PART I – FINANCIAL INFORMATION

 

Item 1.     Financial Statements.

 

Sun BioPharma, Inc.
Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

 

 

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)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

Sun BioPharma, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited) 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

Sun BioPharma, Inc.

Condensed Consolidated Statements of Cash Flows
(In thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

Sun BioPharma, Inc.
Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Quarterly Report and other publicly available documents, including any documents incorporated herein and therein by reference 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 the U.S. Private Securities Litigation Reform Act of 1995. When used in the following discussion, the words “anticipates,” “intends,” “believes,” “expects,” “intends,” “plans,” ”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. Examples 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 inherent uncertainties, risks and changes 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 indicated 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) the impact of the current COVID-19 pandemic on our ability to complete enrollment in our current clinical trial; (iv) our ability to demonstrate the safety and effectiveness of our SBP-101 product candidate (v) our ability to obtain regulatory approvals for our SBP-101 product candidate in the United States, the European Union or other international markets; (vi) the market acceptance and level of future sales of our SBP-101 product candidate; (vii) the cost and delays in product development that may result from changes in regulatory oversight applicable to our SBP-101 product candidate; (viii) the rate of progress in establishing reimbursement arrangements with third-party payors; (ix) the effect of competing technological and market developments; (x) the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims; and (xi) such other factors as discussed in Part I, Item 1A under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, any additional risks presented in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.

 

Any forward-looking statement made by us in this Quarterly Report is based on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking 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

 

The Company exists for the primary purpose of advancing the commercial development of a proprietary polyamine analogue for pancreatic cancer and for a potential additional indication in certain other solid tumor cancers. We have exclusively licensed the worldwide rights to this compound, which has been designated as SBP-101, from the UFRF.

 

In August 2015, the Food and Drug Administration of the United States (“FDA”) granted an Investigational New Drug (“IND”) approval for our SBP-101 product candidate. From January 2016 through September 2017, we enrolled twenty-nine patients into six cohorts, or groups, in the dose-escalation phase of a Phase 1 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 has a total of 4 dosing levels, cohorts, and determined a recommended dose (and schedule) of SBP-101 to be given in combination with standard treatment. The Company completed enrollment of the fourth cohort in the quarter ended March 31, 2020, this cohort is evaluating an alternative dosing schedule for the administration of SBP 101. Enrollment in the expansion (1b) phase of the trial began immediately after enrollment in the fourth cohort, Due to the COVID 19 pandemic, the Company made a decision in early April to pause enrollment in the expansion phase of the study until conditions allow for us to resume enrollment. All subjects enrolled at the time of the pause continued to be treated. Promising interim results were presented in a poster presentation at ASCO-GI; the poster contained data as of January 4, 2020 in the response-evaluable subjects in cohorts 2 and 3 (N=13). The conclusions at that time reflected (i) an objective response rate of 62%; 4 PRs were observed after 2 cycles of therapy and 4 PRs were observed after 4 cycles of therapy and (ii) a disease control rate (DCR) of 85% by Response Evaluation Criteria in Solid Tumors (“RECIST”) criteria (at least SD for ≥ 16 weeks); 4 subjects had not reached week 16 scans.

 

We are currently evaluating the appropriate timing and form of the next clinical trial to be initiated at the completion of the Phase 1b expansion of the current study. It is expected to be a randomized phase 2 trial for patients with metastatic PDA. Additional funds will be required to complete the current study. Additional clinical trials will likely be required for FDA or other similar approvals if the results of the current clinical trial of our SBP-101 product candidate remain positive. The cost and timing of additional clinical trials are highly dependent on the nature and size of the trials. However, it is estimated that the next steps in the approval process could cost between $20 and $40 million.

 

Financial Overview 

 

We have incurred losses of $42.6 million since inception. For the three months ended March 31, 2020, we incurred a net loss of $1.8 million. We also incurred negative cash flows from operating activities of $1.1 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 approximately $1.3 million and $2.4 million as of March 31, 2020 and December 31, 2019, respectively.

 

A decrease of $1.1 million in cash for the three months ended March 31, 2020 was primarily due to negative cash flow from operations.

 

Other than the temporary pause in enrollment in our current clinical trial, the Company has not experienced any significant disruptions to our operations as the result of the COVID-19 pandemic. We anticipate resuming enrollment as soon as conditions allow. The Company was not required to change management practices as it was decentralized prior to the current pandemic.

 

 

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, and laboratory studies to explore potential indications in other cancer types. 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, 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 March 31,
		2020				2019				Percent Change
Operating Expenses
General and administrative		$	468			$	303				54.5	%
Research and development			598				350				70.9	%
Total operating expenses			1,066				653				63.2	%
Other expenses, net			(824	)			(999	)			-17.5	%
Income tax benefit			92				71				29.6	%
Net Loss		$	(1,798	)		$	(1,581	)			13.7	%

 

Research and development (“R&D”) and general and administrative (“G&A”) 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 March 31, 2020 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 three months ended March 31, 2020 and March 31, 2019 (in thousands):

 

		Three Months Ended March 31,
		2020				2019
General and administative		$	99			$	10
Research and Development			13				-
Total Stock based compensation		$	112			$	10

 

General and administrative expense

 

Our G&A expenses increased 54.5% to $468,000 in the first quarter of 2020 up from $303,000 in the first quarter of 2019. The increase is due in part to increased salary costs as employees had taken a voluntary reduction of salaries for a part of the first quarter of 2019; increased stock compensation expense, legal expenses made up the remaining increase.

 

Research and development expense

 

Our R&D expenses increased 70.9% to $598,000 in the first quarter of 2020 up from $350,000 in the first quarter of 2019 the increase is due primarily to increased clinical trial costs in the first quarter of 2020. 

 

 

Other expense, net

 

Other expense, net, was $824,000 and $999,000 for the three months ended March 31, 2020 and 2019, respectively. The net expense in the quarter ended March 31, 2020 is composed primarily of a foreign currency exchange loss on the intercompany receivable balance, The net expense in the quarter ended March 31, 2019 is primarily the amortization of debt discount on convertible notes sold in December 2018 and January 2019, all of which converted into equity securities in 2019.

 

Income tax benefit

 

Income tax benefit increased to $92,000 for the three months ended March 31, 2020 up from $71,000 during the three months ended March 31, 2019. Our income tax benefit is derived primarily from refundable tax credits associated with our R&D activities conducted in Australia and was increased due to increased eligible R&D activities in the first three months of 2020 versus the first three months of 2019.

 

Liquidity and Capital Resources

 

The following table summarizes our liquidity and capital resources as of March 31, 2020 and December 31, 2019 and our cash flow data for the three months ended March 31, 2020 and 2019 and is intended to supplement the more detailed discussion that follows (in thousands):

 

 

Liquidity and Capital Resources
		March 31, 2020				December 31, 2019
Cash		$	1,296			$	2,449
Working capital		$	679			$	2,076

 

 

Cash Flow Data		Three Months Ended March 31,
		2020				2019
Cash Provided by (Used in):
Operating Activities		$	(1,120	)		$	(783	)
Investment Activities			-				-
Financing Activities			(26	)			758
Effect of exchange rate changes on cash			(7	)			(1	)
Net (decrease) increase in cash		$	(1,153	)		$	(26	)

 

Working Capital

 

Our total cash was $1.3 million and $2.4 million as of March 31, 2020 and December 31, 2019, respectively. We had $1.4 million in current liabilities and working capital of $0.7 million as of March 31, 2020, compared to $1.8 million in current liabilities and a working capital of $1.3 as of December 31, 2019.

 

Cash Flows

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $1.1 million in the three months ended March 31, 2020 compared to $0.8 million in the three months ended March 31, 2019. 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.

 

 

Net Cash Provided by Financing Activities

 

Net cash used by financing activities was $26,000 for the three months ended March 31, 2020 and net cash provided by financing activities was $0.8 million for the three months ended March 31, 2019. The cash provided for the three months ended March 31, 2019 represents the gross proceeds from the sale of the Notes sold during the quarter.

 

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 1a /1b clinical trial, a human clinical trial in Australia and the United States;

 

●

the impact of the current COVID-19 pandemic on our ability to monitor and complete enrollment in our current clinical trial;

 

●

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 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. As of March 31, 2020, we did not have any existing credit facilities under which we could borrow funds.

 

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 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 additional R&D efforts on mechanism of action, biomarkers and secondary indications in other cancer types. The exact amounts and timing of any expenditure may vary significantly from our current intentions. We will 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.

 

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 reduce 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, 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 stockholders would be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our current stockholders. If we issue preferred stock, it could affect the rights of our stockholders 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 March 31, 2020, we had $90,0000 outstanding in an unsecured loan that accrues interest of 4.125% per year and is scheduled to mature on December 31, 2020. 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 2019 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, 2019.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet 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, the 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 March 31, 2020, 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

 

Item 1A.

Risk Factors.

 

In our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 the following risk was identified:

 

Our business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness. The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe, and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain and the manufacture or shipment of both drug substance and finished drug product for our product candidates for preclinical testing and clinical trials and adversely impact our business, financial condition or results of operations. We often attend and present clinical updates at various medical and investor conferences throughout the year. The COVID-19 outbreak has caused, and is likely to continue to cause, cancellations or reduced attendance of these conferences and we may need to seek alternate methods to present clinical updates and to engage with the medical and investment communities. The spread of COVID-19 may also slow potential enrollment of clinical trials and reduce the number of eligible patients for our clinical trials. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition and our potential to conduct financings on terms acceptable to us, if at all. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

 

Subsequent to the filing of our Form 10-K for the year ended December 31, 2019, on April 3, 2020, as a result of the COVID-19 pandemic, the Company announced a temporary pause in enrollment in our current clinical study.  This Company will evaluate resuming enrollment in May of 2019, but at this time continued uncertainty remains regarding possible risk to our clinical monitoring access, supply chain and limitation on the resources of our investigational sites.

 

Other than noted above, 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, 2019.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

 On February 21, 2020, the company issued to a service provider a five-year warrant to purchase 75,000 shares at an exercise price of $6.49 per share. We relied on exemptions from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), without the use of any general solicitations or advertising to market or otherwise offer the securities for sale.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

None.

 

 

Item 6.

Exhibits.

 

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		Certificate of Incorporation, as amended through May 12, 2016 (incorporated by reference to Exhibit 3.1 to quarterly report on Form 10-Q for the quarter ended June 30, 2016)		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
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 March 31, 2020, 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 (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: May 12, 2020	/s/ Michael T. Cullen, MD
	Michael T. Cullen Chief Executive Officer
	(Duly Authorized Officer)
Date: May 12, 2020	/s/ Susan Horvath
	Susan Horvath Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)