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

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,” “continue,” “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 a Phase 2 clinical trial; (ii) progress and success of our pending and any subsequent clinical trials; (iii) the impact of the COVID-19 pandemic on our ability to add new clinical sites for, complete enrollment in and administer clinical trials; (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 potential additional indications 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 mono-therapy, 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. Enrollment in the expansion cohort (1b) phase of the trial began immediately after enrollment in the fourth cohort. Due to the COVID-19 pandemic, the Company paused enrollment in the expansion phase of the study for 7 weeks in the quarter ended June 30, 2020. All patients enrolled prior to the pause continued to receive treatment. Recruiting and enrollment of subjects resumed in May of 2020 and has continued without further interruptions. 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 RECIST criteria (at least SD for ≥ 16 weeks); 4 subjects had not reached week 16 scans. Subsequent to the publication of these results, an investigator reclassified one patient from PR to SD, resulting in an objective response rate of 54%. Results of the full (1a/1b) study are expected to become available in the first half of 2021.

In June of 2020, the FDA designated a Fast Track development program to the investigation of SBP-101 for the treatment of first-line patients with metastatic PDA when administered in combination with gemcitabine and nab-paclitaxel.

Additional clinical trials will be required for FDA approval or other similar approvals if the results of the current clinical trial of our SBP-101 product candidate remain positive. We are evaluating the appropriate timing and study design of the next clinical trial to be initiated at the completion of the expansion phase of the current study. It is expected to be a randomized trial for patients with first-line metastatic PDA. Current resources will allow us to begin this next trial in the first half of 2021, but additional funds will likely be required to complete the trial. The cost and timing of additional clinical trials are highly dependent on the nature and size of the trials.

Effective July 15, 2020, Jennifer K. Simpson was appointed to succeed Michael T. Cullen as President and Chief Executive Officer and elected to serve as an additional member of our board of directors. Dr. Simpson has more than 25 years of experience across a variety of executive, business operations, marketing and clinical development roles in the biopharmaceutical industry. Dr. Cullen continues to serve as Executive Chairman and remains actively engaged with the Company.

Financial Overview 

We have incurred losses of $45.1 million since the inception of our business in 2011. For the nine months ended September 30, 2020, we incurred a net loss of $3.9 million. We also incurred negative cash flows from operating activities of $2.7 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 $10.9 million and $2.4 million as of September 30, 2020 and December 31, 2019, respectively.

On September 1, 2020 we closed a public offering of 2,545,454 shares of common stock and five-year warrants to purchase the same amount of common stock. The gross proceeds of the offering were approximately $10.5 million. We received net proceeds of approximately $9.3 million, after deducting the underwriting discounts and commissions and offering expenses. In connection with this offering the Company’s common stock was approved for listing and began trading on the Nasdaq Capital Market tier of the Nasdaq Stock Market LLC (“Nasdaq”) on August 28, 2020. We expect the cash on hand at the end of the third quarter will be sufficient to fund our planned business operations into the first half of 2022.

Other than the temporary pause in enrollment in our current clinical trial, the Company has not experienced any significant disruptions to our operations as a result of the COVID-19 pandemic. Recruitment and enrollment were resumed in May of 2020 and will continue as conditions allow until the expansion cohort is fully enrolled which is expected by the end of 2020. The Company was not required to change management practices as it was decentralized prior to the COVID-19 pandemic.

Based on anticipated use of cash we expect the proceeds of the recent sale of equity securities will be sufficient to fund our expected operations into the first half of 2022.We will need to obtain additional funds to continue our operations and execute our current business plans, including completing 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 equity securities and debt. 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 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):

General and administrative (“G&A”) expenses consist primarily of salaries, incentive compensation and other employee benefits, including stock-based compensation. Other G&A expenses include professional fees for accounting and tax, legal services, insurance, and costs associated with being a publicly traded company including directors and officer’s liability insurance premiums.

Research and development (“R&D”) expenses consist primarily of clinical and regulatory costs, costs incurred under agreements with contract research organizations, pre commercial manufacturing and stability testing and employee compensation related expenses.

R&D and G&A expenses include non-cash stock-based compensation expense because of our issuances 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 September 30, 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 (in thousands):

Other Expense, net consists primarily to foreign currency exchange gains or losses and amortization of debt discounts on convertible notes.

Three months ended September 30, 2020 and September 30, 2019

General and administrative expense

For the three months ended September 30, 2020 and 2019 G&A expenses were $1.2 million and $0.6 million, respectively. The increase is due to higher employee compensation expense.

Research and development expense

For the three months ended September 30, 2020 and 2019 R&D expenses were $0.8 million and $0.7 million, respectively. The increase was primarily due to higher spending on the current clinical trial.

Other income (expense), net

Other income, net, was $236,000 for the three months ended September 30, 2020 and is primarily the result of a foreign currency exchange gain. The net expense of approximately $222,000 in the three months ended September 30, 2019 is primarily a foreign exchange loss.

Income tax benefit

Income tax benefit decreased to $89,000 for the three months ended September 30, 2020 down from $190,000 during the three months ended September 30, 2019. Our income tax benefit is derived primarily from refundable tax credits associated with our R&D activities conducted in Australia which were decreased in the quarter.

Nine months ended September 30, 2020 and September 30, 2019

General and administrative expense

For the nine months ended September 30, 2020 and 2019 G&A expenses were $2.3 million and $1.5 million, respectively. The increase is due to increased employee compensation expense as well as increased spending on consulting and legal services.

Research and development expense

For the nine months ended September 30, 2020 and 2019 R&D expenses were $1.8 million and $1.6 million, respectively. The increase was due primarily to increased spending on the current clinical trial resulting from 2 new sites in 2020 versus the same period in 2019.

Other income (expense), net

Other income, net, was $43,000 for the nine months ended September 30, 2020 and is primarily the result of a foreign currency exchange gain. The net expense approximately $2.5 million in the nine months ended September 30, 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 decreased slightly to $222,000 for the nine months ended September 30, 2020 down from $331,000 during the nine months ended September 30, 2019. 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, 2020 and December 31, 2019 and our cash flow data for the nine months ended September 30, 2020 and 2019 and is intended to supplement the more detailed discussion that follows (in thousands):

Working Capital

Our total cash was $10.9 million and $2.4 million as of September 30, 2020 and December 31, 2019, respectively. We had $1.9 million in current liabilities and working capital of $9.5 million as of September 30, 2020, compared to $1.8 million in current liabilities and a working capital of $1.3 as of December 31, 2019.  Working capital is calculated as current assets less current liabilities.

Cash Flows

Net Cash Used in Operating Activities

Net cash used in operating activities was $2.7 million in the nine months ended September 30, 2020 compared to $1.9 million in the nine months ended September 30, 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 provided by financing activities was $11.2 million and $3.8 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. The cash provided for the nine months ended September 30, 2020 represents the net proceeds of $9.3 million from the underwritten public offering completed on September 1, 2020 and the sales of common stock and warrants in private placements to accredited investors completed in May and June of 2020 for net proceeds of $1.7 million. The cash provided for the nine months ended September 30, 2019 represents the net proceeds from the sale of convertible notes and the sale of common stock and warrants in private placements to accredited investors.

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:

We traditionally have used the sale of equity securities and debt to fund our ongoing business operations and short-term liquidity needs. As of September 30, 2020, we did not have any existing credit facilities under which we could borrow funds.

We expect that we will have only modest increases in expenditures in order to continue our efforts to grow our business, complete our Phase 1a clinical trial and begin the next clinical trial for our SBP-101 product candidate. We also expect to invest in additional R&D efforts on mechanism of action, biomarkers, additional indications in other cancer types and the possibility of SBP-101 to act as a sensitizing agent for certain immunotherapies. 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 completion of required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. 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 size or 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 could 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 September 30, 2020, we had indebtedness totaling $0.9 million. This includes a balance of $0.7 million due under an unsecured, non-interest-bearing promissory note. The note became payable when the Company was listed on Nasdaq on September 1, 2020 and was paid in full subsequent to the close of the quarter. We also had a balance of $39,000 due under an unsecured loan that accrues an annual interest of 4.125% which is scheduled to mature on December 31, 2020. We commenced monthly payments of principal and interest on that loan totaling $10,000 per month on May 1, 2018.

Also included in our indebtedness is a loan obtained by the Company on May 1, 2020 in the principal amount of approximately $103,000 from Bank of America pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act administered by the U.S. Small Business Administration (“SBA”). In accordance with the requirements of the CARES Act, the Company has used the proceeds of the loan exclusively for qualified expenses, including payroll costs, as further detailed in the CARES Act and applicable guidance issued by the SBA. The loan is evidenced by an unsecured promissory note and interest is scheduled to accrue on the outstanding balance at a rate of 1.0% per annum beginning on November 1, 2020. However, the Company expects to be eligible to apply for forgiveness of up to all of the principal and interest due under the loan, in an amount equal to the sum of qualified expenses under the PPP during the twenty-four weeks following disbursement. Notwithstanding the Company’s anticipated eligibility to apply for forgiveness, no assurance can be given that it will obtain forgiveness of all or any portion of the amount due under the loan. Subject to any such forgiveness granted under the PPP, the loan is scheduled to mature on May 1, 2022 and may require us to commence payments of principal and interest as soon as November 2020. The loan may be prepaid at any time prior to maturity with no prepayment penalties. The unsecured promissory note governing the loan provides for customary events of default, including, among others, those relating to failure to make payments, bankruptcy, breaches of representations, significant changes in ownership, and material adverse effects. The Company’s obligations under the note are not secured by any collateral. The Company completed the application for forgiveness in November 2020, although a decision is not expected from the SBA before December 31, 2020.

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.

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

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 Securities Exchange Act of 1934 (the “Exchange Act”). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 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 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

None

Other than noted 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, 2019.

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.

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. The Company reauthorized recruitment and enrollment on May 20, 2020. Enrollment resumed at all clinical sites will continue as long conditions allow. 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.

On September 1, 2020, the Company issued 35,665 shares of common stock as a result of the exercise of outstanding warrants that were set to expire as a result of the public offering. All of the warrants were exercised at $1.875 per share. Of the shares issued, 27,500 were issued for approximately $52,000 cash. One warrant to purchase 15,000 shares of common stock was exercised on a net, cashless basis, resulting in the issuance of the remaining 8,165 shares. The shares were issued in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) to “accredited investors,” as defined in Rule 501 of Regulation D of the SEC, without the use of any general solicitation or advertising to market or otherwise offer the securities for sale. None of the shares issued have been registered under the Securities Act or applicable state securities laws and none may be offered or sold in the United States absent registration under the Securities Act, or an exemption from such registration requirements.

Item 3.     Defaults Upon Senior Securities.

None.

Not applicable.

None.

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.

* Management compensatory arrangement required to be filed herewith.

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.