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– Release Delayed ·As Of Filer Filing For·On·As Docs:Size Issuer Agent 7/24/15 Sun BioPharma, Inc. PRER14C¶ 2:2.7M Discount Edgar/FA |
Document/Exhibit Description Pages Size 1: PRER14C Revised Preliminary Proxy Information Statement HTML 2.46M 2: CORRESP ¶ Comment-Response or Other Letter to the SEC HTML 7K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box: |
x |
Preliminary Information Statement |
¨ |
Confidential, for use of the Commission only (as permitted by Rule 14c-5(d)(2)) |
¨ |
Definitive Information Statement |
CIMARRON MEDICAL, INC. |
(Name of Registrant As Specified In Charter) |
Payment of Filing Fee (Check the appropriate box):
1) |
Amount Previously Paid: | |
2) |
Form, Schedule or Registration Statement No: | |
3) |
Filing Party: | |
4) |
Date Filed: |
CIMARRON MEDICAL, INC.
10 W. Broadway, Ste. 700
NOTICE OF SHAREHOLDER ACTION BY WRITTEN CONSENT
Dear Shareholder:
This notice and the accompanying Information Statement are being distributed to the holders of record (the "Shareholders") of the voting capital stock of Cimarron Medical, Inc., a Utah corporation (the "Company"), as of the close of business on July 23, 2015 (the "Record Date"), in accordance with Rule 14c-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the notice requirements of the Utah Revised Business Corporation Act (the "URBCA"). The purpose of this notice and the accompanying Information Statement is to notify the Shareholders of actions approved by our Board of Directors (the "Board") and taken by written consent in lieu of a meeting by the holders of a majority of the voting power of our outstanding capital stock as of the Record Date (the "Written Consent").
The Written Consent approved amendments to the Company's Articles of Incorporation, which include changing the name of the Company to Sun BioPharma, Inc., increasing the Company's authorized capital from 10,700,000 shares to 110,000,000 shares, divided into (i) 100,000,000 shares of $0.001 par value per share common voting stock; and (ii) 10,000,000 shares of $0.001 par value per share preferred stock, with the rights, designations and privileges to be set by the Board of Directors (collectively the "Corporate Actions").
The Written Consent is the only shareholder approval required to effect the Corporate Actions under the URBCA, our Articles of Incorporation, as amended, or our Bylaws. No consent or proxies are being requested from our shareholders, and our Board of Directors (the "Board") is not soliciting your consent or proxy in connection with the Corporate Actions. The Corporate Actions, as approved by the Written Consent, will not become effective until 20 calendar days after the accompanying Information Statement is first mailed or otherwise delivered to the Shareholders. We expect to mail the accompanying Information Statement to the Shareholders on or about July __, 2015.
Important Notice Regarding the Availability of Information Statement Materials in Connection with this Schedule 14C: We will furnish a copy of this Notice and Information Statement, without charge, to any shareholder upon written request to the address set forth above, Attention: Corporate Secretary.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
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Sincerely, |
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/s/ David Fuhrman |
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David Fuhrman, |
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CIMARRON MEDICAL, INC.
10 W. Broadway, Ste. 700
______________
INFORMATION
STATEMENT
[Preliminary]
_____________
WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
INTRODUCTION
This Information Statement advises the shareholders of Cimarron Medical, Inc. (the "Company," "we," "our" or "us") of the following:
· |
The approval of amendments to our Articles of Incorporation, which include changing our name from "Cimarron Medical, Inc." to "Sun BioPharma, Inc.," and increasing the Company's authorized capital from 10,700,000 shares to 110,000,000 shares, divided into (i) 100,000,000 shares of $0.001 par value per share common voting stock; and (ii) 10,000,000 shares of $0.001 par value per share preferred stock, with the rights, designations and privileges to be set by the Board of Directors (the "Article Amendments"); and |
On July 23, 2015 (the "Record Date"), our Board of Directors (the "Board") approved the Article Amendments and submitted the same to certain holders of our common stock, no par value ("Common Stock") and Series A Preferred Stock, par value $0.001 per share ("Series A Preferred Stock"). On the same date, the holders of a majority of the voting power of the outstanding Common Stock and all of the outstanding Series A Preferred Stock (the "Majority Shareholders") executed and delivered to us a written consent in lieu of a meeting (the "Written Consent") approving the Article Amendments.
Finally, on June 12, 2015, we entered into a merger agreement Sun BioPharma, Inc. ("Sun BioPharma") to merge a wholly owned subsidiary of the Company with and into Sun BioPharma, with Sun BioPharma being the surviving entity of that merger. As conditions to closing the merger, we are required to effect the Article Amendments. For a discussion of this merger, see "Merger and Potential Change of Control."
Section 16-10a-704 of the URBCA provides that the written consent of the holders of outstanding shares of voting capital stock having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted can approve an action in lieu of conducting a special shareholders" meeting convened for the specific purpose of such action. The URBCA, however, requires that in the event an action is approved by written consent, a company must provide prompt notice of the taking of any corporate action without a meeting to the shareholders of record who have not consented in writing to such action and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to a company.
Under Utah law, shareholders are not entitled to dissenters" rights with respect to the Article Amendments.
In accordance with the foregoing, we intend to mail a notice of the Written Consent and this Information Statement on or about July __, 2015. This Information Statement contains a brief summary of the material aspects of the actions approved by the Board and the Majority Shareholders, which hold a majority of the voting capital stock and preferred stock of the Company.
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Voting Securities and Principal Holders Thereof Voting in Favor of Corporate Actions
As of the Record Date, there were issued and outstanding 1,450,322 shares of Common Stock, and 200,119 shares of preferred stock, all of which are designated Series A Preferred Stock. Each share of Common Stock is entitled to one vote and each share of Series A Preferred Stock is entitled to one vote for each share of Common Stock into which such share of Series A Preferred Stock could then be converted, which, as of the Record Date, was approximately 1.205 votes per share (each share of Series A Preferred Stock could then be converted into a number of shares of Common Stock equal to $1.00/$0.83), with fractional votes on an as- converted basis (after aggregating all shares into which such shares of Series A Preferred Stock held by each holder could be converted) rounded to the nearest whole number (with one- half being rounded upward). Pursuant to the URBCA, at least a majority of the voting equity of the Company, or at least 845,715 votes, was required to approve the Name Change by written consent. The Majority Shareholders, which held 750,266 shares of Common Stock (approximately 51.7% of the total class of Common Stock) and all of the Series A Preferred Stock, executed and delivered the Written Consent approving the Name Change, thereby satisfying the requirement that at least a majority of the voting equity vote in favor of a corporate action by written consent.
The following table sets forth the names of the Majority Shareholders, the number of shares of Common Stock and Series A Preferred Stock held by each, the total number of votes that the Majority Shareholders voted in favor of the Name Change, and the percentage of the issued and outstanding voting equity of the Company voted in favor thereof.
Name of Majority Shareholder |
Number of Shares of Common Stock held | Number of Series A Preferred Stock held |
Number of Votes Held by Such Shareholder |
Number of Votes that Voted in Favor of the Name Change |
Percentage of the Voting Equity that Voted in Favor of the Name Change | |||||||||||||||
David Fuhrman, CEO & Director |
458,736 |
100,059.5 |
579,290 |
579,290 |
34.25 |
% | ||||||||||||||
Robert Sargent, Director 1 |
291,530 |
100,059.5 |
412,084 |
412,084 |
24.36 |
% | ||||||||||||||
Total |
750,266 |
200,119 |
991,374 |
991,374 |
58.61 |
% |
CORPORATE ACTIONS TO BE TAKEN
We intend to effect the Article Amendments by filing an amendment to our Articles of Incorporation, as amended, with the State of Utah in the form of Articles of Amendment. We intend to file the Articles of Amendment with the State of Utah promptly after the twentieth (20th) calendar day following the date on which this Information Statement is mailed to the Shareholders.
ARTICLE AMENDMENTS: NAME CHANGE
Our Board of Directors has unanimously approved a proposal to amend our Articles of Incorporation to change our name from Cimarron Medical, Inc. to Sun BioPharma, Inc. (the "Name Change"). Our Board has recommended to our Majority Shareholders that they vote in favor of the Name Change, and our Majority Shareholders have voted in favor of the Name Change. The votes of our Majority Shareholders were obtained by written consent. The Name Change will be effected through an amendment to our Articles of Incorporation.
Reason for the Name Change
The Board of Directors and the Majority Shareholders of the Company have approved the Name Change as the Name Change is necessary to complete the merger of a wholly owned subsidiary of the Company with and into Sun BioPharma, with Sun BioPharma being the surviving entity of that merger. For a discussion of this merger, see "Merger and Potential Change of Control."
No Dissenters' Rights as to Authorized Share Increase
Under applicable Utah law, dissenting shareholders are not entitled to dissenters' rights with respect to the Name Change, and we will not independently provide our shareholders with any such right.
ARTICLE AMENDMENTS: INCREASING OUR AUTHORIZED CAPITAL STOCK
Our Board of Directors has unanimously approved a proposal to amend our Articles of Incorporation to increase the number of shares of common stock which we are authorized to issue from 10,000,000 to 100,000,000, and the number of shares of our preferred stock which we are authorized to issue from 700,000 to 10,000,000 (the "Authorized Share Increase"). Our Board has recommended to our Majority Shareholders that they vote in favor of the Authorized Share Increase, and our Majority Shareholders have voted in favor of the Authorized Share Increase. The votes of our Majority Shareholders were obtained by written consent. The Authorized Share Increase will not alter the current number of our issued and outstanding shares of common or preferred stock. The
Authorized Share Increase will be effected through an amendment to our Articles of Incorporation.
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Reasons for the Authorized Share Increase
We anticipate that we will in the future adopt employee option plans, issue shares in acquisition transactions and attempt to raise additional capital from the sale of our shares of common stock or preferred stock. These actions, if they were to occur, of which there can be no assurance, will require the issuance of additional shares of our common stock or preferred stock. We believe that now is an appropriate time to increase our authorized shares of capital stock so that we will have flexibility in structuring future transactions.
The disadvantages of increasing our authorized common stock and preferred stock include:
· |
The issuance of authorized but unissued stock could be used to deter a potential takeover of the Company that may otherwise be beneficial to stockholders by diluting the shares held by a potential suitor or issuing shares to a shareholder that will vote in accordance with our Board of Directors' desires. A takeover may be beneficial to independent stockholders because, among other reasons, a potential suitor may offer such stockholders a premium for their shares of stock compared to the then-existing market price. The Company does not have any other provisions in its Articles of Incorporation, by- laws, employment agreements, credit agreements or any other documents that have material anti-takeover consequences. Additionally, the Company has no plans or proposals to adopt other provisions or enter into other arrangements, except as disclosed below, that may have material anti-takeover consequences. The Board of Directors is not aware of any attempt, or contemplated attempt, to acquire control of the Company, and this proposal is not being presented with the intent that it be utilized as a type of anti-takeover device. | |
· |
Shareholders do not have any preemptive or similar rights to subscribe for or purchase any additional shares of common stock that may be issued in the future, and therefore, future issuances of common stock may, depending on the circumstances, have a dilutive effect on the earnings per share, voting power and other interests of the existing stockholders. | |
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The issuance of additional shares of common stock or preferred stock could have a dilutive effect on a stockholder's voting power. |
Although an increase in the authorized number of shares of common stock and preferred stock could, under certain circumstances, also be construed as having an anti-takeover effect (for example, by diluting the stock ownership of a person seeking to effect a change in the composition of the Board of Directors or contemplating a tender offer or other transaction for the combination with another company), the Authorized Share Increase is not in response to any effort to accumulate stock or to obtain control of the Company by means of a merger, tender offer, or solicitation in opposition to management. Furthermore, the Board of Directors does not currently contemplate recommending the adoption of any other amendments to the Articles of Incorporation that could be construed to affect the ability of third parties to take over or change control of the Company.
We have no plans to issue any of our newly authorized preferred stock, but we may issue shares of our newly issued common stock pursuant to a potential merger of our wholly owned subsidiary, SB Acquisition Corporation, with Sun BioPharma, Inc. For a discussion of this merger, see "Merger and Potential Change of Control."
No Dissenters" Rights as to Authorized Share Increase
Under applicable Utah, dissenting shareholders are not entitled to dissenters" rights with respect to the Authorized Share Increase, and we will not independently provide our shareholders with any such right.
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ARTICLE AMENDMENTS: AUTHORIZING "BLANK CHECK" PREFERRED STOCK
Our Board of Directors has unanimously approved a proposal to amend our Articles of Incorporation to designate our authorized preferred stock as "blank check" preferred stock, meaning that the Board will have the authority to determine and designate the rights, preferences and limitations associated with the shares of preferred stock without having to seek a vote of the Company"s shareholders as to those rights, preferences, and limitations (the "Preferred Stock Amendment"). Our Board has recommended to our Majority Shareholders that they vote in favor of the Preferred Stock Amendment, and our Majority Shareholders have voted in favor of the Preferred Stock Amendment. The votes of our Majority Shareholders were obtained by written consent. The Preferred Stock Amendment will be effected through an amendment to our Utah Articles of Incorporation.
Reasons for the Preferred Stock Amendment
The Board of Directors and the Majority Stockholders have approved the authorization of blank-check preferred stock in order to provide the Company with flexibility in pursuing its long-term business objectives. A reserve of preferred shares available for issuance from time-to-time will enable the Company to entertain a broad variety of financing proposals and act quickly upon such proposals without having to solicit shareholder approval prior to taking action. Management may utilize the shares of "blank-check" preferred stock in connection with corporate acquisitions, joint venture arrangements, or for other corporate purposes, including the solicitation and compensation of key personnel. Other than as previously disclosed in the Company"s periodic filings with the Securities and Exchange Commission and herein, the Company is not currently engaged in any acquisition or similar transaction.
After effecting the Preferred Stock Amendment, the Board will have the authority to provide for the issuance of the preferred stock in one or more series, and to establish the number of shares in each series and the designation, relative rights, preferences and limitations of the shares in each series. Utah law requires that the Board use its reasonable business judgment in determining the rights and preferences of the preferred stock, as well as the consideration the Company will receive in exchange for issuing the shares. Nevertheless, preferred stock typically has rights and preferences greater than those associated with common stock. Therefore, the issuance of the preferred stock by the Company could be disadvantageous to holders of our Common Stock in one or more of the following ways:
The Preferred Stock Amendment is not being filed for the purpose of impeding any takeover attempt, and other than as disclosed herein, management is not aware of any person who is acquiring or plans to acquire control of the Company. Nevertheless, the power of the Board to provide for the issuance of shares having rights and preferences to be determined by the Board without shareholder approval has potential utility as a device to discourage or impede a takeover of the Company. In the event that a non-negotiated takeover were attempted, the private placement of preferred stock into "friendly" hands, or the issuance of preferred stock upon terms very favorable to the preferred shareholder, for example, could make the Company unattractive to the party seeking control of the Company. This would have a detrimental effect on the interests of any stockholder who wanted to tender his or her shares to the party seeking control or who would favor a change in control.
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No Dissenters" Rights as to Preferred Stock Amendment
Under applicable Utah, dissenting shareholders are not entitled to dissenters" rights with respect to the Preferred Stock Amendment, and we will not independently provide our shareholders with any such right.
MERGER AND POTENTIAL CHANGE OF CONTROL
On June 12, 2015, the Company (Cimarron Software, Inc., a Utah corporation), Sun BioPharma, Inc. ("Sun BioPharma," or the "Target Company"), and SB Acquisition Corporation, a wholly owned subsidiary of the Company recently incorporated in the State of Delaware (the "Merger Subsidiary") entered into an Agreement and Plan of Merger, a copy of which is attached hereto as Exhibit A (the "Merger Agreement"). Under the terms of the Merger Agreement, the Merger Subsidiary will merge with and into the Target Company (the "Merger"), and the Target Company will be the surviving corporation to the Merger and become a wholly owned subsidiary of the Company. The Merger is expected to close on or about August 31, 2015, subject to the satisfaction or waiver of customary closing conditions. We are required to effect the Article Amendments discussed above prior to closing the Merger.
Also on June 12, 2015, our two directors and majority shareholders, David Fuhrman and Robert Sargent (through his entity, Rare Principle, L.C.), agreed to sell (i) an aggregate of 517,266 shares of common stock, and (ii) a $250,000 portion of loan indebtedness they are owed by the Company, to three unrelated third parties for total consideration of $250,000. Closing of the purchase agreements is contingent on the Company and the Target Company closing the Merger. The loan indebtedness being sold will not be modified from its existing terms and is not convertible into equity. Additionally, on June 12, 2015, three of our non- executive affiliate shareholders entered into stock purchase agreements to sell a total 566,067 shares of common stock to three unrelated third parties at a purchase price of $0.01 per share. Closing of each of these stock purchase agreements is also contingent on the Company and the Target Company closing the Merger. Certain of the purchasers, as set forth below, may be deemed affiliates of the Target Company.
Seller |
Purchaser |
Shares Sold |
Debt Sold |
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David Fuhrman (1) |
Ryan Gilbertson 2012 Family Trust |
300,561 |
$ |
125,000 |
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Rare Principle, L.C. (2) |
Douglas Polinsky (3) |
216,705 |
$ |
100,000 |
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Rare Principle, L.C. (2) |
Providence Investments LLC (4) |
- |
$ |
25,000 |
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Cartwright Investments, Ltd (5) |
Clearline Ventures, LLC (6) |
218,000 |
- |
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The Marks Family Limited Partnership (7) |
Providence Investments LLC (4) |
177,535 |
- |
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Doug Adamson |
Ryan Gilbertson 2012 Family Trust |
170,532 |
- |
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Total |
1,083,333 |
$ |
250,000 |
(1) CEO & Director of the Company.
(2) Robert Sargent, one of the Company"s directors, has sole voting and dispositive power with respect to the securities held in the name of Rare Principle, L.C., and will therefore be considered the beneficial owner of securities held in the name of such entity.
(3) Douglas Polinsky is a director of the Target Company.
(4) Christopher Johnson has sole voting and dispositive power with respect to securities held in the name of Providence Investments LLC, and will therefore be considered the beneficial owner of securities held in the name of such entity. Mr. Johnson may be deemed an employee of the Target Company.
(5) Peter Cartwright has sole voting and dispositive power with respect to the securities held in the name of Cartwright Investments, Ltd, and will therefore be considered the beneficial owner of securities held in the name of such entity.
(6) Thomas Howells has sole voting and dispositive power with respect to securities held in the name of Clearline Ventures, LLC, and will therefore be considered the beneficial owner of securities held in the name of such entity.
(7) Andrew Marks has sole voting and dispositive power with respect to securities held in the name of The Marks Family Limited Partnership, and will therefore be considered the beneficial owner of securities held in the name of such entity.
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Our Board of Directors approved the Merger and the consummation of the transactions contemplated in the Merger Agreement. Shareholder approval of the Merger is not required under the laws of the State of Utah as a precondition to consummation of such transaction. Each of the Target Company and the Merger Subsidiary were the "constituent corporations" (as defined in the Delaware General Corporation Law) to the Merger. Pursuant to the Merger Agreement, the Company agreed to issue to the Target Company shareholders four (4) shares of common stock for each share of Target Company stock outstanding at the closing of the Merger. As of June 12, 2015, the Target Company had 6,963,746 shares of common stock issued and outstanding, no shares of preferred stock issued and outstanding, 616,667 shares of common stock issuable pursuant to outstanding convertible notes, 637,500 shares of common stock issuable pursuant to outstanding warrants, 2,059,304 shares of common stock issuable pursuant to outstanding options, and 257,162 options available for issuance. As a result, it is anticipated that the Target Company shareholders will acquire control of the Company at closing of the Merger, and the Target Company (as the surviving entity of the constituent corporations merging in Delaware) will become a wholly-owned subsidiary of the Company.
Both the Company and the Target Company have made customary representations, warranties and covenants in the Merger Agreement, including: (i) to conduct their businesses in the ordinary course during the interim period between the execution of the Merger Agreement and closing, (ii) not to engage in certain kinds of transactions or take certain actions during such interim period, and (iii) obtain all consents and approvals necessary to consummate the transactions contemplated by the Merger Agreement.
Additionally, prior to the Merger, the Target Company must undertake efforts to engage in a private placement of Company common stock (any such transaction or series of related transactions is the "Private Placement"). The Company is also entitled to grant registration rights to investors in the Private Placement such that, following the Merger, Parent may be obligated to file a registration statement with respect to the resale of Company common stock received in the Merger by investors in the Private Placement.
The Merger Agreement contains certain termination rights for each of the parties. Among those rights, Parent or Company may, if the Merger has not been effected on or before December 31, 2015, or such later date as the Company and the Target Company may mutually agree, terminate the Merger Agreement.
The foregoing description of the Merger and Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is filed as Exhibit A and is incorporated herein by reference.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Information Statement contains forward-looking statements about Sun BioPharma and its industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this filing, including statements regarding Sun BioPharma"s future financial condition, business strategy and plans, and objectives of management for future operations, are forward- looking statements. In some cases, you can identify forward- looking statements by words such as "anticipate," "believe," "could," "design," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "will," "would" or the negative of these terms or other similar expressions.
Sun BioPharma has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled "Risk Factors" and elsewhere in this filing, regarding, among other things:
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New risk factors emerge from time to time, and it is not possible for Sun BioPharma"s management to predict all risk factors, nor can it assess the impact of all factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.
You should not rely upon forward- looking statements as predictions of future events. Sun BioPharma cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although Sun BioPharma believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, Sun BioPharma undertakes no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or to changes in our expectations.
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Description of Business
About Sun BioPharma
Sun BioPharma is a pre-clinical stage drug development company founded with technology from The University of Florida, College of Pharmacy (the "University"). Sun BioPharma has licensed from the University a polyamine analogue compound (SBP-101) exhibiting extraordinary specificity for the exocrine pancreas, with therapeutic potential for both pancreatic cancer and pancreatitis indications. Studies in dogs revealed ablation, or "chemical resection", of the exocrine pancreatic architecture, while leaving the islet cells functionally unchanged. Sun BioPharma may refer to this effect as: "pharmaceutical pancreatectomy with islet auto-transplant" (PP-IAT). Xenograft studies of human pancreatic cancer cells transplanted into mice indicate that SBP-101 suppresses both primary and metastatic growth of these cells. To facilitate and accelerate the development of this compound in the pancreatic cancer indication, Sun BioPharma has also acquired data and materials related to this technology from other researchers. Sun BioPharma believes that SBP-101, if successfully developed, may represent a novel approach that effectively treats pancreatic cancer and pancreatitis, and could become the dominant product in these markets. It is important to note that only three treatment options for pancreatic cancer have been approved by the United States (US) Food & Drug Administration (FDA) in the last 20 years, and that no drugs have been approved for the treatment of patients with pancreatitis.
Sun BioPharma estimates that completion of necessary preclinical development work, the completion of a Phase 1 clinical trial in pancreatic cancer and initiation of a Phase 1 clinical trial in pancreatitis, will require additional funding of at least $10 million in addition to what Sun BioPharma has already raised prior to this transaction. Additional clinical trials will be subsequently required for FDA approval if the results of Sun BioPharma"s first clinical trials are positive. Sun BioPharma currently estimates the additional time and cost to obtain FDA and European Medicines Agency (EMA) approval and bring SBP-101 to market in these two indications to be 6 to 7 years and up to $200 million.
Sun BioPharma was founded in September 2011 as a Delaware corporation. With approximately $10 million in capital raised to date from all sources, the founders of Sun BioPharma have organized Sun BioPharma, evaluated and secured its technology, and have completed initial non-clinical steps in the development plan for their lead drug candidate, which Sun BioPharma has designated as SBP-101. An Investigative New Drug ("IND") application has been submitted to the US FDA, is currently in review, and may enable start of a Phase 1 clinical trial in the pancreatic cancer indication by the end of 2015.
Introduction
An effective treatment for pancreatic cancer remains a major unmet medical need. Adenocarcinoma of the pancreas, which accounts for ninety-five percent (95%) of all cases of pancreatic cancer, has a median overall survival rate of 8 to 11 months in patients with favorable prognostic signs and optimal chemotherapy. Every year more than 40,000 Americans, and over 300,000 persons worldwide, are afflicted with this disease. Pancreatic cancer is ranked ninth among all cancers in terms of occurrence, but is currently the fourth-leading cause of cancer death in the US. A recent report from the Pancreatic Cancer Action Network projects that pancreatic cancer deaths in the US will soon surpass those from breast and colorectal cancers, where earlier detection and modestly successful drug interventions have been developed, to rank number two in deaths, behind only lung cancer. The five-year survival rate for pancreatic cancer remains at less than six percent (6%), and there has been little significant improvement in survival since gemcitabine was approved in the US in 1996.
Early diagnosis of pancreatic cancer is often delayed because the initial clinical signs and symptoms are vague and non-specific. By the time of diagnosis, the cancer often is locally advanced or metastatic (usually to regional lymph nodes, liver, lung and peritoneum), and is seldom amenable to surgical resection with curative intent.
Currently, surgical resection offers the only potentially curative therapy, but most patients have disease that is unresectable at the time of diagnosis. The prognosis for these patients is poor and most die from complications related to progression. Treatment for metastatic disease is limited to chemotherapy. Current chemotherapy treatment regimens vary from single agent gemcitabine and various gemcitabine combinations to the multi-drug FOLFIRINOX (Conroy NEJM 2011) regimen, frequently supplemented with white blood cell (WBC) growth factors. Compared to gemcitabine alone, these combination therapies deliver to selected patients with good performance status median survival benefits ranging from 7 weeks (Von Hoff NEJM 2013) to 4 months (Conroy NEJM 2011).
It has been demonstrated that SBP-101 induces apoptosis in the acinar cells of the pancreas by activation of caspase 3. In animal models at two independent laboratories, SBP-101 has demonstrated nearly complete suppression of transplanted human pancreatic cancer tumor models, including metastases. Sun BioPharma intends to develop and commercialize SBP-101 as a unique and novel targeted approach to treating pancreatic cancer. Sun BioPharma also intend to continue evaluation of the potential value of SBP-101 in the treatment of patients with pancreatitis.
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Pancreatic Cancer
Adenocarcinoma of the pancreas afflicts approximately 61,000 people in the European Union (Eurostat 2014) and nearly 45,000 people in the United States annually (337,000 people worldwide World Health Organization 2014); it is the seventh leading cause of death from cancer in Europe (GLOBOCAN 2012) and the fourth leading cause of death from cancer in the United States (SEER Cancer Statistics Factsheets 2014). Pancreatic ductal adenocarcinoma (PDA) represents approximately 95% of all pancreatic cancers. Considering that the median overall survival for previously untreated patients with good performance status is between 8.5 months (Von Hoff 2013) and 11.1 months (Conroy 2011) with the best available treatment regimens, effective treatment for PDA remains a major unmet medical need.
Early diagnosis of pancreatic cancer is usually delayed because the initial clinical signs and symptoms are vague and non-specific. The most common presenting symptoms include weight loss, epigastric (upper central region of the abdomen) and/or back pain, and jaundice. The back pain is typically dull, constant, and of visceral origin radiating to the back, in contrast to the epigastric pain which is vague and intermittent. Less common symptoms include nausea, vomiting, diarrhea, anorexia, and glucose intolerance (Hidalgo 2010). By the time the diagnosis is made, the cancer often is locally advanced or metastatic (usually to regional lymph nodes, liver, lung and peritoneum), and is seldom amenable to surgical resection with curative intent.
For the minority of patients who present with resectable disease, surgery is the treatment of choice. Depending on the location of the tumor the operative procedures may involve cephalic pancreatoduodenectomy (Whipple procedure), distal pancreatectomy or total pancreatectomy. Pancreatic enzyme deficiency and diabetes are frequent complications of these procedures. Up to 70% of patients with pancreatic cancer present with biliary obstruction, that can be relieved by percutaneous or endoscopic stent placement. However, even if the tumor is fully resected, the outcome in patients with pancreatic cancer is disappointing (Hidalgo 2010, Seufferlein 2012). Post-operative administration of chemotherapy improved progression-free and overall survival in three large, randomized clinical trials (Hidalgo 2010), but median post-surgical survival in patients treated in all three trials was similar: only 20-22 months.
For the majority patients, who present with unresectable locally advanced or metastatic disease, management options range from chemotherapy alone to combined forms of treatment with chemoradiation therapy and chemotherapy. However, due to the increased toxicity of combined treatment, randomized trials of such combined regimens have had low enrollment, precluding a firm conclusion as to any advantage of adding chemoradiation to chemotherapy (Hidalgo 2010).
Gemcitabine was the first chemotherapeutic agent approved for the treatment of PDA, providing a median survival duration of 5.65 months (Burris 1997). Gemcitabine monotherapy was the standard of care for patients with metastatic pancreatic cancer until combination therapy with gemcitabine plus erlotinib (TarcevaŇ) was shown to increase median survival by 2 weeks. This modest benefit was tempered by a significant side effect profile and high cost, limiting its adoption as a standard treatment regimen. More recently, the multidrug chemotherapy combination of leucovorin, fluorouracil, irinotecan, and oxaliplatin (FOLFIRINOX) was shown to provide a median survival benefit of 4.3 months (OS = 11.1 months) over gemcitabine alone (6.8 months), but its side effect profile limits the regimen to select patients with a good performance status and often requires supplementation with WBC growth factor therapy. Nab-paclitaxel (AbraxaneŇ) received marketing authorization for use in combination with gemcitabine after showing an increase in overall survival of 7 weeks compared to gemcitabine alone (Von Hoff 2013). Thus, combination therapies have demonstrated limited survival benefit compared to gemcitabine alone as summarized in the table below (Thota 2014). Other drugs are currently under investigation, but none have received marketing authorization for the treatment of PDA.
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Chronic Pancreatitis
A second potential indication for SBP-101 is treatment of patients with the serious and potentially life-threatening condition of chronic pancreatitis. Chronic pancreatitis occurs in about 10% of the approximately 300,000 patients who suffer from acute pancreatitis annually in the US. Pancreatitis is a painful abdominal condition occurring most often in adults aged 30-40 years, and is associated in some cases with increased consumption of alcohol and tobacco, and less often, with the presence of stones in the bile or pancreatic duct system. In a small minority of cases the disease may be hereditary, but many cases have no clear precipitating etiology. Treatment is limited to supportive care, as there are no specific agents approved for treatment of acute or chronic pancreatitis. Patients with chronic pancreatitis endure repeated episodes of abdominal pain, often with progression to narcotic dependency and to pancreatic enzyme deficiency, as well as insulin dependent diabetes mellitus as a consequence of the ultimate destruction of pancreatic function. Once a patient has suffered from repeated painful bouts of chronic pancreatitis and become narcotic- and pancreatic enzyme-dependent, they may be offered a total pancreatectomy. A total pancreatectomy is an extensive surgical procedure resulting in the resection of the pancreas (guaranteeing both pancreatic enzyme deficiency as well as insulin-dependent diabetes mellitus), and often includes the spleen, gall bladder and appendix. The operation is both extensive and expensive. While the goal of a total pancreatectomy in patients with chronic pancreatitis is pain relief, as many as 60% remain narcotic dependent, and even with islet auto transplantation, i.e., isolation and transplant of the patient"s remaining functional islets, if any, over 70% remain insulin dependent. The combination of a total pancreatectomy and islet auto transplant (TP & IAT) represents a small subset of the surgical approaches to patients with chronic pancreatitis. Thus, a patient with chronic pancreatitis may face months of abdominal pain, narcotic dependence, the onset of diabetes mellitus, the requirement for both insulin and pancreatic enzyme replacement, and finally, an extensive and expensive surgical procedure which may not materially improve any of his symptoms.
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SBP-101, with an organ-specific ability to target the acinar cells of the pancreas, may represent an opportunity for up to 30,000 US patients annually with chronic pancreatitis to experience an early, non-surgical intervention into the natural history of their disease, with the potential to avoid narcotic dependency, insulin dependency and months of painful bouts of chronic pancreatitis. Patients would still require pancreatic enzyme replacement, but may be able to avoid surgery, diabetes, insulin and narcotic dependency. Consultation with pancreatitis experts at Harvard University, the Ohio State University, the University of Minnesota, Cedars Sinai Medical Center and the National Institute of Health (NIH) has resulted in enthusiastic endorsement of the study of SBP-101 in the treatment of patients with pancreatitis.
Clinical development of SBP-101 for the treatment of patients with pancreatitis is expected to proceed following the pancreatic cancer indication, with FDA consultation in a pre-IND meeting, completion of a series of IND-enabling nonclinical toxicology and pharmacology studies, and submission of an IND package to the FDA. It is important to note that much of this nonclinical work will be employed to support an IND for a Phase 1 pancreatic cancer trial prior to the IND in chronic pancreatitis.
Proprietary Technology
Function and Characteristics of Polyamines
Polyamines are metabolically distinct entities within human cells which bind to and facilitate DNA replication, RNA transcription and processing, and protein (such as pancreatic enzymes) synthesis. Human cells contain three essential and naturally occurring polyamines"putrescine, spermidine, and spermine"that, in contrast to cell building blocks such as amino acids and sugars, remain as metabolically distinct entities inside the cell. Polyamines perform many functions necessary for cellular proliferation and protein synthesis. The critical balance of polyamines within cells is maintained by several enzymes such as ornithine decarboxylase (ODC) and spermidine/spermine N1 acetyl transferase (SSAT). All of these homeostatic enzymes are short-lived, rapidly inducible intracellular proteins that serve to tightly and continuously regulate native polyamine pools. These enzymes constantly maintain polyamines within a very narrow range of concentration inside the cell.
Polyamine Analogues
Polyamine analogues such as SBP-101 are structurally similar to naturally occurring polyamines, and are recognized by the cell"s polyamine uptake system, allowing these compounds to gain rapid entrance to the cell. Evidence suggests that pancreatic acinar cells, because of their extraordinary protein synthesis capacity, exhibit enhanced uptake of polyamines and polyamine analogues such as SBP-101. Because of preferential uptake by pancreatic acinar cells, polyamine analogies such as SBP-101 disrupt the cell"s polyamine balance and biosynthetic network, and induce programmed cell death via caspase 3 activation (apoptosis). Proof of concept has been demonstrated in multiple human pancreatic cancer models, both in vivo and in vitro, that pancreatic ductal adenocarcinoma exhibits sensitivity to SBP-101. It is also known that many tumors, including pancreatic cancer, display an increased uptake rate of polyamines and polyamine analogues.
SBP-101
SBP-101 is a proprietary polyamine analogue, which accumulates in the acinar cells of the beagle pancreas causing a complete pharmaceutical resection of the exocrine pancreas, but without producing an inflammatory response. Due to a physiologically high intracellular concentration, SBP-101 induces disruption in acinar cells and pancreatic adenocarcinoma cells, which exhibit similar characteristics. Pancreatic islet cells, which secrete insulin, are structurally and functionally dissimilar to acinar cells and are not impacted by SBP-101.
The primary mechanism of action for SBP-101 has been demonstrated to include the enhanced uptake of the compound in the exocrine pancreas. This effect leads to corresponding depressed levels of native polyamines, with caspase 3 activation and apoptotic destruction of the exocrine pancreatic architecture without an inflammatory response. In animal models at two independent laboratories, SBP-101 has demonstrated significant suppression of transplanted human pancreatic cancer cells, including metastatic pancreatic cancer growth. See "Proof of Principle" below.
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Sun BioPharma believes that SBP-101 will have a distinct advantage over current pancreatic cancer therapies in that it specificallytargets the exocrine pancreas and may cause ablation, or pharmaceutical resection, of the acinar cells, as well as the primary and metastatic pancreatic cancer, while leaving the insulin-producing islet cells and most non-pancreatic tissue unharmed. Most current cancer therapies (including chemotherapy, radiation or surgery) are associated with significant side effects that further reduce the patient"s quality of life. However, Sun BioPharma believes that the adverse effects of SBP-101 will be limited to the gastrointestinal tract. It is expected that SBP-101 will produce exocrine pancreatic insufficiency and other GI adverse events, which may already be present as a common complication of advanced pancreatic cancer and part of the natural history of the disease. Exocrine pancreatic insufficiency is treatable with currently marketed digestive enzyme replacement capsules, such as CreonŇ (AbbVie). As the endocrine pancreas is expected to be unaffected by SBP-101, no new requirement for insulin is expected.
Proof of Principle
SBP-101 has been tested and found effective in two separate in vivomodels of human pancreatic cancer. SBP-101 was used to treat mice subcutaneously transplanted with the human pancreatic cancer cell line PANC-1. A dose-response for efficacy was demonstrated with a 26 mg/kg daily injection resulting in near complete suppression of the transplanted tumor, as shown in Figure 1.
Figure 1 Impact of SBP-101 on PANC-1 Tumor Burden in a Murine Xenograft Model
Source: Study BERG20100R1a (MIR1581) (data on file) note: SBP-101 was formerly known as SUN-101
A separate orthotopic xenograft study (direct transplant of tumor into the pancreas) employed a particularly aggressive human pancreatic cancer cell line, L3.6pl, that is known to metastasize from the pancreas to the liver and the peritoneum in mice. Mice implanted with L3.6pl were treated with SBP-101 that had been sourced with a different synthetic process from that of the PANC-1 study, and the results were compared with untreated control mice and with mice treated with gemcitabine (then current "gold standard" treatment). SBP-101 (at 25 mg/kg) was demonstrably more effective than the comparator gemcitabine therapy in suppressing the tumor, as shown in Figure 2.
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Figure 2 L3.6pl Orthotopic Xenograft Dose-response Study - Mean (" "±SD) Tumor Volume after Treatment with SBP-101, Gemcitabine or Both
Gemzar=gemcitabine
Source: Study101-Biol-101-001 (data on file)
The potential for SBP-101 as an effective therapy for pancreatic cancer has therefore been demonstrated in vivoby two separate investigators, employing two different human pancreatic cancer cell lines in two different animal models, using SBP-101 synthesized by two different routes, while arriving at nearly equal, and remarkably effective, doses of 25 and 26 mg/kg, respectively. Additionally, when compared in vitro to existing therapies, SBP-101 produced superior results in suppressing growth of pancreatic cancer cells.
Development Plan for SBP- 101
Development of SBP-101 for the pancreatic cancer indication includes a preclinical and a clinical phase. The preclinical phase consists of four primary components: chemistry, manufacturing and controls (CMC), preclinical (laboratory and animal) pharmacology studies, preclinical toxicology studies, and regulatory submissions in Australia and the US. Pursuant to a potentially earlier start of clinical (human) trials in Australia, an HREC (Human Research Ethics Committee) application will be submitted with subsequent CTN (Clinical Trial Notification) to the TGA (Therapeutic Goods Administration). Complementing the Australian initiative, a similar, but considerably more extensive, preclinical package has been submitted to the US FDA in support of an IND (Investigational New Drug) application, enabling the same clinical trial to open at sites in the US. The initial clinical trial in previously treated patients with locally advanced or metastatic pancreatic cancer will be a Phase 1 First-in-Human study with a dose-escalation phase, and possibly an expansion phase at the anticipated recommended treatment dose, conducted at clinical sites in both Australia and the US. Sun BioPharma has engaged expert clinicians who treat pancreatic cancer at major cancer treatment centers in Melbourne, Sydney and Adelaide, Australia as well as the Fred Hutchinson Cancer Center in Seattle, Washington; the Ohio State University in Columbus, Ohio; and Translational Genomics Research Institute (TGen) in Scottsdale, Arizona. These Key Opinion Leaders (KOLs) with demonstrated proven performance in pancreatic cancer studies have enthusiastically agreed to participate as investigators for Sun BioPharma"s Phase 1 First-in-Human study.
Subject to obtaining sufficient financing, Sun BioPharma expects to be positioned to initiate a Phase 1 clinical trial of SBP-101 in previously treated pancreatic cancer patients is expected to start in late 2015 at up to three sites in Australia and another three sites in the US. Sun BioPharma estimates that additional funding of $10 million will be required to complete preclinical work, obtain regulatory milestones (a CTN and an IND) and complete the Phase 1 First-in-Human study. Once human data have been acquired with SBP-101 in a Phase 1 trial, Sun BioPharma will evaluate the estimated response rate and determine whether this novel approach to pancreatic cancer could be safe and effective. A response rate of at least 30% with a reasonable safety profile will justify continued development of SBP-101 for patients with adenocarcinoma of the pancreas.
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Cancer therapeutics typically require a successful randomized Phase 3 trial that shows a survival advantage, with costs often exceeding $250-350 million before efficacy is established. Sun BioPharma believes that the unique specificity of SBP-101 to the pancreas and pancreatic adenocarcinoma will permit a potential safety and efficacy demonstration and decision point to be reached with a randomized Phase 2 study following a successful Phase 1 demonstration of safety and tolerability with cancer project spending of less than $20 million for completion of the Phase 1 study.
Given the laboratory evidence of comparative efficacy, Sun BioPharma believes that SBP-101 has the potential to change the standard of care for patients with pancreatic cancer, either as monotherapy, or more likely, in combination with existing therapy.
Preclinical Development
To enable IND and HREC/CTN submission and as part of its pharmacology work, Sun BioPharma has conducted plasma and urine assay development and validation in animals, in vitro metabolism studies in liver microsomes and hepatocytes, in vitro interaction studies with hepatic and renal transporters, a protein binding study, animal pharmacokinetic and metabolism/mass balance studies, and human plasma and urine assay development and validation. As a part of the pharmacology evaluation, Sun BioPharma has conducted in vitro pharmacology screen profiling assay, a study in six human pancreatic cell lines, and studies in tumor xenograft models in mice using PANC-1 cell lines and human pancreatic cancer cells (L3.6pl) injected orthotopically in the tail of the pancreas of nude mice.
To meet regulatory requirements and to establish the safety profile of SBP-101, Sun BioPharma has conducted, in rodents and non-rodents, toxicology dose-ranging studies, IND-enabling general toxicology studies, and genetic toxicology studies, including an Ames test. Exploratory studies in mice and rats and a Good Laboratory Practice (GLP)-compliant dog toxicology study have been completed. The relationship between dose and exposure (pharmacokinetics) has been described for all three species. Sun BioPharma has also completed a preclinical hERG assay to detect any electrocardiographic QTc interval effects (IKrpotassium ion channel testing). Additionally, Sun BioPharma may also conduct reproductive toxicity, immunotoxicity as well as phototoxicity testing if necessary (but not prior to the Phase 1 trial). As Sun BioPharma anticipates the possibility of using SBP-101 in combination therapy with gemcitabine or AbraxaneŇ, Sun will conduct appropriate nonclinical studies to evaluate the use of these combinations. Sun BioPharma will also evaluate comparative efficacy of SBP-101, gemcitabine and nab- paclitaxel in various combinations.
Although epidemiology of pancreatic cancer indicates that this is a disease of the older patient and is seen only rarely in the pediatric population, preliminary discussions with pediatric oncologists have nonetheless suggested that SBP-101 be considered for exploratory studies in children with pancreatic cancer.
Overall, given the pharmacodynamic effect of SBP-101, Sun BioPharma does not presently anticipate that indications other than pancreatic adenocarcinoma and pancreatitis will be developed. Longer term, however, Sun BioPharma may explore the use of SBP-101 in hepatocellular or biliary tract carcinoma, given that the drug is known to also be taken up by the liver at fairly high levels.
Sun BioPharma has met FDA-mandated Chemistry, Manufacturing and Control (CMC) requirements with a combination of in-house expertise and contractual arrangements. To date, preparation of anticipated metabolites and an internal standard as a prerequisite for Sun BioPharma"s analytical studies have been completed through a Sponsored Research Agreement with the University of Florida and a contract manufacturer. Sun BioPharma has completed Service Agreements with Syngene International Ltd. for the manufacture and supply of specific quantities of Good Manufacturing Practice (GMP) SBP-101 active pharmaceutical agreement (API) and for the development of synthetic process improvements. Investigational product (IP or clinical trial supply) has been made and tested at Albany Molecular Research Inc. (AMRI) in Burlington, MA.
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Pancreatic Cancer Investigational New Drug (IND) " Form 1571 Submission
The preclinical work to support the IND submission has been completed. An IND application package containing the following: an Investigator"s Brochure; a statement of general investigative plans; the proposed Phase 1 pancreatic cancer study protocol, a data management and statistical plan; the CMC data; and the pharmacology, ADME (absorption, distribution, metabolism, excretion), and toxicology data. Preparation of the SBP-101 IND for pancreatic cancer required collaboration by Sun BioPharma"s manufacturing, preclinical toxicology, pharmacokinetic and metabolism experts, Sun BioPharma"s regulatory affairs project management, and Sun BioPharma"s in-house clinical expertise. Submission of Sun BioPharma"s pancreatic cancer IND, and allowance thereof by the FDA, will permit Sun BioPharma to proceed in the United States with its Phase 1 clinical trial, that will be a safety and tolerability study in previously treated patients with metastatic pancreatic ductal adenocarcinoma. This is further discussed in "Clinical Development" below.
Clinical Development " Pancreatic Cancer
Given the unique effects of SBP-101 on the mammalian pancreas, special factors have been considered in the design of the first-in-man study.
Phase 1 Clinical Trial Design
Subject to obtaining Financing, a Phase 1 study in patients with pancreatic cancer, for a duration of approximately 24 months, is anticipated to enroll the first patient before the end of 2015. This study is expected to include a dose-escalation phase with 15-day cycles of treatment at each dose level. At least two cycles of therapy are anticipated in this trial, with continued treatment permitted for patients with clinical responses or stable disease. The projected safety profile suggests that repeat cycles would be well tolerated.
The absence of non-target organ adverse events implies non-overlapping toxicity in the case of subsequent combination with conventional chemotherapeutic agents, such as gemcitabine or nab-paclitaxel, or even FOLFIRINOX.
The specific nature of the pancreatic effect implies a single cancer indication (pancreatic adenocarcinoma) for the compound. This pancreatic effect of the compound also presumably contraindicates study of SBP- 101 in any healthy volunteer studies (such as a definitive QT interval study) due to potential subsequent development of pancreatic insufficiency. Other than the possible longer-term exploration of SBP-101 in hepatocellular or biliary tract carcinoma (as mentioned earlier), no indication for malignancy other than pancreatic adenocarcinoma is anticipated. These facts lead to the expedient circumstance that a classic Phase 1 multi-tumor oncology study is not possible. Accordingly, the first human study of SBP-101 is designed to be a dose-response study, i.e., a Phase 1 study producing Phase 2 results, or a Phase 1a/1b study.
An unexpected but favorable characteristic of the pancreatic action of SBP-101 is the lack of an effect on the normal insulin-producing islet cells. Preservation of the islet cells implies the absence of diabetes as a complication of SBP-101 therapy, although the necessity of supplementary oral pancreatic enzymes is expected to be unavoidable. Impact of the anticipated adverse effect of pancreatic insufficiency is mitigated by Sun BioPharma"s recognition that many patients with pancreatic carcinoma require pancreatic enzyme replacement as a feature of their underlying disease, a complication so common that pancreatic enzyme replacement with one of several commercially available products is typically covered by US and Australian health care plans. Patients with cystic fibrosis, chronic pancreatitis and pancreatic cancer are the populations most often treated with pancreatic enzyme replacement.
Timing of the onset of action of SBP- 101 has resulted in a careful dose-finding strategy with intervals between cycles of therapy. Correlation between systemic drug exposure, pharmacologic and toxic effects will facilitate dose-finding and schedule determination for an optimal treatment regimen.
Patients will require regular pancreatic and hepatic enzyme assays, and periodic abdominal CT follow-up. Patients will also require careful monitoring for clinical signs of GI adverse events.
Given the life-threatening nature of pancreatic adenocarcinoma, the limited efficacy of current treatment options, and the long history of failures in pancreatic adenocarcinoma developmental therapeutics, it is anticipated that a successful outcome of the Phase 1a/1b dose-ranging trial will enable execution of an Accelerated Approval pathway. A 6-month FDA review period is would be a desirable outcome, along with an Oncology Drugs Advisory Committee (ODAC) presentation with post-approval clinical trial commitments for confirmatory studies.
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Phase 2 Pivotal Clinical Trial
Unlike nearly every other early-stage cancer drug, SBP-101"s specificity of anticipated effects uniquely requires that its first human trial will be a dose- response study in the target pancreatic cancer patient population. This rare opportunity results in a simplified path to determine the success or failure of SBP-101 in the treatment of this disease and may result in an expedited development pathway.
With successful Phase 1 results, Sun BioPharma intends to meet with the US FDA to obtain advice on potential breakthrough therapy designation and accelerated approval strategy. Sun BioPharma will actively seek potential commercial partners and the opportunity to evaluate combination therapy alternatives.
With successful completion of FDA recommended clinical studies, Sun BioPharma intends to seek marketing authorization from the FDA, the EMA (European Union), Ministry of Health and Welfare (Japan) and TGA (Australia). The submission fees may be waived when SBP-101 has been designated an orphan drug in each geographic region, as described under "Orphan Drug Status."
Total Development Costs
The development and commercialization of SBP-101 will involve a preclinical and a clinical development phase. Sun BioPharma estimates that completion of the proposed preclinical development work and Phase 1a/1b clinical trial in pancreatic cancer will require additional funding of at least $10 million in addition to what Sun BioPharma has already raised and to take up to 24 months from the completion of this transaction. Additional clinical trials will be subsequently required if the results of the Phase 1 pancreatic cancer trial are positive. Sun BioPharma estimates the total time and cost to obtain FDA and EU approval and bring SBP-101 to market is 6 to 7 years and up to two-hundred million dollars ($200 million), although this process could be accelerated and less funds would be needed if SBP-101 qualifies for Breakthrough Status. A breakthrough therapy designation conveys fast track program features, more intensive FDA guidance on an efficient drug development program, an organizational commitment involving senior managers, and eligibility for rolling review and priority review.
Orphan Drug Status
The Orphan Drug Act (ODA) provides special status to drugs which are intended for the safe and effective treatment, diagnosis or prevention of rare diseases that affect fewer than 200,000 people in the US, or that affect more than 200,000 persons but for which a manufacturer is not expected to recover the costs of developing and marketing such a drug. Orphan drug designation has the advantage of reducing drug development costs by: (i) streamlining the FDA"s approval process, (ii) providing tax breaks for expenses related to the drug development, (iii) allowing the orphan drug manufacturer to receive assistance from the FDA in funding the clinical testing necessary for approval of an orphan drug, and (iv) facilitating drug development efforts. More significantly, the orphan drug manufacturer"s ability to recover its investment in developing the drug is also greatly enhanced by the FDA granting the manufacturer seven years of exclusive US marketing rights upon approval. Designation of a drug candidate as an orphan drug therefore provides its sponsor with the opportunity to adopt a faster and less expensive pathway to commercializing its product. Given the prevalence of pancreatic cancer, (about 40,000 in the US) Sun BioPharma has successfully obtained US Orphan Drug Status in 2014 and intends to submit an application for Orphan Drug Status in Europe, Japan and Australia.
Intellectual Property Status
Intellectual property licensed by Sun BioPharma from the University includes Patent #5,962,533 and #6,160,022 covering composition of matter and method of use, with expirations in 2016 and 2019, respectively.
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Development Project Managers
Project managers have been hired or contracted to coordinate all the functions identified in Sun BioPharma"s Development Plan for SBP-101. In addition, an experienced regulatory affairs project specialist has been engaged to compile and submit all data in support of a European orphan drug status filing (see "Development Costs and Orphan Drug Status"), compile the General Investigative Plan to support all clinical activities, and coordinate all activities in connection with assembly and filing of Sun BioPharma"s IND. More specifically, the Sun BioPharma experts responsible for overseeing critical functions of the Development Plan are as follows:
Sun BioPharma"s CMC program is under the direction of Thomas Neenan, PhD, a founding member of the Board of Directors and Sun BioPharma"s Chief Scientific Officer, and an experienced pharmaceutical industry synthetic chemist. Dr. Neenan has commissioned Contract Manufacturing Organizations (CMOs), who have improved the process for synthesis of SBP-101, and who have produced high- quality compound, chemically identical to that synthesized by Dr. Bergeron at the University of Florida. Dr. Neenan"s completed work includes development, confirmation and documentation of the synthetic chemistry process, analytical purity, reproducibility, stability (shelf-life), degradation products and pharmaceutical formulation and packaging. This work has culminated in a supply of drug to support Sun BioPharma"s preclinical work and human clinical trials.
Ajit Shah, PhD, is Sun BioPharma"s Vice President of Clinical Pharmacology. Dr. Shah has extensive prior experience with numerous other compounds at both large and mid-size sponsoring companies, including Pfizer and MGI Pharma. His completed work includes development of analytical methods to quantify levels of drug and characterization of metabolites in plasma, urine and tissues, plus distribution of the compound in living tissues, metabolic pathways and products, anticipated drug blood levels, half- life in the organism, and excretion pathways. Dr. Shah"s work has enabled informed dose and schedule planning for human clinical trials.
Anthony Kiorpes, PhD, DVM, has responsibility for Sun BioPharma"s toxicology program, a role he has assumed previously for many preclinical projects at other companies. His studies have determined single- and multiple-dose safety profiles in rodent and non-rodent species, enabling improved safety monitoring in the design of clinical trials for SBP-101. Dr. Kiorpes" results have helped management to predict and prevent potential side effects in humans.
Michael Cullen, MD, Sun BioPharma founder, CEO, Chairman and President, an experienced drug development specialist with 10 prior NDA approvals, has led Sun BioPharma"s overall Clinical and Regulatory Affairs & Project Management effort, including timeline and budget management, critical path timeline synchronization, IND/HREC/CTN package submissions, management of industry partner collaborative efforts, initial EU Regulatory Affairs planning, and collaboration on oversight of outsourced CMC efforts. Dr. Cullen has recruited additional experienced and talented staff in the positions of statistical analyses, clinical operations, clinical research and non-clinical studies.
Suzanne Gagnon, MD, Sun BioPharma"s Chief Medical Officer, an experienced CMO, having served in that capacity for several private and public companies, including BioPharm/IBAH/Omnicare, ICON, Idis, NuPathe, Luitpold and Rhone-Poulenc Rorer where she helped develop docetaxel, still an important chemotherapy agent, will join Michael Cullen, MD in leading the design of Sun BioPharma"s clinical trials, recruiting investigators, monitoring the safety of the patients and reporting the findings to the FDA, EMA and TGA, and in the medical literature. Sun BioPharma has engaged Courante Oncology, an experienced clinical contract research organization (CRO), to manage clinical operations in the USA, and has selected a CRO for Sun BioPharma"s Australian operations. These two CROs will provide regulatory documentation for HREC/CTN and IRB (Investigational Review Board) submissions, FDA 1571 regulation compliance, and informed consents, as well as clinical study site qualification, contracting and payment, study conduct monitoring, data collection, analysis and reporting.
Government Regulation
FDA regulations require submission of an IND (Investigational New Drug) application, which was submitted in May 2015, and is currently in review by FDA. CMC (Chemistry, Manufacturing and Controls) questions from FDA on 19 June 2015 has resulted in a minimum 60 day delay in FDA acceptance of the IND for filing, pending FDA review and acceptance of the Sun BioPharma CMC response, due for submission to FDA in late July 2015.
The SBP-101 clinical program will be conducted in the US under the IND and FDA regulations, which are primarily safety focused, until late in the development program, when an NDA (New Drug Application) with satisfactory evidence of both safety and tolerability, will be submitted to FDA in the quest for marketing approval. Similarly, an abbreviated data package, primarily consisting of the clinical study protocol and IB (Investigator"s Brochure) is in review by an Australian HREC (Human Research Ethics Committee). This application review is also delayed pending the FDA review of the additional CMC data requested on June 19, 2015. The Clinical Trial will commence in Australia following HREC approval, Local Governance (Hospital) approval and submission and acceptance of a CTN (Clinical Trial Notification) by the TGA (Therapeutic Goods Administration) in Australia. It is anticipated that the Clinical Trial will commence in both the US and Australia late in 2015.
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Research and Development
As a pre-clinical stage drug development company, without a marketed product, no costs are borne directly by customers. Approximately $3 million US has been spent in each of the last two years on research and development.
Compliance with Environmental Laws
All of the costs of development above are directed at compliance with US FDA and Australian TGA regulations; however, environmental compliance costs have been incurred primarily in the CMC function at our CMOs both in Bangalore, India and Burlington, MA, USA. These costs are borne by the respective CMOs, and are typically not broken out, but are reflected in the overall cost of the contracts between SB the respective CMOs.
Employees
As of July 2, 2015, Sun BioPharma had 9 employees, all of whom were full-time employees including its Chief Executive Officer, President and Chairman of the Board, its Chief Financial Officer, its Chief Scientific Officer, its Chief Medical Officer, its Vice President of Clinical Pharmacology, its Vice President of Operations and its Director of Pancreatitis Research. Sun BioPharma may hire additional employees to support the growth of its business. Sun BioPharma believes that operational responsibilities can be handled by its current employees and independent consultants. Sun BioPharma is using and will continue to use the services of independent consultants and contractors to perform various professional services. Sun BioPharma believes that this use of third-party service providers enhances its ability to minimize general and administrative expenses.
Description of Securities to be Assumed
Options
As of July 2, 2015, Sun BioPharma had issued and outstanding options to purchase 2,059,304 shares of common stock, all of which were issued under the Sun BioPharma, Inc. 2011 Stock Option Plan (the "2011 Plan"), which is proposed to be assumed by our Company pursuant to the Merger. As of July 2, 2015, an additional 257,162 shares remained available for future grants under the 2011 Plan.
Warrants
As of July 2, 2015, Sun BioPharma had issued and outstanding warrants to purchase 637,500 shares of common stock and no warrants to purchase shares of preferred stock outstanding. Each warrant is exercisable for up to ten (10) years after the date of issuance (or earlier upon Change of Control (as defined in each warrant) or an initial public offering); and (z) each holder of a warrant has the right to purchase up to 50% of the original principal amount of the related (but cancelled) convertible promissory notes at a specified exercise price.
Convertible Promissory Notes
As of July 2, 2015, Sun BioPharma had outstanding $2,775,000 aggregate principal amount of Sun BioPharma, Inc. Convertible Promissory Notes (collectively, the "Notes"), which convert into fully paid and nonassessable shares of Common Stock of Sun BioPharma at a rate of $4.50 per share of Sun BioPharma Common Stock. If all of the outstanding "Notes" converted into shares of Sun BioPharma common stock as of July 2, 2015, the holders would receive a total of 616,667 shares of common stock.
Management"s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of Sun BioPharma"s financial condition and results of operations together with its consolidated financial statements and related notes included elsewhere in this filing. Some of the information contained in this discussion and analysis or set forth elsewhere in this filing, including information with respect to its plans and strategy for tis business and related financing, includes forward- looking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements." Sun BioPharma"s actual results may differ materially from those described below. You should read the section titled "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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Overview
Sun BioPharma is a pre-clinical stage drug development company advancing the commercial development of a proprietary polyamine analogue for pancreatic cancer and for a second indication in chronic pancreatitis. Sun BioPharma has exclusively licensed the worldwide rights to this compound, which has been designated as SBP-101, from the University of Florida Research Foundation, Inc. ("UFRF"). Sun BioPharma intends to generate income from pharmaceutical products it develops either alone or with one or more strategic partners. In the years ended December 31, 2014 and 2013, Sun BioPharma had no revenues and net losses of $3,531,000 and $4,087,000, respectively.
In the three month period ended March 31, 2015, Sun BioPharma had no revenues and a net loss of $2,191,000, compared to no revenues and a net loss of $581,000 for the three month period ended March 31, 2014.
Sources of Expenses
General and administrative expense
Sun BioPharma"s general and administrative expense consists primarily of management staffing, legal and accounting fees, debt discount, insurance premiums, office support costs and share-based compensation.
Research and product development expense
Sun BioPharma"s research and product development expense consists of costs associated with pre- clinical testing, drug manufacturing and share-based compensation.
Other income (expense)
Sun BioPharma"s other income (expense) primarily reflects interest expense and change in fair value of derivatives.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While Sun BioPharma bases its estimates and judgments on its experience and on various other factors that Sun BioPharma believes to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. Sun BioPharma believes the following critical accounting policies used in the preparation of its financial statements require significant judgments and estimates. For additional information relating to these and other accounting policies, see Note 2 to Sun BioPharma"s audited financial statements for the years ended December 31, 2014 and 2013, and Note 2 to Sun BioPharma"s unaudited condensed consolidated financial statements for the three month periods ended March 31, 2015 and 2014, each appearing elsewhere in this filing.
Fair Value Estimates of Common Stock
Sun BioPharma utilizes estimates and assumptions in determining the fair value of its common stock. Sun BioPharma granted stock options at exercise prices not less than the fair market value of its common stock as determined by its Board, with input from management. Sun BioPharma has obtained independent appraisals of the estimated fair value of its common stock based on a number of objective and subjective factors, including external market conditions affecting the medical device industry and the historical prices at which Sun BioPharma sold shares of its common stock.
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Share-Based Compensation
Sun BioPharma recognizes compensation expense in an amount equal to the estimated grant date fair value of each option grant, or stock award over the estimated period of service and vesting. This estimation of the fair value of each stock-based grant or issuance on the date of grant involves numerous assumptions by management. Although Sun BioPharma calculates the fair value under the Black Scholes option pricing model, which is a standard option pricing model, this model still requires the use of numerous assumptions, including, among others, the expected life (turnover), volatility of the underlying equity security, a risk free interest rate and expected dividends. The model and assumptions also attempt to account for changing employee behavior as the stock price changes and capture the observed pattern of increasing rates of exercise as the stock price increases. The use of different values by management in connection with these assumptions in the Black Scholes option pricing model could produce substantially different results.
Accounting for Income Taxes
Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates. Future tax benefits are subject to a valuation allowance when management is unable to conclude that Sun BioPharma"s deferred tax assets will more-likely-than-not be realized from the results of operations. Sun BioPharma"s estimate for the valuation allowance for deferred tax assets requires management to make significant estimates and judgments about projected future operating results. A valuation allowance has been established against all net deferred tax assets. If actual results differ from these projections or if management"s expectations of future results change, it may be necessary to adjust the valuation allowance.
Results of Operations
Comparison of years ended December 31, 2014 and 2013
Operating expenses
Sun BioPharma had total operating expenses of $3,445,000 in 2014, an increase of $208,000, or 6%, compared to $3,237,000 in 2013. The primary reason for the increase was higher research and development costs, offset by lower general and administrative expenses. The changes in the various components of Sun BioPharma"s operating expenses are described below.
General and administrative expense
Sun BioPharma had general and administrative expense of $1,079,000 in 2014, a decrease of $570,000, or 35%, compared to $1,649,000 in 2013. The primary reasons for the decrease were caused by decreases in option compensation ($764,000), offset by increases in personnel costs ($116,000) and legal and accounting fees ($65,000).
Research and product development expense
Sun BioPharma had research and product development expense of $2,366,000 in 2014, an increase of $778,000, or 49%, compared to $1,588,000 in 2013. The primary reasons for the increase were caused by increases in outside services ($607,000), materials and supplies ($29,000), licenses and patents ($20,000) and stock option compensation ($19,000).
Other income (expense)
Other income (expense) consists primarily of interest expense on convertible promissory notes and change in fair value of derivatives. Interest expense was $156,000 in 2014, whereas interest expense in 2013 was $98,000, an increase of $58,000, or 59% as a result of issuance of additional convertible notes. Included in interest expense was the accretion of debt discount which was $184,000 in 2013 and zero in 2014. The change in the fair value of derivative relating the warrants whose terms became certain in December 2013 was $626,000 in 2013.
Income tax benefit
Income tax benefit consists of refundable tax credits relating to Sun BioPharma"s Australian subsidiary of $108,000 in 2014, which was an increase of $10,000, or 10%, compared to $98,000 in 2013.
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Net loss
For the foregoing reasons, Sun BioPharma had a net loss of $3,531,000 in 2014, as compared to a net loss of $4,087,000 in 2013.
Comparison of three months ended March 31, 2015 and 2014
Operating expenses
Sun BioPharma had total operating expenses of $2,190,000 for the three month period ended March 31, 2015, an increase of $1,614,000, or 280%, compared to $576,000 for the same period in 2014. The primary reason for the increase was higher general and administrative costs and higher research and development costs. The changes in the various components of Sun BioPharma"s operating expenses are described below.
General and administrative expense
Sun BioPharma had general and administrative expense of $1,203,000 for the three month period ended March 31, 2015, an increase of $948,000, or 372%, compared to $255,000 for the same period in 2014. The primary reasons for the increase were caused by increases in personnel costs ($150,000), legal and accounting fees ($114,000) and stock option compensation ($700,000).
Research and product development expense
Sun BioPharma had research and product development expense of $987,000 for the three month period ended March 31, 2015, an increase of $666,000, or 207%, compared to $321,000 for the same period in 2014. The primary reasons for the increase were caused by increases in outside services ($397,000) and stock option compensation ($180,000).
Other income (expense)
Other income (expense) consists primarily of interest expense on convertible promissory notes and loss on foreign currency exchange. Interest expense was $40,000 for the three month period ended March 31, 2015, whereas interest expense for the same period in 2014 was $33,000, an increase of $7,000, or 21%. The loss on foreign currency exchange was $20,000 for the three month period ended March 31, 2015, whereas the loss on foreign exchange for the same period in 2014 was $3,000, an increase of $13,000, or 433%.
Net loss
For the foregoing reasons, Sun BioPharma had a net loss of $2,191,000 for the three month period ended March 31, 2015, as compared to a net loss of $581,000 for the same period in 2014.
Liquidity and Capital Resources
Sun BioPharma had cash and cash equivalents of $1,653,000 at December 31, 2014 compared to $2,693,000 at December 31, 2013, and total current liabilities of $467,000 at December 31, 2014 compared to $559,000 at December 31, 2013. At December 31, 2014 and 2013, Sun BioPharma had working capital of $1,906,000 and $2,303,000, respectively.
At March 31, 2015 Sun BioPharma had cash and cash equivalents of $1,171,000, total current liabilities of $817,000, and working capital of $1,036,000.
Sun BioPharma"s principal source of cash has been the issuance of convertible promissory notes and capital stock. Sun BioPharma expects its operating expenses will continue to grow and, as a result, Sun BioPharma will need to generate significant additional funding. Sun BioPharma believes that cash on hand will be sufficient to fund its operations through September 2015. Although Sun BioPharma does not have any current capital commitments, it expects that it will increase its projected expenditures once it has additional capital on hand in order to continue its efforts to grow its business and complete Phase 1 clinical trials for its SBP-101 drug candidate. Accordingly, Sun BioPharma expects to make additional expenditures in product development to continue enhancing its current products. Sun BioPharma also expects to invest in research and development efforts of follow-on products. However, Sun BioPharma does 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 its current intentions.
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Going Concern
Sun BioPharma has incurred recurring losses since inception and expects to continue to incur costs and expenses related to product development and sales and marketing of its products. As of December 31, 2014, Sun BioPharma had cash of $1,653,000, working capital of $1,906,000 and stockholders" deficit of $1,316,000. As of March 31, 2015, Sun BioPharma had cash of $1,171,000, working capital of $1,036,000 and stockholders" deficit of $2,196,000. Sun BioPharma"s principal source of cash has been the issuance of convertible notes and capital stock. Sun BioPharma anticipate that its operating expenses will continue to grow and, as a result, it will need to generate significant additional funding to finance company operations.
Sun BioPharma expects to continue its business into the foreseeable future as long as additional debt or equity financing is raised and revenues are achieved as anticipated. There can be no assurance that such financing will be available on terms commercially acceptable to Sun BioPharma or on any terms. Sun BioPharma does not anticipate generating revenues for the foreseeable future. Failure to manage discretionary expenditures, raise additional financing and increase revenues may adversely impact Sun BioPharma"s ability to achieve its intended business objectives. As a result, Sun BioPharma may be forced to reduce or curtail its operations. These factors raise substantial doubt about Sun BioPharma"s ability to continue as a going concern. The consolidated financial statements included elsewhere in this filing do not include any adjustments that might be necessary if Sun BioPharma is unable to continue as a going concern.
Cash Flows
Operating activities
Sun BioPharma used $3,343,000 of net cash in operating activities in 2014. Adjustments to reconcile net loss to net cash used in operating activities plus changes in operating assets and liabilities were $188,000 in 2014. These adjustments primarily reflect increases in share-based compensation expense, non-cash interest expense, and rebate receivable, offset by a decrease in accounts payable and accrued expenses.
Sun BioPharma used $1,931,000 of net cash in operating activities in 2013. Adjustments to reconcile net loss to net cash used in operating activities plus changes in operating assets and liabilities were $2,156,000 in 2013. These adjustments primarily reflect increases in share based compensation, fair value adjustment to warrant liabilities, and a decrease to accounts payable and accrued expenses.
Sun BioPharma used $913,000 of net cash in operating activities for the three months ended March 31, 2015. Adjustments to reconcile net loss to net cash used in operating activities plus changes in operating assets and liabilities were $1,278,000 in the three month period ended March 31, 2015. These adjustments primarily reflect increases in accounts payable and stock-based compensation expense.
Sun BioPharma used $710,000 of net cash in operating activities for the three month period ended March 31, 2014. Adjustments to reconcile net loss to net cash used in operating activities plus changes in operating assets and liabilities were $130,000 in the three month period ended March 31, 2014. These adjustments primarily reflect decreases in accounts payable, offset by stock based compensation, reductions in receivables and increases in accrued expenses.
Investing activities
Sun BioPharma used $501,000 of net cash in investing activities in 2014 to invest excess cash in a mutual fund. There were no significant investing activities during 2013.
24
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Financing activities
Sun BioPharma generated $2,815,000 of net cash from financing activities in 2014 from issuance of convertible promissory notes and the exercise of common stock options and warrants.
Sun BioPharma generated $2,991,000 of net cash from financing activities in 2013 from the issuance of convertible promissory notes.
Sun BioPharma generated $434,000 of net cash from financing activities during the three month period ended March 31, 2015 from the sale of common stock and exercise of common stock options.
Sun BioPharma generated $2,408,000 of net cash from financing activities during the three month period ended March 31, 2014 from the issuance of convertible promissory notes and exercise of common stock options.
Description of Indebtedness
As of March 31, 2015, Sun BioPharma had $3,000,000 outstanding in convertible promissory notes that incur annual interest of 5%, payable quarterly, and are convertible into common stock at $4.50 per share. These notes are scheduled to mature in December 2018. Sun BioPharma also had $300,000 outstanding in an unsecured loan that accrues annual interest of 4.125%. All principal and accrued interest on this loan are scheduled to become payable in October 2017.
Off-Balance Sheet Arrangements
As of December 31, 2014 and 2013 and March 31, 2015 and 2014, Sun BioPharma had no off-balance sheet arrangements.
Contractual Obligations and Commitments
As of December 31, 2014 and 2013 and March 31, 2015 and 2014, Sun BioPharma had no material commitments other than the liabilities reflected in its financial statements.
Sun BioPharma"s Financial Statements
Sun BioPharma"s audited consolidated financial statements and notes thereto for the years ended December 31, 2014 and 2013 begin on Page F-1 of this Information Statement, and its unaudited condensed consolidated financial statements for the interim periods ended March 31, 2015 and 2014 begin on Page F-20 of this Information Statement.
Pro Forma Financial Statements
Unaudited pro forma financial statements and notes thereto, reflecting amounts as if the Merger between the Company's subsidiary and Sun BioPharma had occurred previously, begin on Page F-30 of this Information Statement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding the beneficial ownership of our Common Stock as of the Record Date, of (i) each person known to us to beneficially own more than 5% of our stock, (ii) our directors, (iii) each named executive officer, and (iv) all directors and named executive officers as a group. As of July 23, 2015, there were a total of 1,450,322 shares of Common Stock issued and outstanding and 200,119 shares of Series A Preferred Stock issued and outstanding, with no other shares of preferred stock issued or outstanding.
The column titled "Percentage Owned" shows the percentage of voting stock beneficially owned by each listed party.
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The number of shares beneficially owned is determined under the rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which a person or entity has sole or shared voting power or investment power plus any shares which such person or entity has the right to acquire within sixty (60) days of the Record Date, through the exercise or conversion of any stock option, convertible security, warrant or other right. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with that person"s spouse) with respect to all shares of capital stock listed as owned by that person or entity, and the address of each of the shareholders listed below is c/o Cimarron Medical, Inc., 10 W. Broadway, Ste. 700, Salt Lake City, Utah, 84101.
Name and Address of Beneficial Owner |
Shares of Common Stock | Percent of Common Stock | Shares of Series A Preferred Stock | Percent of Series A Preferred Stock | ||||||||||||
David Fuhrman (CEO & Director) |
458,736 |
31.6 |
% |
100059.5 |
50 |
% | ||||||||||
15 South 1200 East |
||||||||||||||||
Robert Sargent (Director) 1 |
291,530 |
20.1 |
% |
100059.5 |
50 |
% | ||||||||||
1951 Logan Avenue |
||||||||||||||||
All Officers and Directors as a Group (2 persons) |
750,266 |
51.7 |
% |
200,119 |
100 |
% | ||||||||||
Peter Cartwright |
222,274 |
15.3 |
% |
|||||||||||||
1761 Mohawk Circle |
||||||||||||||||
Andrew Marks |
177,535 |
12.2 |
% |
|||||||||||||
2516 Dimple Dell Road |
||||||||||||||||
Doug Adamson |
174,532 |
12 |
% |
|||||||||||||
1371 Farm Meadow Lane |
||||||||||||||||
Salt Lake City, Utah 847117 |
(1) Robert Sargent is the manager of Rare Principle, L.C., and, as such, is the beneficial owner of 291,530 shares of Common Stock and 100,059.5 shares of Series A Preferred Stock held by Rare Principle, L.C., with sole voting and dispositive power with respect to all such shares.
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the disclosure requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports, information statements and other information, including annual and quarterly reports on Form 10-K and 10-Q, respectively, with the Securities and Exchange Commission (the "SEC"). Reports and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549. Copies of such material can also be obtained upon written request addressed to the SEC, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the SEC maintains a web site on the Internet (http://www.sec.gov) that contains reports, information statements and other information regarding issuers that file electronically with the SEC through the Electronic Data Gathering, Analysis and Retrieval System.
The following documents, as filed with the SEC by the Company, are incorporated herein by reference:
(1) |
Annual Report on Form 10-K for the fiscal year ended December 31, 2013; |
(2) |
Annual Report on Form 10-K for the fiscal year ended December 31, 2014; and |
(3) |
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015. |
You may request a copy of these filings, at no cost, by writing Cimarron Medical, Inc., at 10 W. Broadway, Ste. 700, Salt Lake City, Utah, 84101, or telephoning the Company at (801) 532-3080. Any statement contained in a document that is incorporated by reference will be modified or superseded for all purposes to the extent that a statement contained in this Information Statement (or in any other document that is subsequently filed with the SEC and incorporated by reference) modifies or is contrary to such previous statement. Any statement so modified or superseded will not be deemed a part of this Information Statement except as so modified or superseded.
This Information Statement is provided to the holders of capital of the Company only for information purposes in connection with the Written Consent, pursuant to and in accordance with Rule 14c-2 of the Exchange Act and the notice requirements of the URBCA. Please carefully read this Information Statement.
By Order of the Board of Directors
/s/ David Fuhrman |
|
Chief Executive Officer |
|
Director |
|
Dated: July 24, 2015
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Audited Financial Statements (as of December 31, 2014 and 2013 and for the years ended December 31, 2014 and 2013)
Unaudited Financial Statements (as of March 31, 2015 and 2014 and for the three months ended March 31, 2015 and 2014)
2014 |
2013 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,653,494 | $ | 2,693,375 | ||||
Stock subscription receivable |
94,400 | - | ||||||
Investments |
499,495 | - | ||||||
Rebate receivable |
- | 51,850 | ||||||
Prepaid expenses |
17,556 | 22,567 | ||||||
Income tax receivable |
108,459 | 94,965 | ||||||
Total current assets |
2,373,404 | 2,862,757 | ||||||
Property and equipment, net |
271 | 407 | ||||||
Other assets, net |
104,341 | 123,557 | ||||||
Total assets |
$ | 2,478,016 | $ | 2,986,721 | ||||
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 334,710 | $ | 337,668 | ||||
Accrued expenses |
132,208 | 221,784 | ||||||
Total current liabilities |
466,918 | 559,452 | ||||||
Long- term liabilities: |
||||||||
Accrued interest |
26,984 | 14,611 | ||||||
Long- term debt |
300,000 | 300,000 | ||||||
Convertible notes payable |
3,000,000 | 700,000 | ||||||
Total long-term liabilities |
3,326,984 | 1,014,611 | ||||||
Commitments and contingencies (Note 5) |
- | - | ||||||
Stockholders' (deficit) equity: |
||||||||
Common stock, $0.001 par value; 20,000,000 shares authorized; |
||||||||
5,688,927 and 5,005,522 shares issued and outstanding |
||||||||
at December 31, 2014 and 2013, respectively |
5,688 | 5,005 | ||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; |
||||||||
no shares issued and outstanding |
- | - | ||||||
Additional paid-in capital |
7,264,729 | 6,449,907 | ||||||
Accumulated deficit |
(8,568,880 | ) | (5,037,678 | ) | ||||
Accumulated comprehensive loss, net |
(17,423 | ) | (4,576 | ) | ||||
Total stockholders' (deficit) equity |
(1,315,886 | ) | 1,412,658 | |||||
Total liabilities and stockholders' (deficit) equity |
$ | 2,478,016 | $ | 2,986,721 |
Additional |
Accumulated |
Total |
||||||||||||||||||||||
Common Stock |
Paid-In |
Accumulated |
Comprehensive |
Stockholders' |
||||||||||||||||||||
Shares |
Par Value |
Capital |
Deficit |
Loss |
(Deficit) Equity |
|||||||||||||||||||
Balances, January 1, 2013 |
2,567,171 | $ | 2,566 | $ | 2,281,962 | $ | (951,025 | ) | $ | - | $ | 1,333,503 | ||||||||||||
Issuance of common stock |
28,572 | 29 | 99,972 | - | - | 100,001 | ||||||||||||||||||
Conversion of convertible notes payable |
||||||||||||||||||||||||
and accrued interest into common stock |
2,409,779 | 2,410 | 2,407,369 | - | - | 2,409,779 | ||||||||||||||||||
Reclassification of derivative liability to equity |
- | - | 809,963 | - | - | 809,963 | ||||||||||||||||||
Share- based compensation |
- | - | 850,641 | - | - | 850,641 | ||||||||||||||||||
Foreign currency translation adjustment, net of taxes of $-0- |
- | - | - | - | (4,576 | ) | (4,576 | ) | ||||||||||||||||
Net loss |
- | - | - | (4,086,653 | ) | - | (4,086,653 | ) | ||||||||||||||||
Balances, December 31, 2013 |
5,005,522 | 5,005 | 6,449,907 | (5,037,678 | ) | (4,576 | ) | 1,412,658 | ||||||||||||||||
Issuance of common stock for services |
100,000 | 100 | 90,900 | - | - | 91,000 | ||||||||||||||||||
Conversion of convertible notes payable |
22,505 | 22 | 101,252 | - | - | 101,274 | ||||||||||||||||||
and accrued interest into common stock |
||||||||||||||||||||||||
Exercise of stock options |
535,900 | 536 | 492,464 | - | - | 493,000 | ||||||||||||||||||
Exercise of warrants |
25,000 | 25 | 24,975 | - | - | 25,000 | ||||||||||||||||||
Share- based compensation |
- | - | 105,231 | - | - | 105,231 | ||||||||||||||||||
Foreign currency translation adjustment, net of taxes of $-0- |
- | - | - | - | (12,847 | ) | (12,847 | ) | ||||||||||||||||
Net loss |
- | - | - | (3,531,202 | ) | - | (3,531,202 | ) | ||||||||||||||||
Balances, December 31, 2014 |
5,688,927 | $ | 5,688 | $ | 7,264,729 | $ | (8,568,880 | ) | $ | (17,423 | ) | $ | (1,315,886 | ) |
Non-cash financing activities: | |||||
· |
The Company converted $101,274 and $2,409,779 of convertible notes payable and accrued interest into 22,505 and 2,409,779 shares of common stock during the years ended December 31, 2014 and 2013, respectively. | ||||
|
| ||||
· |
During December 2013, derivative liabilities of $809,963 were reclassified to equity. |
2014 |
2013 |
|||||||
Stock options |
1,371,938 | 1,712,838 | ||||||
Warrant |
1,137,500 | 1,162,500 | ||||||
Shares under convertible note agreements |
666,667 | 155,657 | ||||||
3,176,105 | 3,030,995 |
Quoted Prices in Active Markets (Level 1) |
Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Fair Value |
|||||||||||||
Assets: |
||||||||||||||||
Investments |
$ | 499,495 | $ | - | $ | - | $ | 499,495 |
Quoted Prices in Active Markets (Level 1) |
Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Fair Value |
|||||||||||||
Assets: |
||||||||||||||||
Investments |
$ | - | $ | - | $ | - | $ | - |
· |
$50,000 is due upon enrollment of the first subject in a Phase I trial; |
|
|
· |
$300,000 is due upon enrollment of the first subject in a Phase II clinical trial; |
· |
$3,000,000 is due upon approval of a New Drug Application; |
· |
$2,000,000 is due upon approval to manufacture and market in either the European Union or Japan (one time only); |
· |
$1,000,000 is due upon the first time annual net sales of licensed product or licensed process by the Company reaches $100,000,000; and |
· |
$3,000,000 is due upon the first time annual net sales of licensed product or licensed process by the Company reaches $500,000,000. |
Weighted |
||||||||||||
Average |
||||||||||||
Number of |
Exercise |
Intrinsic |
||||||||||
Shares |
Price |
Value |
||||||||||
Outstanding, January 1, 2013 |
125,900 | $ | 0.35 | $ | - | |||||||
Granted |
1,586,938 | 0.99 | ||||||||||
Exercised |
- | - | ||||||||||
Forfeited |
- | - | ||||||||||
Outstanding, December 31, 2013 |
1,712,838 | 0.95 | $ | 126,904 | ||||||||
Granted |
195,000 | 0.96 | ||||||||||
Exercised |
(535,900 | ) | 0.92 | |||||||||
Forfeited |
- | - | ||||||||||
Outstanding, December 31, 2014 |
1,371,938 | 0.96 | $ | 616,441 | ||||||||
Options exercisable, December 31, 2014 |
1,371,382 | 0.96 | $ | 611,330 | ||||||||
Weighted average fair value of options granted during 2014 |
$ | 0.52 | ||||||||||
Weighted average fair value of options granted during 2013 |
$ | 0.53 |
Weighted |
|||||||||||
Average |
Weighted |
||||||||||
Remaining |
Average |
||||||||||
Number |
Contractual |
Exercise |
|||||||||
Exercise Price Range |
Outstanding |
Life |
Price |
||||||||
$ | 0.30 - $0.39 | 90,900 |
7.05 years |
$ | 0.35 | ||||||
$ | 0.40 - $0.49 | 75,000 |
8.46 years |
$ | 0.44 | ||||||
$ | 0.90 - $0.99 | 50,000 |
9.59 years |
$ | 0.91 | ||||||
$ | 1.00 - $1.09 | 684,336 |
9.00 years |
$ | 1.00 | ||||||
$ | 1.10 - $1.19 | 471,702 |
8.99 years |
$ | 1.10 | ||||||
1,371,938 | $ | 0.96 |
Weighted |
||||||||||||
Average |
||||||||||||
Number of |
Grant Date |
Intrinsic |
||||||||||
Shares |
Fair Value |
Value |
||||||||||
Unvested shares, January 1, 2013 |
48,889 | $ | 0.17 | $ | - | |||||||
Granted |
1,586,938 | 0.53 | ||||||||||
Vested |
(1,621,244 | ) | 0.52 | |||||||||
Forfeited |
- | - | ||||||||||
Unvested shares, December 31, 2013 |
14,583 | 0.22 | $ | 8,167 | ||||||||
Granted |
195,000 | 0.52 | ||||||||||
Vested |
(209,027 | ) | 0.50 | |||||||||
Forfeited |
- | - | ||||||||||
Unvested shares, December 31, 2014 |
556 | 0.22 | $ | 5,111 |
2014 |
2013 |
|||||||
Common stock fair value |
$ | 0.44 - $0.91 | $ | 0.44 - $0.91 | ||||
Risk- free interest rates |
0.75 - 1.76 | % | 0.75 - 1.74 | % | ||||
Expected dividend yield |
0.00 | % | 0.00 | % | ||||
Expected option life (years) |
5 | 5 | ||||||
Expected stock price volatility |
69.37% - 70.93 | % | 76.92 | % |
Balance, January 1, 2013 |
$ | - | ||
184,258 | ||||
Loss on change in fair value |
625,705 | |||
Warrants reclassified to equity |
(809,963 | ) | ||
Balance, December 31, 2013 |
$ | - |
Reclassification | Transaction | |||||||
to Equity | Dates | |||||||
December 27, | May and June | |||||||
2013 |
2013 |
|||||||
Common stock fair value |
$ | 0.91 | $ | 0.44 | ||||
Risk- free interest rates |
3.02 | % | 1.80 - 2.13 | % | ||||
Expected dividend yield |
0.00 | % | 0.00 | % | ||||
Expected life (years) |
9.5 | 10 | ||||||
Expected stock price volatility |
73.31 | % | 74.48 | % |
Sun BioPharma, Inc. |
||||||||
Condensed Consolidated Balance Sheets |
||||||||
(Unaudited) |
||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,170,660 | $ | 1,653,494 | ||||
Stock subscription receivable |
- | 94,400 | ||||||
Investments |
501,226 | 499,495 | ||||||
Prepaid expenses |
14,787 | 17,556 | ||||||
Income tax receivable |
166,464 | 108,459 | ||||||
Total current assets |
1,853,137 | 2,373,404 | ||||||
Property and equipment, net |
229 | 271 | ||||||
Other assets, net |
97,691 | 104,341 | ||||||
Total assets |
$ | 1,951,057 | $ | 2,478,016 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 816,815 | $ | 466,918 | ||||
Total current liabilities |
816,815 | 466,918 | ||||||
Long- term liabilities: |
||||||||
Convertible notes payable |
3,000,000 | 3,000,000 | ||||||
Long- term debt |
300,000 | 300,000 | ||||||
Accrued interest |
30,084 | 26,984 | ||||||
Total long-term liabilities |
3,330,084 | 3,326,984 | ||||||
Total liabilities |
4,146,900 | 3,793,902 | ||||||
Commitments and contingencies |
- | - | ||||||
Stockholders' deficit: |
||||||||
Common stock, $0.001 par value; 20,000,000 share authorized; |
||||||||
6,053,068 and 5,688,927 shares issued and outstanding |
||||||||
at March 31, 2015 and December 31, 2014, respectively |
6,053 | 5,688 | ||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; |
||||||||
no shares issued and outstanding |
- | - | ||||||
Additional paid-in-capital |
8,579,971 | 7,264,729 | ||||||
Accumulated deficit |
(10,760,068 | ) | (8,568,880 | ) | ||||
Accumulated comprehensive loss, net |
(21,799 | ) | (17,423 | ) | ||||
Total stockholders' deficit |
(2,195,843 | ) | (1,315,886 | ) | ||||
Total liabilities and stockholders' deficit |
$ | 1,951,057 | $ | 2,478,016 |
Sun BioPharma, Inc. |
||||||||
Condensed Consolidated Statements of Operations and Comprehensive Loss |
||||||||
(Unaudited) |
||||||||
Three Months Ended March 31, |
||||||||
2014 |
||||||||
Operating expenses: |
||||||||
General and administrative |
$ | 1,202,848 | $ | 255,419 | ||||
Research and development |
987,268 | 320,568 | ||||||
Total operating expenses |
2,190,117 | 575,987 | ||||||
Loss from operations |
(2,190,117 | ) | (575,987 | ) | ||||
Other income (expense): |
||||||||
Interest income |
2,221 | 2,993 | ||||||
Interest expense |
(40,086 | ) | (33,339 | ) | ||||
Other expense |
(20,207 | ) | (3,347 | ) | ||||
Total other income (expense) |
(58,071 | ) | (33,693 | ) | ||||
Loss before income tax benefit |
(2,248,188 | ) | (609,680 | ) | ||||
Income tax benefit |
57,000 | 29,000 | ||||||
Net loss |
(2,191,188 | ) | (580,680 | ) | ||||
Foreign currency translation adjustment |
(4,376 | ) | 7,888 | |||||
Comprehensive loss |
$ | (2,195,564 | ) | $ | (572,792 | ) | ||
Weighted average shares outstanding: |
||||||||
Basic and diluted |
5,862,124 | 5,017,189 | ||||||
Net loss per share attributable to common stockholders: |
||||||||
Basic and diluted |
$ | (0.37 | ) | $ | (0.12 | ) |
Sun BioPharma, Inc. | ||||||||||||||||||||||||
Condensed Consolidated Statements of Changes in Stockholders' Deficit | ||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
Additional | Accumulated | Total | ||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Deficit | |||||||||||||||||||
Balance at January 1, 2015 |
5,688,927 |
$ |
5,688 |
$ |
7,264,729 |
$ |
(8,568,880 |
) |
$ |
(17,423 |
) |
$ |
(1,315,886 |
) | ||||||||||
Exercise of common stock options |
330,900 |
332 |
339,659 |
- |
- |
339,991 |
||||||||||||||||||
Issuance of stock for services and technology rights |
33,241 |
33 |
42,183 |
- |
- |
42,216 |
||||||||||||||||||
Share-based compensation |
- |
- |
933,400 |
- |
- |
933,400 |
||||||||||||||||||
Net loss |
- |
- |
(2,191,188 |
) |
- |
(2,191,188 |
) | |||||||||||||||||
Foreign currency translation adjustment, net of taxes of $-0- |
- |
- |
- |
- |
(4,376 |
) |
(4,376 |
) | ||||||||||||||||
Balance at March 31, 2015 |
6,053,068 |
$ |
6,053 |
$ |
8,579,971 |
$ |
(10,760,068 |
) |
$ |
(21,799 |
) |
$ |
(2,195,843 |
) |
See notes to condensed consolidated financial statements.
F-22
|
Sun BioPharma, Inc. |
||||||||
Condensed Consolidated Statements of Cash Flows |
||||||||
(Unaudited) |
||||||||
Three Months Ended March 31, |
||||||||
2014 |
||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ |
(2,191,188 |
) |
$ |
(580,680 |
) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization expense |
6,656 |
6,609 |
||||||
Non-cash interest expense |
3,100 |
47,955 |
||||||
Unrealized gain on investment |
(1,731 |
) |
- |
|||||
Stock based compensation |
933,400 |
53,093 |
||||||
Issuance of common stock for services and technology rights |
42,216 |
- |
||||||
Increase (decrease) in cash resulting from changes in: |
||||||||
Income tax receivable |
(57,028 |
) |
19,099 |
|||||
Prepaid expenses |
2,769 |
(1,192 |
) | |||||
Accounts payable and accrued expenses |
354,540 |
(255,150 |
) | |||||
Total adjustments |
1,283,922 |
(129,586 |
) | |||||
Net cash used in operating activities |
(907,266 |
) |
(710,266 |
) | ||||
Cash flows from financingactivities: |
||||||||
Proceeds from issuance of debt |
- |
2,400,000 |
||||||
Exercise of stock options |
339,991 |
7,704 |
||||||
Collection of stock subscription receivable |
94,400 |
- |
||||||
Net cash provided by financing activities |
434,391 |
2,407,704 |
||||||
Effect of exchange rate changes on cash and cash equivalents |
(9,959 |
) |
7,549 |
|||||
Net decrease in cash and cash equivalents |
(482,834 |
) |
1,704,988 |
|||||
Cash and cash equivalents, beginning of period |
1,653,494 |
2,693,375 |
||||||
Cash and cash equivalents, end of period |
$ |
1,170,660 |
$ |
4,398,363 |
||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for interest |
$ |
36,986 |
$ |
30,288 |
See notes to condensed consolidated financial statements.
(1) Organization and Description of Business and Liquidity:
SUN BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Organization and Description of Business and Liquidity (continued): If necessary, certain planned expenditures, including expenditures related to research and development projects, could be deferred or forgone if Sun BioPharma believes it is necessary to do so in order to fund operations. In addition, if necessary, Sun BioPharma could implement restrictions on non- essential travel, put in place a salary deferral program for certain employees, reduce utilization of outside professional service providers and implement a reduction of its workforce. Accordingly, Sun BioPharma will seek additional sources of funds, including the sale of debt or equity securities, or it will modify its current business plan. There can be no assurances that Sun BioPharma will be able to obtain additional financing on commercially reasonable terms, if at all. The sale of additional convertible debt or equity securities would likely result in dilution to Sun BioPharma"s current stockholders.
(2) Summary of Significant Accounting Policies:
Principles of consolidation"The accompanying condensed consolidated financial statements include the assets, liabilities and expenses of Sun BioPharma, Inc. and its wholly-owned subsidiary. Intercompany transactions and balances are eliminated in consolidation.
Use of estimates"The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Determination of Sun BioPharma"s Common Stock"Determining the fair value of shares of privately held companies with regards to estimating the values of share based payments requires making complex and subjective judgments. Sun BioPharma concluded the only viable methodologies to value its common stock are the implied valuations based on the terms of the bridge and convertible debt financing to estimate its enterprise values for the dates on which these transactions occurred. The assumptions take into account certain discounts related to control and lack of marketability. There is inherent uncertainty in these estimates.
The board of directors determines the estimated fair value of Sun BioPharma"s common stock based on a number of objective and subjective factors, including external market conditions affecting the health sciences industry sector and prices at which Sun BioPharma issued convertible debt and sold shares of its common stock. The board of directors also retained an independent financial valuation firm to substantiate the valuations they estimated. That firm employed and implied valuation methodology based on the terms of the recent convertible note financings.
Debt issuance costs"Costs associated with the issuance of debt instruments are capitalized. These costs are amortized on a straight-line basis, which approximates the effective interest method, over the term of the debt agreements.
SUN BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) Summary of Significant Accounting Policies (continued):
Investments"Investments consist of a mutual fund and are reported at fair value at each reporting period. Investments are considered trading securities by Sun BioPharma. As such, unrealized gains and losses are included in earnings and recorded as interest income in the accompanying condensed consolidated statements of operations and comprehensive loss.
Research and development costs"Research and development costs are charged to operations as incurred. These expenses consist primarily of (i) fees paid to third-party service providers to perform, monitor and accumulate data related to Sun BioPharma"s preclinical studies and clinical trials; (ii) costs related to sponsored research agreements; (iii) costs to develop a scaled-up process and subsequently manufacture sufficient drug product for use in our studies and trials; (iv) fees paid to consultants for specialized expertise related to execution of Sun BioPharma"s Development Plan for its licensed drug compound; and (v) fees related to licensing Sun BioPharma"s technology and concurrent maintenance of licensed patents and patent applications. Sun BioPharma expenses costs associated with obtaining licenses for patented technologies when it is determined there is no alternative future use of the intellectual property subject to the license (purchased in- process research and development).
Share-based compensation" Sun BioPharma accounts for compensation for all arrangements under which employees and others receive equity awards through options and warrants based on fair value. The fair values of Sun BioPharma"s share-based awards are estimated on the grant dates using the Black-Scholes valuation model and amortized as compensation expense over the requisite service period. This valuation model requires the input of highly subjective assumptions, including the fair value of Sun BioPharma"s common stock on the grant date, the expected stock price volatility, estimated award term and risk-free interest rates for the expected term. When estimating the expected term, Sun BioPharma utilizes the "simplified" method for "plain vanilla" options. Sun BioPharma bases its estimate of expected stock price volatility on the average of historical volatilities of publicly traded companies it deems similar to Sun BioPharma because it lacks its own relevant historical volatility data. Sun BioPharma utilizes risk-free interest rates based on zero-coupon U.S. treasury instruments, the terms of which are consistent with the expected term of the stock awards. Sun BioPharma has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero.
Foreign currency translation adjustments"The functional currency of Sun BioPharma Australia Pty Ltd is the Australian Dollar ("AUD"). Accordingly, assets and liabilities, and equity transactions of Sun BioPharma Australia Pty Ltd are translated into U.S. dollars at period-end exchange rates. Revenues and expenses are translated at the average exchange rate in effect for the period. The resulting translation gains and losses are recorded as a component of accumulated comprehensive loss in the consolidated statements of changes of stockholders" equity. For the three month period ended March 31, 2015 and 2014, Sun BioPharma recognized a loss on translation adjustment of $4,376 and a gain on translation adjustment of $7,888, respectively. During the three months ended March 31, 2015 and 2014, any reclassification adjustments from accumulated other comprehensive income to operations was inconsequential.