UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

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(Mark One)
☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarterly period ended September 30, 2016
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the transition period from ________ to ________.

 

Commission File No.: 000-55242

 

Sun BioPharma, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware		87-0543922
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
712 Vista Blvd #305, Waconia, Minnesota
(Address of principal executive offices)

 

(952) 479-1196

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☑   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑   No ☐ *

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if smaller reporting company)	Smaller reporting company ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☑

 

On November 7, 2016, there were 32,176,306 shares of the registrant’s common stock, par value $0.001, outstanding.

 

 

 

Sun BioPharma, Inc.
Index to Quarterly Report on Form 10-Q

 

  

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements.	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	11
Item 3.	Quantitative and Qualitative Disclosure About Market Risk.	16
Item 4.	Controls and Procedures.	16
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	17
Item 1A.	Risk Factors.	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	18
Item 3.	Defaults Upon Senior Securities.	18
Item 4.	Mine Safety Disclosures.	18
Item 5.	Other Information.	18
Item 6.	Exhibits.	18

 

 

 

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’ Deficit

(In thousands except share and per share amounts)

(Unaudited)

 

 

See accompanying notes to 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.

 

The following discussion contains various forward-looking statements within the meaning of the safe harbor provisions 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”). Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates” and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ materially from those anticipated, certain of which are beyond our control, are set forth herein and in Part I, Item 1A under the caption “Risk Factors” in our most recent Annual Report on Form 10-K.

 

Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the cautions and risks described in this document and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear. We do not undertake to update any forward-looking statement.

 

Overview

 

Sun BioPharma, Inc. and its wholly-owned subsidiary, Sun BioPharma Australia Pty Ltd. (“SBA”) (collectively “we,” “us,” “our,” and the “Company”) exist for the primary purpose of advancing the commercial development of a proprietary polyamine analogue for pancreatic cancer and for a second indication in pancreatitis. We have exclusively licensed the worldwide rights to this compound, which has been designated as SBP-101, from the University of Florida Research Foundation, Inc. (“UFRF”).

 

In August 2015, the U.S. FDA granted an Investigational New Drug (“IND”) approval for our SBP-101 product candidate and we began enrolling patients in a Phase 1 clinical trial on January 4, 2016. We estimate that completion of our Phase 1 clinical trial in pancreatic cancer and the completion of necessary preclinical development work and initiation of a Phase 1 clinical trial in pancreatitis, will require additional funding of at least $10 million to $20 million. Additional clinical trials will likely be required for FDA or other similar approvals if the results of the first clinical trial of our SBP-101 product candidate is positive. We estimate that the additional time and cost to obtain FDA and European Medicines Agency (“EMA”) approval and to bring our SBP-101 product candidate to market in these two indications will be 6 to 7 years with related costs up to $200 million.

 

On May 25, 2016, Sun BioPharma, Inc. completed a reincorporation into the State of Delaware from the State of Utah pursuant to an agreement and plan of merger between Sun BioPharma, Inc., a Utah corporation, and its wholly owned subsidiary, Sun BioPharma Research, Inc., a Delaware corporation. Upon the reincorporation, each outstanding certificate representing shares of the Utah corporation’s common stock was deemed, without any action by the holders thereof, to represent the same number and class of shares of our company’s common stock. As of May 25, 2016, the rights of our stockholders began to be governed by Delaware law and our current certificate of incorporation and bylaws.

 

In four closings from June through September 2016, we entered into Securities Purchase Agreements pursuant to which we sold an aggregate of 2,221,000 shares of common stock (the “Purchased Shares”) and warrants (the “Warrants”) to purchase an aggregate of 1,110,500 shares of common stock (the “Warrant Shares”). We received aggregate gross proceeds of $1.9 million from the Purchase Agreements closings under these private placement transactions and an additional $196,000 was invested by management through the conversion of previously deferred compensation. Pursuant to the Purchase Agreements, we filed a registration statement on Form S-1 with the SEC covering the resale of the Purchased Shares and Warrant Shares. On October 3, 2016, the SEC declared the registration statement effective. See “Private Placement, Resale Registration” in Note 9 to the accompanying condensed consolidated financial statements for additional information.

 

On August 15, 2016, we announced that the Data Safety Monitoring Board (“DSMB”), an independent group of medical experts closely monitoring our Phase 1 clinical trial of SBP-101 in the treatment of patients with previously treated locally advanced or metastatic pancreatic cancer, completed its safety review of the data from the dosing of the second cohort of patients. As a result of that review, we initiated enrollment of the third patient cohort in the dose escalation phase of the trial. On October 6, 2016, we announced that the DSMB completed its safety review of the data from the dosing of the third cohort of patients and, as a result of the review by the DSMB, we initiated enrollment of the fourth patient cohort in the trial.

 

 

 

Financial Overview 

 

We have incurred losses of $16.5 million since inception. For the nine months ended September 30, 2016 and 2015, we incurred net losses of $2.9 million and $4.2 million, respectively, and negative cash flows from operating activities of $1.6 million and $3.0 million, respectively. We expect to incur substantial losses, which will continue to 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 and cash equivalents were $1.2 million as of September 30, 2016, compared to $925,000 as of December 31, 2015. We will need to obtain additional funds to continue our operations and execute our current business plans, including completing our current Phase 1 clinical trial, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually.

 

On March 1, 2016 we instituted substantial salary deferrals for all senior employees in order to conserve cash.

 

In May 5, 2016, SBA received a $772,000 tax rebate under the Australian R&D Incentive Rebate program related to 2015 research and development activities.

 

From June through September 2016, we received aggregate gross proceeds of $1.9 million from the sale of the Purchased Shares and Warrants. See “Private Placement, Resale Registration” in Note 9 to the accompanying condensed consolidated financial statements for additional information.

 

If we are unable to obtain additional financing when needed, we will need to reduce our operations by taking actions that may include, among other things, reducing use of outside professional service providers, reducing staff or further reducing staff compensation, significantly modifying or delaying the development of our SBP-101 product candidate, licensing rights to third parties, including the right to commercialize our SBP-101 product candidate for pancreatic cancer, acute pancreatitis or other applications that we would otherwise seek to pursue, or discontinue operations entirely.

 

Results of Operations

 

Comparison of the three and nine months ended September 30, 2016 to the three and nine months ended September 30, 2015 (in thousands):

 

		Three Months Ended September 30,												Nine Months Ended September 30,
		2016				2015				Percent Change				2016				2015				Percent Change
Operating expenses:
General and administrative		$	499			$	429				16.3	%		$	1,399			$	2,224				(37.1	)%
Research and development			636				341				86.5				1,657				1,936				(14.4	)
Total operating expenses			1,135				770				47.4				3,056				4,160				(26.5	)
Other income (expense), net			11				(46	)			nm				(70	)			(157	)			(55.4	)
Income tax benefit			45				23				95.7				252				118				113.6
Net loss		$	(1,079	)		$	(793	)			(36.1	)%		$	(2,874	)		$	(4,199	)			(31.6	)%

 

General and administrative expense

 

Our general and administrative (“G&A”) expenses increased 16.3% to $499,000 in the third quarter of 2016 up from $429,000 in the third quarter of 2015. G&A expenses decreased 37.1% to $1.4 million from $2.2 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in the current quarter was related primarily to an increase in staff and salary increases implemented in the fourth quarter of 2015, partially offset by decreased legal and accounting fees relating to the Company’s merger with Cimarron Medical, Inc. during 2015. The decrease on a year-to-date basis was due primarily to reductions in stock-based compensation and decreased legal and accounting fees relating to the merger during 2015, partially offset by increased salaries and reporting and compliance costs associated with being a public company during 2016.

 

 

 

Research and development expense

 

Our research and development (“R&D”) expenses increased 86.5% to $636,000 in the third quarter of 2016, up from $341,000 in the third quarter of 2015. R&D expenses decreased 14.4% to $1.7 million in the nine months ended September 30, 2016, down from $1.9 million in the nine months ended September 30, 2015. The increase in the current quarter was driven primarily by increased costs associated with conducting the Phase 1 clinical trial of SBP-101, the Company’s initial product candidate, as the pace of enrollment has increased. Increased staff and salaries implemented in the fourth quarter of 2015 also contributed to the increase. The decrease in R&D expenses for the nine months ended September 30, 2016 was due primarily to decreased costs of preclinical studies, other product development costs and stock-based compensation, partially offset by increased clinical trial costs.

 

Other income (expense), net

 

Other income (expense), net, improved to a net income of $11,000 in the current quarter and decreased 55.4% to $70,000 for the nine months ended September 30, 2016, as compared with the same periods in the prior year. Other expense, net, consists primarily of interest expense on convertible promissory notes and long-term debt and foreign currency transaction gains and losses. The current year fluctuations resulted primarily from the impact of fluctuations in the foreign currency exchange rates between the United States and Australian dollars on the translation of the SBA financial statements.

 

Income tax benefit

 

Income tax benefit increased to $45,000 and $252,000 for the three and nine months ended September 30, 2016, respectively. Our income tax benefit is derived primarily from refundable tax credits associated with our R&D activities conducted in Australia.

 

Liquidity and Capital Resources

 

The following table summarizes our liquidity and capital resources as of September 30, 2016 and December 31, 2015 and our cash flow data for the nine months ended September 30, 2016 and 2015 and is intended to supplement the more detailed discussion that follows (in thousands):

 

Liquidity and Capital Resources		September 30, 2016				December 31, 2015
Cash and cash equivalents		$	1,229			$	925
Working capital		$	(436	)		$	357

 

		Nine Months Ended September 30,
Cash Flow Data		2016				2015
Cash provided by (used in):
Operating activities		$	(1,570	)		$	(3,019	)
Investing activities			—				500
Financing activities			1,873				2,675
Effect of exchange rate changes on cash and cash equivalents			1				(23	)
Net increase in cash and cash equivalents		$	304			$	133

 

Working Capital

 

Our total cash and cash equivalents were $1.2 million as of September 30, 2016, compared to $925,000 as of December 31, 2015. We had $2.1 million in current liabilities, and negative working capital of $436,000 as of September 30, 2016, compared to $1.4 million in current liabilities and $357,000 in working capital as of December 31, 2015. In May 2016, SBA received a $772,000 tax rebate under the Australian R&D Incentive Rebate program related to 2015 research and development activities. From June through September 2016, we received aggregate gross proceeds of $1.9 million from the sale of the Purchased Shares and Warrants. See “Private Placement, Resale Registration” in Note 9 to the accompanying condensed consolidated financial statements for additional information.

 

 

 

Cash Flows

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $1.6 million in the nine-months ended September 30, 2016 compared to $3.0 million in the nine months ended September 30, 2015. 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 and, in the nine months ended September 30, 2015, by non-cash charges recorded for stock-based compensation.

 

Net Cash Provided by Investing Activities

 

There were no cash flows related to investing activities in the nine months ended September 30, 2016. Net cash provided by investing activities was $500,000 for the nine months ended September 30, 2015. Net cash provided by investing activities in 2015 was derived from sales and maturities of short-term investments.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities was $1.9 million for the nine-months ended September 30, 2016, compared to $2.7 million in the nine months ended September 30, 2015. Net cash provided by financing activities was comprised of net proceeds from the sale of common stock and warrants and, in 2015, proceeds from the exercise of stock options and stock purchase warrants.

 

Capital Requirements

 

As we continue to pursue our operations and execute our business plan, including completing our current Phase 1 clinical trial for our product candidate SBP-101 in pancreatic cancer, planning for required future regulatory submissions and trials and 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 1 clinical trial, a human clinical trial in Australia and the United States;

 

●

our ability to demonstrate the safety and effectiveness of our SBP-101 product candidate;

 

●

our ability to obtain regulatory approval of our SBP-101 product candidate in the United States, the European Union or other international markets;

 

●

the market acceptance and level of future sales of our SBP-101 product candidate;

 

●

the rate of progress in establishing reimbursement arrangements with third-party payors;

 

●

the effect of competing technological and market developments;

 

●

the cost and delays in product development that may result from changes in regulatory oversight applicable to our SBP-101 product candidate; and

 

●

the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims.

 

To date, we have used primarily convertible debt and equity financings to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future.

 

Our cash and cash equivalents were $1.2 million as of September 30, 2016, compared to $925,000 as of December 31, 2015. Although we do not have any current capital commitments, 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, complete our Phase 1 clinical trial for our SBP-101 product candidate and prepare to submit an Investigational New Drug application for the use of SBP-101 to treat acute pancreatitis. Accordingly, we expect to make additional expenditures in product development to continue enhancing our current products. However, we do not have any definitive plans as to the exact amounts or particular uses at this time, and the exact amounts and timing of any expenditure may vary significantly from our current intentions.

 

 

 

As of September 30, 2016, we did not have any existing credit facilities under which we could borrow funds. We historically have financed our operations principally from the sale of convertible debt and equity securities. 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.

 

We will need to obtain additional funds to continue our operations and execute our business plans, including completing our current Phase 1 clinical, planning for required future regulatory submissions and 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.

 

On March 1, 2016 we instituted substantial salary deferrals for all senior employees in order to conserve cash.

 

In May 5, 2016, SBA received a $772,000 tax rebate under the Australian R&D Incentive Rebate program related to 2015 research and development activities.

 

From June through September 2016, we received aggregate gross proceeds of $1.9 million from the sale of the Purchased Shares and Warrants. See “Private Placement, Resale Registration” in Note 9 to the accompanying condensed consolidated financial statements for additional information.

 

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. In particular, 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 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

 

We currently have $2,775,000 outstanding in convertible promissory notes that accrue annual interest of 5%, payable quarterly, and are convertible into common stock at $1.125 per share. These notes mature in December 2018. We have $300,000 outstanding in an unsecured loan that accrues annual interest of 4.125%. All principal and accrued interest on this loan are payable in October 2017. We also have $250,000 of unsecured demand notes which we assumed in connection with the September 2015 merger with Cimarron Medical, Inc. These demand notes have no stated interest rate or maturity date.

 

 

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are set forth in notes accompanying the condensed consolidated financial statements included in this document. The accounting policies used in preparing our interim fiscal 2016 condensed consolidated financial statements are the same as those described in our Annual Report on Form 10-K filed with the SEC on March 8, 2016.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), that have or are reasonably likely to have a material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk.

 

As a smaller reporting company, we are not required to provide disclosure pursuant to this item.

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. As of the date of this filing, management has not identified any material weaknesses but believes that it does have a significant deficiency in that it has insufficient personnel resources within the accounting function to fully segregate the duties over financial transaction processing and reporting. Management has mitigated this deficiency primarily through greater involvement in the review and monitoring of financial transaction processing and reporting by executive and senior management.

 

We believe that our internal control system provides reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even effective internal controls over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time.

 

As of the end of the period covered by this quarterly report, we 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 September 30, 2016, 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.

 

Other than as set forth below, 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, 2016.

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property, which could impede our ability to compete.

 

Because we operate in the highly technical field of medical technology development, we rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with all of our employees, consultants and corporate partners to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third parties any confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.

 

Our common stock is eligible for quotation on the over-the-counter-market but not listed on any national securities exchange.

 

Our shares of common stock are eligible for quotation on the OTCQB tier of the over-the-counter markets under the symbol “SNBP.” Despite eligibility for quotation, no assurance can be given that any market for our common stock will develop or, if one develops, that it will be maintained for any period of time. Quotation on the over-the-counter markets, in particular the OTC Pink tier, is generally understood to be a less active, and therefore less liquid, trading market than other types of markets such as a national securities exchange. In comparison to a listing on a national securities exchange, quotation on the over-the-counter markets may have an adverse effect on the liquidity of shares of our common stock, both in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in analyst and media coverage. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and ask prices for our common stock.

 

Our common stock is a “penny stock,” which may make it difficult to sell shares of our common stock.

 

Our common stock is categorized as a “penny stock” as defined in Rule 3a51-1 of the Exchange Act and is subject to the requirements of Rule 15g-9 of the Exchange Act. Under this rule, broker-dealers who sell penny stocks must, among other things, provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. Under applicable regulations, our common stock will generally remain a “penny stock” until and for such time as its per-share price is $5.00 or more (as determined in accordance with SEC regulations), until we meet certain net asset or revenue thresholds or until we list on an accepted national market exchange, e.g. the Nasdaq. These thresholds include the possession of net tangible assets (i.e., total assets less intangible assets and liabilities) in excess of $2 million or average revenues equal to at least $6 million for each of the last three years.

 

The penny-stock rules substantially limit the liquidity of securities in the secondary market, and many brokers choose not to participate in penny-stock transactions. As a result, there is generally less trading in penny stocks. If you become a holder of our common stock, you may not always be able to resell shares of our common stock in a public broker’s transaction, if at all, at the times and prices that you feel are fair or appropriate.

 

 

 

The protection provided by the federal securities laws relating to forward-looking statements does not apply to us. The lack of this protection could harm us in the event of an adverse outcome in a legal proceeding relating to forward-looking statements made by us.

 

Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to certain issuers, including penny stock issuers. We believe we are not currently eligible for the statutory safe harbor included in the Exchange Act of 1934. As a result, we will not have the benefit of this statutory safe harbor protection in the event of certain legal actions based upon forward-looking statements. The lack of this protection in a contested proceeding could harm our financial condition and, ultimately, the value of our common stock.

 

We are an emerging growth company and we cannot be certain if reduced disclosure requirements applicable to emerging growth companies will make our Common Stock less attractive to investors.

 

We are an emerging growth company under the JOBS Act. For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board. If we do, the information that we provide stockholders may be different than what is available with respect to other public companies. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

On August 11, 2016, we issued 220,000 shares of common stock and Warrants to purchase 110,000 additional shares of common stock pursuant to the Purchase Agreements for aggregate cash proceeds of approximately $220,000.

 

On September 2, 2016, we issued 50,000 shares of common stock and Warrants to purchase 25,000 additional shares of common stock pursuant to the Purchase Agreements for aggregate cash proceeds of approximately $50,000.

 

We plan to use the proceeds from the foregoing private placements to fund the continuing Phase 1 clinical trial of SBP-101 for pancreatic cancer as well as preclinical efforts to further study the impact of SBP-101 on pancreatitis.

 

The foregoing private placements were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act. Pursuant to the terms of the Purchase Agreements, the underlying common stock was registered pursuant to a registration statement on Form S-1 declared effective on September 30, 2016 (file no. 333-213687).

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

None.

 

Item 6.

Exhibits.

 

The exhibit index appearing after the signature page is incorporated herein by reference.

 

 

 

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: November 10, 2016	By:	/s/ David B. Kaysen
		David B. Kaysen Chief Executive Officer
		(Principal Executive Officer)
Date: November 10, 2016	By:	/s/ Scott Kellen
		Scott Kellen Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

EXHIBIT INDEX

 

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
2.1		Agreement and Plan of Merger, dated May 25, 2016 (incorporated by reference to Exhibit 2.1 to quarterly report on Form 10-Q for the quarter ended June 30, 2016)		Incorporated by Reference
3.1		Certificate of Incorporation of Sun BioPharma, Inc., 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 of Sun BioPharma, Inc., as amended through May 12, 2016 (incorporated by reference to Exhibit 3.2 to quarterly report on Form 10-Q for the quarter ended June 30, 2016)		Incorporated by Reference
10.1		Form of Securities Purchase Agreements, dated June 10, 2016, June 24, 2016, August 11, 2016 and September 2, 2016, by and among the Company and the purchasers identified therein (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed June 14, 2016)		Incorporated by Reference
10.2		Form of Warrant to Purchase Shares of Stock issued pursuant to Securities Purchase Agreements dated June 10, 2016, June 24, 2016, August 11, 2016 and September 2, 2016 (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed June 14, 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 September 30, 2015, formatted in XBRL: (i) the Balance Sheets, (ii) the Statements of Operations and Comprehensive Loss, (iii) the Statements of Cash Flows, and (iv) the Notes to Financial Statements.		Filed Electronically