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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 SEPTEMBER 30, 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
November 11, 1999: 7,400,244.
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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 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, normally disclosed 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)
September 30 December 31,
1999 1998
------------ ------------
ASSETS
Current Assets:
Cash ...................................................................... $ 28,518 $ --
Short-term investments .................................................... -- 1,699,200
Receivables ............................................................... 635,000
Prepaid expenses and other ................................................ 67,375 162,734
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Total current assets ............................................. 730,893 1,861,934
Receivable from stockholder ..................................................... 132,078 124,865
Property and equipment, net ..................................................... 53,475 57,933
Other assets .................................................................... 9,275 9,275
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$ 925,721 $ 2,054,007
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................................... $ 1,046,510 $ 213,627
Accrued liabilities ....................................................... 101,438 135,580
Notes payable ............................................................. 14,248 102,706
Other ..................................................................... 92,961 --
------------ ------------
Total current liabilities ........................................ 1,255,157 451,913
Stockholders' (Deficit) Equity:
Undesignated preferred stock, par value $0.001
per share; 2,000,000 shares authorized;
0 shares issued and outstanding ........................................ -- --
Series A preferred stock, par value $0.001 per
share; 300,000 shares authorized; 300,000
shares issued and outstanding .......................................... 300 300
Series B preferred stock, par value $0.001 per
share; 200,000 shares authorized; 66,667
and 0 shares issued and outstanding .................................... 67 --
Common stock, par value $0.0001 per share;
25,000,000 shares authorized; 7,249,241
and 6,621,395 shares issued and
outstanding ............................................................ 725 662
Additional paid-in capital ................................................ 21,671,051 20,871,578
Accumulated deficit during development stage .............................. (22,001,580) (19,270,446)
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Total stockholders' (deficit) equity ............................. (329,437) 1,602,094
------------ ------------
$ 925,721 $ 2,054,007
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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)
Three Months Ended September 30,
1999 1998
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Revenues:
Sponsored Research/Sublicensing Revenue ................ $ 625,000 $ 100,000
Interest Income ........................................ 4,941 32,695
Miscellaneous Income ................................... 3,600 --
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Total Revenues ..................................... 633,541 132,695
Expenses:
Research and Development ............................... 900,672 687,770
General and Administrative ............................. 360,412 362,996
Royalty Expense ........................................ 175,000 --
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Total Expenses ..................................... 1,436,084 1,050,766
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Net Loss ..................................................... $ (802,543) $ (918,071)
=========== ===========
Net Loss per Share ........................................... $ (0.11) $ (0.16)
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Shares used in computing loss per share ...................... 7,015,331 5,767,830
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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)
Nine Months Ended September 30, Through
1999 1998 September 30, 1999
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Revenues:
Sponsored Research/Sublicensing Revenue ........... $ 625,000 $ 100,000 $ 3,740,729
Interest Income ................................... 38,001 128,726 716,434
Miscellaneous Income .............................. 6,000 -- 6,000
----------- ----------- ------------
Total Revenues ................................ 669,001 228,726 4,463,163
Expenses:
Research and Development .......................... 1,856,492 1,852,568 14,352,293
General and Administrative ........................ 1,368,642 1,382,209 11,447,449
Royalty Expense ................................... 175,000 -- 665,000
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Total Expenses ................................ 3,400,134 3,234,777 26,464,742
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Net Loss ................................................ $(2,731,134) $(3,006,051) $(22,001,580)
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Net Loss per Share ...................................... $ (0.40) $ (0.52)
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Shares used in computing loss per share ................. $ 6,875,328 5,760,419
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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 ........ -- -- -- -- 627,846 63 532,872 --
Issuance of Preferred Stock ..... -- -- 66,667 $ 67 -- -- 266,601 --
Net Loss ........................ -- -- -- -- -- -- -- (2,731,134)
--------------------------------------- -------------------- ------------ ------------
Balance at September 30, 1999 ... 300,000 $ 300 66,667 $ 67 7,249,241 $ 725 $ 21,671,051 $(22,001,580)
======================================= ==================== ============ ============
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
Nine Months Ended September 30, through
1999 1998 September 30, 1999
------------ ------------ ------------------
Operating activities
Net loss .................................................... $ (2,731,134) $ (3,006,051) $(22,001,580)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ......................... 7,733 5,544 93,413
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 in receivable from
stockholder ......................................... (7,213) (13,186) (132,078)
(Increase) decrease in receivables, prepaid
expenses and other assets .......................... (539,641) 145,755 (710,041)
Increase (decrease) in accounts payable ............... 832,883 (182,994) 1,046,510
(Decrease) increase in accrued liabilities ............ (34,142) (33,998) 407,688
Increase in other liabilities ......................... 92,961 -- 92,961
------------ ------------ ------------
Total adjustments ................................... 352,581 (78,879) 2,642,589
------------ ------------ ------------
Net cash used in operating activities ............................ (2,378,552) (3,084,930) (19,358,990)
------------ ------------ ------------
Investing activities
Purchases of short-term investments ......................... (3,384,030) (4,694,296) (29,872,861)
Sales and maturities of short-term investments .............. 5,083,230 8,465,508 29,872,861
Purchases of property and equipment ......................... (3,275) (25,068) (83,193)
Payment of patent costs ..................................... -- -- (67,424)
------------ ------------ ------------
Net cash provided by (used in) investing activities .............. 1,695,925 3,746,144 (150,617)
------------ ------------ ------------
Financing activities
Repayments of notes payable ................................. (88,459) (155,271) (85,753)
Issuance of Series A preferred stock ........................ -- -- 1,673,225
Issuance of Series B preferred stock ........................ 266,668 -- 716,668
Issuance of common stock .................................... 532,935 17,585 17,831,332
Stock offering costs ........................................ -- -- (597,348)
Repayment of payable to shareholders ........................ -- -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities .............. 711,145 (137,686) 19,538,125
------------ ------------ ------------
Net change in cash ............................................... 28,518 523,528 28,518
Cash at beginning of period ...................................... -- 356,969 --
------------ ------------ ------------
Cash at end of period ............................................ $ 28,518 $ 880,497 $ 28,518
============ ============ ============
Supplemental information:
Cash paid for interest ...................................... $ 2,922 $ 3,550 $ 170,374
============ ============ ============
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
SEPTEMBER 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at September 30, 1999, the related statements of
operations for the three- and nine-month periods ended September 30, 1999 and
1998 and the period from inception (May 3, 1990) through September 30, 1999, the
statement of stockholders' equity at September 30, 1999, and the statements of
cash flows for the nine-month periods ended September 30, 1999 and 1998 and the
period from inception through September 30, 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 consulting fees and cost of reimbursements to UFRFI, preclinical and
clinical testing of drug compounds under investigation, and salaries and
benefits of employees engaged in research and development activities.
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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."
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. In May 1999, the
Financial Accounting Standards Board postponed the effective date for SFAS No.
133 to fiscal years beginning after June 15, 2000. At this time, the Company has
not determined the effect of this statement on its financial statements.
2. MERGER WITH GELTEX PHARMACEUTICALS, INC.
On August 13, 1999, the Company's Board of Directors approved the
merger of the Company with GelTex Pharmaceuticals, Inc., a publicly traded
Delaware corporation ("GelTex"), through a reverse triangular merger in which
the Company would merge with a wholly owned subsidiary of GelTex. The Company
entered into a merger agreement to effect such transaction on August 13, 1999.
Both the merger and the merger agreement are subject to approval by the
Company's stockholders at a special meeting to be held on November 16, 1999.
Pursuant to the terms of the merger agreement, the Company's stockholders will
receive shares of common stock of GelTex for their shares of the Company's
Common Stock and Preferred Stock. If the stockholders approve the merger, the
merger will be effected, and the closing of the merger agreement will occur,
immediately following the special meeting.
3. LICENSE AGREEMENT WITH SCHEIN PHARMACEUTICAL, INC.
On September 30, 1999, the Company and Schein Pharmaceutical, Inc.
("Schein") entered into an exclusive license agreement whereby Schein will
obtain the rights to develop and market a proprietary iron chelator in the
Untied States, Europe and certain Far Eastern territories. Under the agreement,
the Company is entitled to receive payments contingent upon reaching certain
clinical, regulatory and manufacturing milestones, in addition to royalties on
sales.
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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 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 $22,001,580 from its inception through September 30,
1999.
The Company has recently undertaken an assessment of its financial and
operational systems to ensure Year 2000 ("Y2K") compliance. Y2K problems 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, the Company does not anticipate that it will incur
any significant costs relating to the remediation of Y2K issues or cause any
significant costs to be incurred by GelTex if the merger discussed in Note 2 to
the financial statements herein is approved. Similarly, the Company believes
that the potential impact, if any, of its systems not being Y2K compliant should
not impact the Company's or GelTex'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 SEPTEMBER 30, 1999 AND 1998
Interest income decreased to $5,000 for the three months ended
September 30, 1999 from $33,000 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 $625,000 of sublicensing revenue was attributable to the license
agreement executed with Schein Pharmaceutical, Inc. The related liability for a
28% royalty payment to the University of Florida Research Foundation, Inc. was
included in accounts payable.
The Company's research and development expenses totaled $901,000 for
the quarter, an increase of 24% from the $688,000 recorded in the same period in
1998. The higher expenses in the current period were due to an increase in
pre-clinical and regulatory expenses, in that the Company was preparing to
initiate clinical investigations during the current period.
-9-
General and administrative expenses were $360,000 for the three months
ended September 30, 1999, essentially unchanged from the $363,000 recorded in
the same period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Interest income decreased to $38,000 for the nine months ended
September 30, 1999 from $129,000 earned in the same period in 1998. The decrease
is attributable to a lower average cash balance available for investment.
The $625,000 of changed research to sublicensing revenue was
attributable to the license agreement with Schein Pharmaceutical, Inc. The
related liability for a 28% royalty payment to the University of Florida
Research Foundation, Inc. was included in accounts payable.
The Company's research and development expenses totaled $1,856,000 for
the nine months ended September 30, 1999, a slight increase from the $1,853,000
recorded in the same period in 1998.
General and administrative expenses were $1,369,000 for the nine months
ended September 30, 1999, as compared to $1,382,000 for the same period in 1998,
a decrease of 1%.
LIQUIDITY AND CAPITAL RESOURCES
Since 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 September 30, 1999, the Company has received $3,741,000 of cumulative
sponsored research and sublicensing revenues and $21,672,000 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. Between August 4,
1999 and November 11, 1999, the Company received $339,000 in cash from the
exercise of various options and warrants.
During the nine months ended September 30, 1999, net cash used in
operating activities was $2,379,000, compared with $3,085,000 for the comparable
period in 1998. The lower use of cash in the current period was due to a lower
net loss resulting from lower expenses, as previously discussed, and also due to
an increase in the Company's accounts payable balance. At September 30, 1999,
the Company had cash and investments totaling $29,000, compared with $1,699,000
at December 31, 1998. The Company's working capital was negative $525,000 at
September 30, 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 nine months of 1999.
On August 13, 1999, the Company's Board of Directors approved the
merger of the Company with GelTex Pharmaceuticals, Inc. a publicly traded
Delaware corporation ("GelTex"), through a reverse triangular merger in which
the Company would merge with a wholly owned subsidiary of GelTex. The Company
-10-
entered into a merger agreement to effect such transaction on August 13, 1999.
Both the merger and the merger agreement are subject to approval by the Company'
stockholders at a special meeting to be held on November 16, 1999. In the
merger, the Company's stockholders will receive shares of common stock of GelTex
for their shares of the Company's Common Stock and Preferred Stock. If the
stockholders approve the merger, the merger will be effected, and the closing of
the merger agreement will occur, immediately following the special meeting.
On February 16, 1999, the underwriter of the Company's IPO agreed to
surrender its option to purchase 110,000 shares of Common Stock 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. Subsequent to the
date of the agreement and payment of proceeds to the Company, but prior to the
surrender of the underwriter's option, it was determined that the underwriter
had previously assigned or disposed of a portion of its option. Accordingly on
August 11, 1999, the Company made a decision to refund to the underwriter
$43,200 of the $66,000 proceeds and reduce the number of shares of Common Stock
to be issued from 110,000 to 38,000.
The Company's future success is affected by a variety of factors,
including progress of the Company's research and development efforts, results of
pre-clinical 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. Nasdaq
has notified the Company that, while it is currently not in compliance with the
minimum net tangible asset requirement for continued listing on the Nasdaq
SmallCap Market, it has been granted an extension to remain out of compliance
until November 30, which is intended to allow completion of its merger with
GelTex. If the merger is not completed by such date, the Company may be delisted
from quotation on the Nasdaq SmallCap Market. In addition, 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's cash balance is sufficient to fund operations to the scheduled
closing of the merger with GelTex on November 16, 1999.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1+ Sublicense Agreement dated October 4, 1999 between
Schein Pharmaceutical, Inc. and SunPharm Corporation
11.1* Statement of computation of weighted average shares
outstanding and net loss per share
27.1* Financial Data Schedule
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+ Confidential treatment has been requested for portions of the referenced
agreement. The copy filed as an exhibit omits the information subject to
the confidentiality request.
* Filed herewith
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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 15, 1999 By: /s/ STEFAN BORG
------------------------------------------------
Stefan Borg
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 By: /s/ PAUL M. HERRON
------------------------------------------------
Paul M. Herron
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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