provided by (used in) financing activities 537,309 (55,375) 19,364,289
------------ ------------ ------------
Net change in cash ................................. 1,041,893 (115,326) 1,041,893
Cash at beginning of period ........................ -- 356,969 --
------------ ------------ ------------
Cash at end of period .............................. $ 1,041,893 $ 241,643 $ 1,041,893
============ ============ ============
Supplemental information:
Cash paid for interest .......................... $ 1,552 $ 2,276 $ 169,004
============ ============ ============
The accompanying notes are an integral part of these financial statements.
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SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at March 31, 1999, the related statements of
operations for the three-month periods ended March 31, 1999 and 1998 and the
period from inception (May 3, 1990) through March 31, 1999, the statement of
stockholders' equity at March 31, 1999, and the statements of cash flows for the
three-month periods ended March 31, 1999 and 1998 and the period from inception
through March 31, 1999 are unaudited. These interim financial statements should
be read in conjunction with the financial statements and related notes included
in the 1998 Form 10-KSB. The unaudited interim financial statements included
herein 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 number of
shares of Common Stock outstanding for the period.
PATENT COSTS
The Company reimburses the University of Florida Research Foundation,
Inc. ("UFRFI") for direct expenses relating to the Company's patents. Patent
costs consist of legal fees and other direct costs incurred in filing,
prosecuting, and maintaining the licensed patents. These costs are charged to
research and development expense when incurred.
RESEARCH AND DEVELOPMENT
Sponsored research payments are recognized as revenue when the research
underlying such payments has been performed. Research and development expenses
are charged to operations when incurred. Research and development expenses
include, among other expenses, consulting fees and cost of reimbursements to
UFRFI.
SEGMENT INFORMATION
The Company is in one business segment and follows the requirements of
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information."
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NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), effective for fiscal years beginning after June 15, 1999. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. At this time, the
Company has not determined the effect of this statement on its financial
statement disclosure.
2. SURRENDER OF PURCHASE OPTION
On February 16, 1999, the underwriter of the Company's initial public
offering ("IPO") agreed to surrender a purchase option for 110,000 shares of
Common Stock exercisable at $11.20 per share, which it had acquired in
connection with the IPO and which was due to expire on January 12, 2000. In
exchange for surrender of this option, the Company agreed to issue an equal
number of shares of Common Stock to the underwriter at $0.60 per share, for
total proceeds of $66,000.
3. PRIVATE PLACEMENT OF PREFERRED STOCK AND COMMON STOCK
On March 31, 1999, the Company sold 66,667 shares of Series B
Redeemable Convertible Preferred Stock at $4.00 per share, (the "Series B
Preferred") and 183,333 shares of Common Stock at $1.273 per share to an
institutional investor in a private placement financing (the "Private
Placement") pursuant to Regulation D under the Securities Act. The shares of
Series B Preferred are initially convertible to Common Stock on a 1-for-1 basis,
subject to customary antidilution adjustments. Dividends shall accrue on the
Series B Preferred at the rate of 8% per annum. In the event of liquidation,
dissolution, or winding up of the Company, or, at the option of the holders of
the Series B Preferred, a consolidation or merger of the Company or a sale of
all or substantially all of its assets, holders of the Series B Preferred will
be entitled to receive in preference to the Company's Common Stock an amount per
share equal to the original purchase price plus any accrued dividends per share.
Proceeds from this Private Placement were approximately $485,000, net of legal
fees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in May 1990, the Company 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
preclinical activities at the University of Florida, with clinical
investigations conducted at various sites, including the University of Florida.
The Company has incurred cumulative net losses of $20,240,000 from its inception
through March 31, 1999. The Company expects to incur additional significant
operating losses for at least the next two years, principally as a result of its
continuing anticipated research and development and clinical trial expenditures.
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The Company has recently undertaken an assessment of its financial and
operational systems to ensure Year 2000 ("Y2K") compliance. Y2K issues result
from the inability of certain computer programs or computerized equipment to
accurately calculate, store or use a date subsequent to December 31, 1999
because certain computer programs or equipment may interpret the year 2000 as
the year 1900. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business.
Based on its review to date and other preliminary information, the Company does
not anticipate that it will incur any significant costs relating to the
remediation of Y2K issues. The Company believes that the potential impact, if
any, of its systems not being Y2K compliant should not impact the Company's
ability to continue its research and development activities. However, there can
be no assurance at this time that the Company, its research and business
partners, vendors or customers will successfully be able to identify and remedy
all potential Y2K problems or that a system failure resulting from a failure to
identify any such problems would not have a material adverse effect on the
Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Interest income decreased to $19,000 for the three months ended March
31, 1999 from $49,000 earned in the same period in 1998. The decrease is
attributable to a lower average cash balance available for investment during the
current quarter.
The Company's research and development expenses totaled $583,000 for
the quarter, an increase of 6% over the $549,000 recorded in the same period in
1998. The higher expenses in the current period were due to increased patent
costs, partially offset by lower clinical expenses. The Company expects its 1999
research and development expenses to be roughly 10% higher than 1998 levels, in
anticipation of initiating clinical trials for four drug candidates during the
current year.
General and administrative expenses were $405,000 for the three months
ended March 31, 1999, as compared to $539,000 for the same period in 1998, a
decrease of 25%. This resulted from a consolidation of investor relations
activity by the Company, combined with a reduction in other administrative
expenses, and also from lower personnel recruiting costs. The Company expects
its general and administrative expenses to increase during 1999, although more
slowly than its research and development expenses.
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 through the issuance of debt and equity securities.
Through March 31, 1999, the Company has received $3,116,000 of cumulative
sponsored research and sublicensing revenues and $21,438,000 in consideration
for the issuance of debt and equity securities, including net proceeds of
approximately $7,200,000 related to its IPO in January 1995.
During the three months ended March 31, 1999, net cash used in
operating activities was $846,000, compared with $1,031,000 for the comparable
period in 1998. The use of less cash in the
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current period was principally due to a lower net loss as a result of less
expenses, as previously discussed. At March 31, 1999, the Company had cash and
investments totaling $1,390,000, compared with $1,699,000 at December 31, 1998.
The Company's working capital was $l,008,000 at March 31, 1999, compared to
$1,410,000 at December 31, 1998. These decreases are attributable to the
Company's use of cash to fund its operations during the first quarter, partially
offset by the funding provided by a private placement financing as discussed
below.
On February 16, 1999, the underwriter of the Company's IPO agreed to
surrender a purchase option for 110,000 shares of Common Stock exercisable at
$11.20 per share, which it had acquired in connection with the IPO and which was
due to expire on January 12, 2000. In exchange for surrender of this option, the
Company agreed to issue an equal number of shares of Common Stock to the
underwriter at $0.60 per share, for total proceeds of $66,000.
On March 31, 1999, the Company sold 66,667 shares of Series B Preferred
and 183,333 shares of Common Stock at $1.273 per share to an institutional
investor in the Private Placement pursuant to Regulation D under the Securities
Act. The shares of Series B Preferred are initially convertible to Common Stock
on a 1-for-1 basis, subject to customary antidilution adjustments. Dividends
shall accrue on the Series B Preferred at the rate of 8% per annum. In the event
of liquidation, dissolution, or winding up of the Company, or, at the option of
the holders of the Series B Preferred, a consolidation or merger of the Company
or a sale of all or substantially all of its assets, holders of the Series B
Preferred will be entitled to receive in preference to holders of the Company's
Common Stock an amount per share equal to the original purchase price plus any
accrued dividends per share. Proceeds from this Private Placement were
approximately $485,000, net of legal fees.
The Company is in the process of conducting a private placement of up
to 2.5 million shares of Common Stock, as discussed in the Company's Proxy
Statement for its Annual Meeting of Stockholders scheduled for June 8, 1999.
Subscriptions have been received from several investors and are being held in
escrow pending the successful approval of the proposed financing by the
stockholders of the Company at the annual meeting. Due to the number of shares
proposed to be sold and the likelihood of the shares being sold at a discount
from market, the Company has submitted the proposed financing to its
stockholders for approval at the 1999 Annual Meeting. Closing is expected to
occur on the private placement immediately following the meeting.
The Company's future success is affected by a variety of factors,
including progress of the Company's research and development efforts, results of
preclinical studies and clinical trials, the cost and timing of regulatory
approvals, the Company's ability to obtain patent protection for its products on
a cost-effective and timely basis, the rate of technological advances,
determinations as to the commercial potential of the Company's products under
development, the status of competitive products, the establishment of
manufacturing capacity or third-party manufacturing arrangements, its reliance
on research institutions and corporate partners, the uncertainty of health care
reform, and the competitive environment in which the Company operates. The
Company's existing capital resources will not be sufficient to fund the
Company's operations to the point of introduction of a commercially successful
product, if and when that time should arrive. No assurance can be given that
additional capital will be available on acceptable terms, if at all. At the
present time, the Company estimates that its cash balance will be sufficient to
fund operations into the third quarter of 1999.
The Company expects to incur substantial additional research and
development expenses, including expenses associated with preclinical studies,
clinical trials and drug testing. The Company intends to use a portion of its
cash resources, together with funds from its existing collaborative arrangements
with the Warner-Lambert Company ("Warner-Lambert") and Nippon Kayaku Co., Ltd.
("Nippon Kayaku"), for these purposes. The Company's rights to receive payments
from Warner-Lambert and Nippon Kayaku, are dependent upon the achievement of
certain milestones by Warner-Lambert and Nippon Kayaku, respectively, and are
not within the control of the Company. No assurance can be made that such
milestones will be achieved or that such payments will be received by the
Company.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the first quarter of 1999, the Company agreed to issue an
aggregate of 110,000 shares of Common Stock at the price of $.60 per share to
the underwriter of the Company's IPO upon the underwriter's surrender of a
purchase option for an equal number of shares of Common Stock. Proceeds of
$66,000 pursuant to this transaction were received by the Company during the
first quarter. The Company also issued 66,667 shares of Series B Preferred at a
price per share of $4.00 and 183,333 shares of Common Stock at a price per share
of $1.273 to an institutional investor in the Private Placement which closed on
March 31, 1999.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* Certificate of Designation, Preferences and Rights of
Series B Convertible Preferred Stock
4.1* Securities Purchase Agreement dated March 31, 1999
between the Company and Uni-Invest
11.1* Statement of computation of weighted average shares
outstanding and net loss per share
27.1* Financial Data Schedule
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the issuer has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUNPHARM CORPORATION
Date: May 14, 1999 By: /s/ STEFAN BORG
------------------------------------------------
Stefan Borg
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 By: /s/ PAUL M. HERRON
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Paul M. Herron
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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