snbp20190930

snbp20190930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission File No.: 000-55242

	Sun BioPharma, Inc.
	(Exact Name of Registrant as Specified in its Charter)

Delaware		87-0543922
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

712 Vista Blvd #305, Waconia, Minnesota
(Address of principal executive offices)

(952) 479-1196

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

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

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

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☐	Smaller reporting company ☑

	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act☐

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

Securities registered pursuant to Section 12(b) of the Act: None

On November 8, 2019, there were 6,631,308 shares of the registrant’s common stock, par value $0.001, outstanding.

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

			Page
PART I – FINANCIAL INFORMATION

	Item 1.	Financial Statements (unaudited).	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk.	19
	Item 4.	Controls and Procedures.	19

PART II – OTHER INFORMATION

	Item 1.	Legal Proceedings.	20
	Item 1A.	Risk Factors.	20
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	20
	Item 3.	Defaults Upon Senior Securities.	20
	Item 4.	Mine Safety Disclosures.	20
	Item 5.	Other Information.	20
	Item 6.	Exhibits.	20

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Sun BioPharma, Inc.
Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

	September 30, 2019			December 31, 2018
ASSETS	(Unaudited)
Current assets:
Cash	$	3,377		$	1,405
Prepaid expenses and other current assets		119			110
Income tax receivable		275			332
Total current assets		3,771			1,847
Other noncurrent assets		49			51
Total assets	$	3,820		$	1,898

LIABILITITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	261		$	1,064
Accrued expenses		223			212
Convertible notes payable, net of debt discounts		-			64
Term debt, current portion		204			286
Accrued interest		1			4
Total current liabilities		689			1,630
Unsecured promissory note payable		742			-
Total liabilities		1,431			1,630

Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 authorized; no shares issued or outstanding as of September 30, 2019 and December 31, 2018		-			-
Common stock, $0.001 par value; 100,000,000 authorized; 6,624,166 and 5,077,483 shares issued and outstanding, as of September 30, 2019 and December 31, 2018, respectively		7			5
Additional paid-in capital		42,164			35,038
Accumulated deficit		(40,284	)		(35,058	)
Accumulated comprehensive income		502			283
Total stockholders' equity		2,389			268
Total liabilities and stockholders' equity	$	3,820		$	1,898

See accompanying notes to condensed consolidated financial statements.

Sun BioPharma, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Operating expenses:
General and administrative	$	622		$	467		$	1,505		$	1,779
Research and development		720			450			1,578			1,475
Operating loss		(1,342	)		(917	)		(3,083	)		(3,254	)

Other (expense) income:
Grant income		-			29			-			51
Interest expense		(3	)		(3	)		(2,187	)		(1,763	)
Other expense		(219	)		(89	)		(287	)		(362	)
Total other expense		(222	)		(63	)		(2,474	)		(2,074	)

Loss before income tax benefit		(1,564	)		(980	)		(5,557	)		(5,328	)

Income tax benefit		190			55			331			163

Net loss		(1,374	)		(925	)		(5,226	)		(5,165	)
Foreign currency translation adjustment		202			155			219			324
Comprehensive loss	$	(1,172	)	$	(770	)	$	(5,007	)	$	(4,841	)

Basic and diluted net loss per share	$	(0.23	)	$	(0.18	)	$	(0.97	)	$	(1.14	)
Weighted average shares outstanding - basic and diluted		6,009,904			5,060,594			5,385,986			4,522,606

See accompanying notes to condensed consolidated financial statements.

Sun BioPharma, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

	For the Nine Months Ended September 30, 2018
	Common Stock				Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Total Stockholders'
	Shares		Amount		Capital			Deficit			Gain (Loss)			Equity (Deficit)
Balances as of January 1, 2018		3,842	$	4	$	25,625		$	(29,153	)	$	(165	)	$	(3,689	)
Sale of common stock and warrants		252		-		1,261			-			-			1,261
Stock-based compensation		-		-		1,792			-			-			1,792
Net loss		-		-		-			(1,753	)		-			(1,753	)
Foreign currency translation adjustment		-		-		-			-			69			69
Balances as of March 31, 2018		4,094	$	4	$	28,678		$	(30,906	)	$	(96	)	$	(2,320	)

Sale of common stock and warrants		216		-		1,080			-			-			1,080
Beneficial conversion feature		-		-		121			-			-			121
Conversion of convertible notes payable and accrued interest into common stock and warrants		751		1		3,257			-			-			3,258
Stock-based compensation		-		-		358			-			-			358
Net loss		-		-		-			(2,487	)		-			(2,487	)
Foreign currency translation adjustment		-		-		-			-			100			100
Balances as of June 30, 2018		5,061	$	5	$	33,494		$	(33,393	)	$	4		$	110

Sale of common stock and warrants		-		-		(28	)		-			-			(28	)
Stock-based compensation		-		-		146			-			-			146
Net loss		-		-		-			(925	)		-			(925	)
Foreign currency translation adjustment		-		-		-			-			155			155
Balances as of Septmber 30, 2018		5,061	$	5	$	33,612		$	(34,318	)	$	159		$	(542	)

	For the Nine Months Ended September 30, 2019
	Common Stock					Additional Paid-In			Accumulated			Accumulated Other Comprehensive			Total Stockholders'
	Shares			Amount		Capital			Deficit			Gain (Loss)			Equity (Deficit)
Balances as of January 1, 2019		5,077		$	5	$	35,038		$	(35,058	)	$	283		$	268
Beneficial conversion feature on convertible notes payable		-			-		353			-			-			353
Warrants issued with sale of convertible notes payable		-			-		419			-			-			419
Common stock converted into convertible notes payable		(7	)		-		(25	)		-			-			(25	)
Stock-based compensation		-			-		10			-			-			10
Net loss		-			-		-			(1,581	)		-			(1,581	)
Foreign currency translation adjustment		-			-		-			-			(32	)		(32	)
Balances as of March 31, 2019		5,070		$	5	$	35,795		$	(36,639	)	$	251		$	(588	)

Conversion of convertible notes payable and accrued interest into common stock		652			1		2,280			-			-			2,281
Stock-based compensation		-			-		412			-			-			412
Net loss		-			-		-			(2,271	)		-			(2,271	)
Foreign currency translation adjustment		-			-		-			-			49			49
Balances at June 30, 2019		5,722		$	6	$	38,487		$	(38,910	)	$	300		$	(117	)

Sale of common stock and warrants		902			1		3,141			-			-			3,142
Stock-based compensation		-			-		536			-			-			536
Net loss		-			-		-			(1,374	)		-			(1,374	)
Foreign currency translation adjustment		-			-		-			-			202			202
Balances at September 30, 2019		6,624		$	7	$	42,164		$	(40,284	)	$	502		$	2,389

See accompanying notes to condensed consolidated financial statements.

Sun BioPharma, Inc.

Condensed Consolidated Statements of Cash Flows
(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(5,226	)	$	(5,165	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		958			1,202
Amortization of debt discount		2,061			1,687
Amortization of debt issuance costs		12			9
Non-cash interest expense		102			6
Changes in operating assets and liabilities:
Income tax receivable		44			(157	)
Prepaid expenses and other current assets		(12	)		23
Accounts payable		179			186
Accrued liabilities		15			(16	)
Net cash used in operating activities		(1,867	)		(2,225	)

Cash flows from financing activities:
Proceeds from the sale of convertible promissory notes and warrants, net of debt issuance costs of $7		810			-
Proceeds from sale of common stock and warrants, net of offering costs of $16 and $27 respectively		3,142			2,314
Repayment of demand note		(25	)		-
Repayments of term debt		(82	)		-
Net cash provided by financing activities		3,845			2,314

Effect of exchange rate changes on cash		(6	)		(2	)

Net change in cash		1,972			87
Cash at beginning of period		1,405			152
Cash at end of period	$	3,377		$	239

Supplemental disclosure of cash flow information:
Cash paid during period for interest	$	11		$	61

Supplemental disclosure of non-cash transactions:
Beneficial conversion feature on convertible notes	$	353		$	121
Warrants issued with convertible notes	$	419		$	-
Common stock converted into convertible notes payable	$	25		$	-
Conversion of convertible notes payable and accrued interest into common stock and warrants	$	-		$	2,908
Conversion of convertible notes payable and accrued interest into common stock	$	2,281		$	350
Issuance of unsecured promissory note in exchange for vendor accounts payable	$	742		$	-
Options granted in exchange for release from contingent payment obligations	$	-		$	1,094

See accompanying notes to condensed consolidated financial statements.

Sun BioPharma, Inc.
Notes to Condensed Consolidated Financial Statements

1.	Business

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

2.	Risks and Uncertainties

The Company operates in a highly regulated and competitive environment. The development, manufacturing and marketing of pharmaceutical products require approval from, and are subject to ongoing oversight by, the Food and Drug Administration (“FDA”) in the United States, the Therapeutic Goods Administration in Australia, the European Medicines Agency in the European Union, and comparable agencies in other countries. Obtaining approval for a new pharmaceutical product is never certain, may take many years, and is normally expected to involve substantial expenditures.

We have incurred losses of $40.3 million since our inception in 2011. For the nine months ended September 30, 2019, we incurred a net loss of $5.2 million, which includes the amortization of discount on debt of $2.1 million. We also incurred negative cash flows from operating activities of $1.9 million during this period. During this same period, we raised $3.1 million from sales of common stock and warrants and $0.8 million from the sale of convertible promissory notes and warrants, as discussed in Note 4 titled “Liquidity and Business Plan”. The notes sold in January 2019, along with similar ones sold in December 2018 converted into common stock on June 30, 2019. As we continue to pursue development activities and seek commercialization of our initial product candidate, SBP-101, we expect to incur substantial losses, which are likely to generate negative net cash flows from operating activities. As of September 30, 2019, we had cash of $3.4 million, working capital (current assets less current liabilities) of $3.1 million and stockholders’ equity of $2.4 million. The Company’s principal sources of cash have historically included the issuance of convertible debt and equity securities.

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts of liabilities that might result from the outcome of these uncertainties. Our current independent registered public accounting firm included a paragraph emphasizing this going concern uncertainty in their audit report regarding our 2018 financial statements dated March 22, 2019. Our ability to continue as a going concern, realize the carrying value of our assets and discharge our liabilities in the ordinary course of business is dependent upon a number of factors, including our ability to obtain additional financing, the success of our development efforts, our ability to obtain marketing approval for our SBP-101 product candidate in the United States, Australia, the European Union or other markets and ultimately our ability to market and sell our SBP-101 product candidate. These factors, among others, raise substantial doubt about our ability to continue operations as a going concern. See Note 4 titled “Liquidity and Business Plan.”

3.	Basis of Presentation

We have prepared the accompanying interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim condensed consolidated financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly our consolidated financial position, consolidated results of operations and consolidated cash flows for the periods and as of the dates presented. Our fiscal year ends on December 31. The condensed consolidated balance sheet as of December 31, 2018 was derived from audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in our most recent filed Annual Report on Form 10-K and our subsequent filings with the SEC. The nature of our business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.

Recently Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-07, “Compensation – Stock Compensation (Topic 718).” ASU 2018-07 simplifies the accounting for nonemployee stock-based payment transactions. This ASU was adopted by the Company effective for the fiscal year beginning January 1, 2019. Historically, the ultimate stock-based compensation related to non-employee common stock options would fluctuate based on changes in the underlying option pricing model as the awards vest. Under the new guidance, the total compensation cost of non-employee options is determined at grant date. The Company has evaluated the impact of this new guidance on its financial statements and has determined that it has affected how the Company records stock-based compensation related to common stock options and other equity-based compensation, if any, granted to non-employees.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which created a new Topic, Accounting Standards Codification (“ASC”) Topic 842 and established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities to make lease payments, that arise from leases. For leases with a term of 12 months or less, a lessee is permitted to make an election under which such assets and liabilities would not be recognized, and lease expense would be recognized generally on a straight-line basis over the lease term. This standard was adopted by the Company for the year beginning January 1, 2019. The Company has evaluated the impact of this revised guidance on its financial statements and determined it had no material impact, as the Company has no leasing arrangements with terms greater than one year.

4.	Liquidity and Business Plan

We will need to obtain additional funds to continue our operations and execute our current business plans. We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually.

In closings occurring in August and September 2019 the Company sold 902,067 shares of common stock and an equal number of warrants to purchase common stock in a private placement to certain accredited investors pursuant to a Securities Purchase Agreement. Net proceeds from these sales totaled approximately $3.1 million. The warrants are exercisable for a period of five years from the date of issuance at an initial exercise price of $4.00.

In closings occurring in December 2018 and January 2019 the Company sold $2.2 million principal amount of unsecured convertible promissory notes (the “Notes”) and warrants to purchase up to 1,243,498 shares of common stock in a private placement to certain investors. On June 30, 2019 the entire principal balance and accrued interest of $105,000 converted into 651,758 shares of common stock per the terms of the Notes at a conversion rate of $3.50. See Note 6 titled “Indebtedness” for a detailed discussion of the material terms of the Notes. The warrants are exercisable for a period of five years from the date of issuance at an initial exercise price of $4.50.

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

Our future success is dependent upon our ability to obtain additional financing, the success of our development efforts, our ability to obtain marketing approval for our SBP-101 product candidate in the United States or other markets and ultimately our ability to market and sell our SBP-101 product candidate. If we are unable to obtain additional financing when needed, if our clinical trials are not successful or if we are unable to obtain marketing approval, we would not be able to continue as a going concern and would be forced to cease operations and liquidate our company.

There can be no assurances that we will be able to obtain additional financing on commercially reasonable terms, or at all. The sale of additional convertible debt or equity securities would likely result in dilution to our current stockholders.

5.	Summary of Significant Accounting Policies

Principles of consolidation

The accompanying condensed consolidated financial statements include the assets, liabilities and expenses of the Company. All significant intercompany transactions and balances have been 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 condensed consolidated financial statements and the reported amount of expenses during the reporting period. Actual results could differ from those estimates.

Beneficial conversion features

For convertible debt where the rate of conversion is below fair market value for our common stock, the Company records a beneficial conversion feature and related debt discount that is presented as a direct deduction from the carrying amount of the related debt and as an increase to additional paid-in capital. The debt discount is amortized through interest expense over the life of the related debt.

Debt issuance costs

Costs associated with the issuance of debt instruments are capitalized and presented as a direct deduction from the carrying amount of the related debt liability. These costs are amortized through interest expense over the life of the related debt.

Research and development costs

Research and development costs include expenses incurred in the conduct of our second Phase 1 human clinical trial, for third-party service providers performing various testing and accumulating data related to our preclinical studies; sponsored research agreements; developing and scaling the manufacturing process necessary to produce sufficient amounts of the SBP-101 compound for use in our pre-clinical studies and human clinical trials; consulting resources with specialized expertise related to execution of our development plan for our SBP-101 product candidate; personnel costs, including salaries, benefits and share-based compensation; and costs to license and maintain our licensed intellectual property.

We charge research and development costs, including clinical trial costs, to expense when incurred. Our human clinical trials are, and will be, performed at clinical trial sites and are administered jointly by us with assistance from contract research organizations (“CROs”). Costs of setting up clinical trial sites are accrued upon execution of the study agreement. Expenses related to the performance of clinical trials generally are accrued based on contracted amounts and the achievement of agreed upon milestones, such as patient enrollment, patient follow-up, etc. We monitor levels of performance under each significant contract, including the extent of patient enrollment and other activities through communications with the clinical trial sites and CROs, and adjust the estimates, if required, on a quarterly basis so that clinical expenses reflect the actual effort expended at each clinical trial site and by each CRO.

All material CRO contracts are terminable by us upon written notice and we are generally only liable for actual effort expended by the CROs and certain non-cancelable expenses incurred at any point of termination.

We expense 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.

Stock-based compensation

In accounting for stock-based incentive awards, we measure and recognize the cost of employee and non-employee services received in exchange for awards of equity instruments based on the fair value of those awards on the grant date. Calculating stock-based compensation expense requires the input of highly subjective assumptions, which represent our best estimates and involve inherent uncertainties and the application of management’s judgment. Compensation cost is recognized ratably using the straight-line attribution method over the vesting period, which is considered to be the requisite service period. Compensation expense for performance-based stock option awards is recognized when “performance” has occurred or is probable of occurring.

The fair value of stock-based awards is estimated at the date of grant using the Black-Scholes option pricing model. The determination of the fair value of stock-based awards is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. Risk free interest rates are based upon U.S. Treasury rates appropriate for the expected term of each award. Expected volatility rates are based primarily on the volatility rates of a set of guideline companies, which consist of public and recently public biotechnology companies. The assumed dividend yield is zero, as we do not expect to declare any dividends in the foreseeable future. The expected term of options granted is determined using the “simplified” method. Under this approach, the expected term is presumed to be the mid-point between the average vesting date and the end of the contractual term. Forfeitures of unvested stock options are recognized as they occur.

Foreign currency translation adjustments

The functional currency of Sun BioPharma Australia Pty Ltd is the Australian Dollar. 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 presented within the statements of stockholders’ equity (deficit). During the nine-month periods ended September 30, 2019 and 2018, any reclassification adjustments from accumulated other comprehensive loss to operations were inconsequential.

Comprehensive loss

Comprehensive loss consists of our net loss and the effects of foreign currency translation.

Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is based on the weighted average of common shares outstanding during the period plus dilutive potential common shares calculated using the treasury stock method. Such potentially dilutive shares are excluded when the effect would be anti-dilutive or reduce a net loss per share. The Company’s potential dilutive shares, which include convertible debt, outstanding common stock options, and warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.

The following table sets forth the potential shares of common stock that were not included in the calculation of diluted net loss per share as their effects would have been anti-dilutive as of:

	September 30,
	2019		2018
Employee and non-employee stock options		1,711,511		1,130,710
Estimated common shares issuable upon conversion of notes payable and accrued interest		-		2,222
Common stock issuable under common stock purchase warrants		3,411,544		1,265,979
		5,123,055		2,398,911

6.	Indebtedness

Notes

On June 30, 2019, all $2.2 million aggregate principal balance of Notes outstanding plus $105,000 of accrued interest was converted at a conversion rate of $3.50 per share of common stock into 651,758 shares of common stock per the terms of the Notes. The Notes were issued in December 2018 and January 2019 and bore interest at a rate of 10.0% per year. Both the relative value of the Warrants and the beneficial conversion feature of the Notes were recorded as a debt discount at the times the Notes were sold which was presented as a direct deduction from the carrying value of the Notes. The discount was fully amortized through interest expense immediately prior to the conversion on June 30, 2019.

Term debt

Effective April 5, 2019, the terms of our unsecured loan (the “Term Debt”) payable to the Institute for Commercialization of Public Research, Inc. (the “Institute”) were amended to extend the maturity date from May 1, 2019 to December 31, 2019. The Institute agreed to the amendment in exchange for a warrant to purchase 5,555 shares of common stock at an exercise price of $4.50. The warrant expires five years from issuance. The fair market value of the warrant was nominal and as such has not been given any accounting treatment. The amendment requires the continuation of monthly payments of principal and interest totaling $10,000. The unpaid principal balance at September 30, 2019 was $204,000.

Unsecured Promissory Notes

On May 17, 2019 the Company executed an unsecured promissory note with a vendor that relieved the Company’s immediate obligation to pay the outstanding vendor invoices. The outstanding vendor invoices totaling approximately $742,000 were removed from the Company’s accounts payable as consideration for the promissory note. The promissory note is unsecured, does not bear interest and the balance is payable in full on the earlier of (1) December 31, 2020 or (2) the date the Company’s stock is registered on a national exchange.

7.	Commitments and Contingencies

License agreement

Subsequent to the end of the quarter, on October 3, 2019, the Company entered into a second amendment to its License Agreement No. A9672 with the University of Florida Research Foundation, Inc. (“UFRF”). The license agreement continues to entitle the Company to a worldwide exclusive license from UFRF for the polyamine analogue compound (“SBP-101”). The second amendment (i) eliminated the Company’s obligation to make any future milestone and minimum royalty payments to UFRF; (ii) clarified the obligation of the Company to make certain payments to UFRF in the event the Company sub-licenses SBP-101 to another party; (iii) reduced the period during which the Company is required to pay royalties on future commercial sales of SBP-101 to the shorter of ten years or the expiration of the period of regulatory exclusivity on a country-by-country basis; and (iv) extended the deadline for the first commercial sale of SBP-101 to December 31, 2025 before UFRF may exercise its termination rights under the license agreement.

8.	Stockholders’ Deficit

Shares of common stock reserved for future issuance were as follows as of September 30, 2019:

	Total Reserved
Stock options outstanding		1,711,511
Shares available for grant under equity incentive plan		52,849
Common shares issuable under outstanding common stock purchase warrants		3,411,544
		5,175,904

Private Placement

During the quarter ended September 30, 2019, we issued an aggregate of 902,067 shares of our common stock and warrants to purchase an aggregate of up to the same number of additional shares of common stock pursuant to closings under 2019 Securities Purchase Agreements. Total proceeds from the sale of common stock and warrants was approximately $3.1 million. See Note 4, titled “Liquidity and Management’s Plans.

9.	Stock-based Compensation

2016 Omnibus Incentive Plan

The Sun BioPharma, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) was adopted by our Board of Directors in March 2016 and approved by our stockholders in May 2016. The 2016 Plan permits the granting of incentive and non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other stock awards to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the 2016 Plan at no less than the fair market value of the underlying common stock as of the date of grant. Options granted under the 2016 Plan have a maximum term of ten years. Under the 2016 Plan, a total of 1,500,000 shares of common stock were initially reserved for issuance. As of September 30, 2019, options to purchase 1,447,151 shares of common stock were outstanding under the 2016 Plan 52,849 shares remained available for future awards.

2011 Stock Option Plan

Our Board of Directors ceased making awards under the Sun BioPharma, Inc. 2011 Stock Option Plan (the “2011 Plan”) upon the receipt of stockholder approval for the 2016 Plan. Awards outstanding under the 2011 Plan remain outstanding in accordance with and pursuant to the terms thereof. Options granted under the 2011 Plan have a maximum term of ten years and generally vest over zero to two years for employees. As of September 30, 2019, options to purchase 264,360 shares of common stock remained outstanding under the 2011 Plan.

Stock-based Compensation Expense

General and administrative (“G&A”) and research and development (“R&D”) expenses include non-cash stock-based compensation expense as a result of our issuance of stock options. The terms and vesting schedules for stock-based awards vary by type of grant and the employment status of the grantee. The awards granted through September 30, 2019 vest based upon time-based and performance conditions. There was approximately $0.6 million unamortized stock-based compensation expense related to options granted to employees and non-employees as of September 30, 2019 which will be amortized over the next eleven quarters.

Stock-based compensation expense for each of the periods presented is as follows (in thousands):

	Nine Months Ended September 30,
	2019		2018
General and Administrative	$	573	$	1,404
Research and Development		385		892
	$	958	$	2,296

A summary of stock option activity for the nine months ended September 30, 2019 is as follows:

	Shares Available for Grant			Shares Underlying Options			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balance at December 31, 2018		732,149			1,032,211		$	8.90	$	169,495
Granted		(700,100	)		700,100			3.41
Exercised		-			-			-
Cancelled		-			-			-
Forfeitures		20,800			(20,800	)		15.10

Balance at September 30, 2019		52,849			1,711,511		$	6.58	$	1,674,675

Information about stock options outstanding, vested and expected to vest as of September 30, 2019, is as follows:

			Outstanding, Vested and Expected to Vest						Options Vested and Excercisable
Per Share Exercise Price			Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Options Excercisable		Weighted Average Remaining Contractual Life (Years)

$0.875	-	$1.10		26,360		3.25	$	1.029		26,360		3.25
$2.275	-	$2.50		38,000		4.37	$	2.464		38,000		4.37
$2.95	-	$3.175		740,800		8.50	$	3.011		398,125		7.52
$4.50	-	$8.10		538,300		8.04	$	6.742		506,500		8.18
$10.00	-	$10.10		54,000		7.80	$	10.007		54,000		7.80
	$15.10			314,051		6.66	$	15.100		307,051		6.76

Totals				1,711,511		7.88	$	6.581		1,330,036		7.43

Key assumptions

The estimated grant-date fair values of the stock options were calculated using the Black-Scholes valuation model, based on the following assumptions for the three months ended September 30, 2019:

	2019
Common stock fair value	4.50	-	5.00
Risk-free interest rate	1.55%	-	1.57%
Expected dividend yield		0%
Expected Option life (years)	5.0	-	5.5
Expected stock price volatility		72%

Item 2.

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

This Quarterly Report and other publicly available documents, including any documents incorporated herein and therein by reference contain, and our officers and representatives may from time to time make, “forward-looking statements,” including within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. When used in the following discussion, the words “anticipates,” “intends,” “believes,” “expects,” “intends,” “plans,” ”seeks,” “estimates,” “likely,” “may,” “would,” “will,” and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding (i) our plans to complete Phase 1b; and (ii) our estimates of additional funds that may be required to complete Phase 1b and obtain necessary approvals.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially and adversely from the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: (i) our ability to obtain additional funding to complete Phase 1 clinical trial; (ii) progress and success of our Phase 1 clinical trial; (iii) our ability to demonstrate the safety and effectiveness of our SBP-101 product candidate; (iv) our ability to obtain regulatory approvals for our SBP-101 product candidate in the United States, the European Union or other international markets; (v) the market acceptance and level of future sales of our SBP-101 product candidate; (vi) the cost and delays in product development that may result from changes in regulatory oversight applicable to our SBP-101 product candidate; (vii) the rate of progress in establishing reimbursement arrangements with third-party payors; (viii) the effect of competing technological and market developments; (ix) the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims; and (x) such other factors as discussed in Part I, Item 1A under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, any additional risks presented in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.

Any forward-looking statement made by us in this Quarterly Report is based on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement or reasons why actual results would differ from those anticipated in any such forward-looking statement, whether written or oral, whether as a result of new information, future developments or otherwise.

Overview

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

In August 2015, the U.S. FDA granted an Investigational New Drug (“IND”) approval for our SBP-101 product candidate. From January 2016 through September 2017, we enrolled twenty-nine patients into six cohorts, or groups, in the dose-escalation phase of a Phase 1 safety trial and published results in the Spring of 2018. The Company’s second trial, a Phase 1a/1b combination of SBP-101 with gemcitabine and nab-paclitaxel in patients previously untreated for metastatic pancreatic ductal adenocarcinoma (“PDA”), began dosing patients in June of 2018. The Phase 1a portion of this study will have a total of 4 dosing levels, cohorts, and determine a recommended dose (and schedule) of SBP-101 to be given in combination with standard treatment. The Company completed enrollment of an expanded cohort 2 early in the quarter ended September 30, 2019. Following review by the Data Safety Monitoring Board (“DSMB”) of cohort 2 data (data for 6 of 7 patients enrolled was available for review at this DSMB meeting), approval was received to advance to the third planned dose level of SBP-101. Enrollment in cohort 3 began in the middle of July 2019 and was completed in October 2019. Encouraging signals of efficacy were noted in the second cohort. Six of 6 subjects (100%) had significant decreases in Tumor Marker CA19-9 levels during treatment, with changes from baseline ranging from 75% to 95%. The CA19-9 level changes were accompanied by Response Evaluation Criteria in Solid Tumors (“RECIST”) tumor assessments of 4 partial responses and 2 subjects with stable disease. Subsequent to the review of cohort 2 data by the DSMB a new RECIST tumor assessment on one of the 6 subjects converted from stable disease to partial response, resulting in interim efficacy RECIST tumor assessments of 5 partial responses and 1 subject with stable disease at dose level 2. The Company is currently evaluating the appropriate next phase of clinical trial. A previously planned expansion to a Phase 1b at the recommended dose of SBP-101 may be modified to a larger, randomized phase 2 trial for patients with PDA. We estimate that that we have sufficient funding to complete the current Phase 1 clinical trial in PDA. Additional clinical trials will likely be required for FDA or other similar approvals if the results of the current clinical trial of our SBP-101 product candidate remain positive. The cost and timing of additional clinical trials are highly dependent on the nature and size of the trials. However, it is estimated that the next steps in the approval process could cost between $30 and $40 million.

During the three months ended September 30, 2019 the Company obtained the results of a preclinical study related to a potential second indication for SBP-101, the treatment of patients with chronic and recurrent acute pancreatitis. Based on the results of this preclinical study the Company will not be pursuing this indication but will begin exploration of SBP-101 as a treatment for other solid cancer tumors as funding becomes available.

Financial Overview

We have incurred losses of $40.3 million since inception. For the nine months ended September 30, 2019, we incurred a net loss of $5.2 million, which included amortization of debt discount of $2.1 million. We also incurred negative cash flows from operating activities of $1.9 million for this period. We expect to continue to incur substantial losses, which will generate negative net cash flows from operating activities, as we continue to pursue research and development activities and commercialize our SBP-101 product candidate.

Our cash was approximately $3.4 and $1.4 million as of September 30, 2019 and December 31, 2018, respectively.

The increase of $2.0 million in cash for the nine months ended September 30, 2019 was primarily due the sale of common stock and warrants in the third quarter for net proceeds of $3.1 million and the sale of convertible notes and warrants in the first quarter for net proceeds of $0.8 million offset in part by negative cash flow from operations in the nine months of $1.9 million.

We will need to obtain additional funds to continue our operations and execute our current business plans, including completing our current Phase 1 clinical trial, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually.

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

Results of Operations

Comparison of the results of operations (in thousands):

	Nine Months Ended September 30,									Nine Months Ended September 30,
	2019			2018			Percent Change			2019			2018			Percent Change
Operating Expenses
General and administrative	$	622		$	467			33.2	%	$	1,505		$	1,779			-15.4	%
Research and development		720			450			60.0	%		1,578			1,475			7.0	%
Operating loss		(1,342	)		(917	)		46.3	%		(3,083	)		(3,254	)		-5.3	%

Other expenses, net		(222	)		(63	)		252.4	%		(2,474	)		(2,074	)		19.3	%
Income tax benefit		190			55			245.5	%		331			163			103.1	%

Net Loss	$	(1,374	)	$	(925	)		48.5	%	$	(5,226	)	$	(5,165	)		1.2	%

General and administrative (“G&A”) expenses and research and development (“R&D”) expenses include non-cash share-based compensation expense because of our issuance of stock options. We expense the fair value of equity awards over their vesting periods. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. The awards granted through September 30, 2019 vest upon performance and time-based conditions. We expect to record additional non-cash share-based compensation expense in the future, which may be significant.

The following table summarizes the stock-based compensation expense in our statements of comprehensive loss for the nine months ended September 30, 2019 and September 30, 2018 (in thousands):

	Nine Months Ended September 30,
	2019		2018
General and administative	$	573	$	1,404
Research and Development		385		892
Total Stock based compensation	$	958	$	2,296

General and administrative expense

Our G&A expenses increased 33.2% to $0.6 million in the third quarter of 2019 up from $0.5 million in the third quarter of 2018. G&A decreased 15.4% to $1.5 million in the nine months ended September 30, 2019, down from $1.8 in the six months ended September 30, 2018. The increase in the quarter ended September 30, 2019 is primarily associated with higher stock compensation expense offset in part by reduced headcount versus the same quarter in the prior year. For the nine-months ended September 30, 2019 the decrease is due to a combination of lower salary expense and lower stock compensation expense.

Research and development expense

Our R&D expenses increased 60.0% to $0.7 million in the third quarter of 2019 up from $0.4 million in the second quarter of 2018. R&D increased 7.0% to $1.6 million in the nine months ended September 30, 2019, up from $1.5 million in the nine months ended September 30, 2018. The increase in the quarter ended September 30, 2019 was due primarily to incremental expenses associated with a manufacturing study, increased cost of the clinical trial and higher stock compensation expense. The increase in the nine-months ended September 30, 2019 was due to manufacturing and preclinical studies, offset in part by reduced stock compensation expense.

Other expense, net

Other income and expense, net, was a net expense of $2.5 million and $2.1 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in other expense is due to higher interest expense resulting from the amortization of debt discount.

Income tax benefit

Income tax benefit was $331,000 for the nine months ended September 30, 2019 versus $163,000 during the nine months ended September 30, 2018. Our income tax benefit is derived primarily from refundable tax credits associated with our R&D activities conducted in Australia and the increased tax benefit is due to higher R&D spending during the nine months ended September 30, 2019.

Liquidity and Capital Resources

The following tables summarize our liquidity and capital resources as of September 30, 2019 and December 31, 2018 and our cash flow data for the nine months ended September 30, 2019 and 2018 and are intended to supplement the more detailed discussion that follows (in thousands):

Liquidity and Capital Resources
	September 30, 2019		December 31, 2018
Cash	$	3,377	$	1,405
Working capital (deficiency)*	$	3,082	$	(1,073	)

* excludes $1,289 of unamortized debt discount at December 31, 2018

Cash Flow Data
	Nine Months Ended September 30,
	2019			2018
Cash Provided by (Used in):
Operating Activities	$	(1,867	)	$	(2,225	)
Investment Activities		-			-
Financing Activities		3,845			2,314
Effect of exchange rate changes on cash		(6	)		(2	)
Net (decrease) increase in cash	$	1,972		$	87

Working Capital

Our total cash was $3.4 million and $1.4 million as of September 30, 2019 and December 31, 2018 respectively. We had $0.7 million in current liabilities and working capital of $3.1 million as of September 30, 2019, compared to $1.6 million in current liabilities and a working capital deficit of $1.1 million (excluding $1.3 million of unamortized debt discount) as of December 31, 2018. The decrease in current liabilities was due to the reduction in vendor payables of $742,000 which were moved to an unsecured, non-interest-bearing promissory note payable which is due on December 31, 2020 and is therefore classified as a long-term liability. The unamortized debt discount as of December 31, 2018 was fully amortized as of June 30, 2019 just prior to the conversion of that debt into common stock of the company.

Cash Flows

Net Cash Used in Operating Activities

Net cash used in operating activities was $1.9 million in the nine months ended September 30, 2019 compared to $2.2 million in the nine months ended September 30, 2018. The net cash used in each of these periods primarily reflects the net loss for these periods and is partially offset by the effects of changes in operating assets and liabilities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $3.8 million and $2.3 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. The cash provided for the nine months ended September 30, 2019 represents the net proceeds of $3.1 million from the sale of common stock and warrants in August and September of 2019 and the net proceeds of $0.8 million from the sale of convertible notes and warrants during the first quarter of 2019 offset in part by payments made on a demand note and term debt. The cash provided in the nine months ended September 30, 2018 represents $2.3 million net proceeds from sales of equity securities and warrants.

Capital Requirements

As we continue to pursue our operations and execute our business plan, including the completion of our current Phase 1 clinical trial for our initial product candidate, SBP-101, in pancreatic cancer, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets, we expect to continue to incur substantial and increasing losses, which will continue to generate negative net cash flows from operating activities.

Our future capital uses and requirements depend on numerous current and future factors. These factors include, but are not limited to, the following:

●

the progress of clinical trials required to support our applications for regulatory approvals, including our current Phase 1a clinical trial, a human clinical trial in Australia and the United States;

●

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

●

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

●

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

●

the market acceptance and size of future market opportunity of our SBP-101 product candidate;

●

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

●

the effect of competing technological and market developments; and

●

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

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

We expect that we will increase our projected expenditures once we have additional capital on hand in order to continue our efforts to grow our business and complete our Phase 1a clinical trial for our SBP-101 product candidate. Accordingly, we expect to make additional expenditures in performing our Phase 1a clinical trial and related support activities. With sufficient capital, we also expect to invest in additional R&D efforts of follow-on products or secondary indications. However, we do not have any definitive plans as to the exact amounts or particular uses at this time, and the exact amounts and timing of any expenditure may vary significantly from our current intentions. We will likely need to obtain additional funds to continue our operations and execute our business plans, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually.

As of September 30, 2019, we did not have any existing credit facilities under which we could borrow funds. We historically have financed our operations principally from the sale of convertible debt and equity securities.

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

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the interests of our current stockholders would be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our current stockholders. If we issue preferred stock, it could affect the rights of our stockholders or reduce the value of our common stock. Specific rights granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any of these events could adversely affect our ability to achieve our regulatory approvals and commercialization goals and harm our business.

Our future success is dependent upon our ability to obtain additional financing, the success of our current Phase 1 clinical trial and required future trials, our ability to obtain marketing approval for our SBP-101 product candidate in the United States, the European Union and other international markets. If we are unable to obtain additional financing when needed, if our Phase 1 clinical trial is not successful, if we do not receive regulatory approval required for future trials or if once these studies are concluded, we do not receive marketing approval for our SBP-101 product candidate, we would not be able to continue as a going concern and would be forced to cease operations. The interim financial statements included in this report have been prepared assuming that we will continue as a going concern and do not include any adjustments relating to the recoverability or classification of assets or the amounts of liabilities that might result from the outcome of these uncertainties.

Indebtedness

As of September 30, 2019, we had $0.9 million indebtedness outstanding.

As of December 31, 2018, the Company had $1.6 million aggregate principal amount of indebtedness outstanding.

The change in the six months ended September 30, 2019 was due to the conversion of $2.2 million of convertible notes and $105,000 of accrued interest to common stock on September 30, 2019 and a new unsecured promissory note payable entered into for the resolution of the balance owed a single vendor previously reflected in Accounts Payable.

One $25,000 convertible promissory note was paid in full on January 4, 2019.

Included in the $0.9 million of indebtedness is $204,000 outstanding in an unsecured loan that accrues interest of 4.125% per year and is scheduled to mature on December 31, 2019. In accordance with the terms of this loan we commenced monthly payments of $10,000 on May 1, 2018.

Critical Accounting Policies and Estimates

Our significant accounting policies are set forth in the notes accompanying the condensed consolidated financial statements included in this document. The accounting policies used in preparing our interim fiscal 2019 condensed consolidated financial statements are the same as those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3.

Quantitative and Qualitative Disclosure About Market Risk.

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

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

As of the end of the period covered by this quarterly report, the Company’s management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2019, our disclosure controls and procedures were effective in ensuring that information relating to the Company required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes to Internal Control Over Financial Reporting

We have not identified any change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

None

Item 1A.

Risk Factors.

There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

On October 10, 2019, we sold 7,142 shares of common stock and a warrant to purchase up to 7,142 additional shares of common stock for total gross proceeds of approximately $25,000. The warrants is exercisable for a period of five years from the date of issuance at an initial exercise price of $4.00 per share. The exercise price of the warrant and the number of the shares issuable upon exercise of the warrant are subject to customary adjustments prior to exercise upon the occurrence of certain events affecting all outstanding shares of common stock.

The foregoing securities were issued in reliance on an exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) to a limited number of persons who were “accredited investors,” as defined in Rule 501 of Regulation D of the SEC, without the use of any general solicitations or advertising to market or otherwise offer the securities for sale. None of the shares, warrant or shares of common stock issued upon exercise of the warrant have been registered under the Securities Act or applicable state securities laws and none may be offered or sold in the United States absent registration under the Securities Act, or an exemption from such registration requirements. Neither this quarterly report on Form 10-Q nor any exhibit attached hereto shall constitute an offer to sell or the solicitation of an offer to buy any securities.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Unless otherwise indicated, all documents incorporated into this quarterly report on Form 10-Q by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 000-55242.

Exhibit No.	Description	Manner of Filing
3.1	Restated Certificate of Incorporation, as amended through November 8, 2017 (incorporated by reference to Exhibit 3.1 to current report on Form 8-K filed November 15, 2017)	Incorporated by Reference

3.2	Bylaws, as amended through May 12, 2016 (incorporated by reference to Exhibit 3.2 to quarterly report on Form 10-Q for the quarter ended June 30, 2016)	Incorporated by Reference

4.1	Form of Warrants issued August 23, August 30, September 20, and October 10, 2019 (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed August 29, 2019)	Incorporated by Reference

10.1	Form of Securities Purchase Agreement, by and among the Investors (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed August 29, 2019).	Incorporated by Reference

10.1	Second Amendment to License Agreement No. A9672 between Sun Biopharma, Inc. and University of Florida Research Foundation, Inc., dated as of October 3, 2019 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 9, 2019).	Incorporated by Reference

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) Under the Securities Exchange Act of 1934, as Amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Electronically

31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) Under the Securities Exchange Act of 1934, as Amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Electronically

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed Electronically

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed Electronically

101	Financial statements from the quarterly report on Form 10-Q of Sun BioPharma, Inc. for the quarter ended September 30, 2019, formatted in XBRL: (i) the Balance Sheets, (ii) the Statements of Operations and Comprehensive Loss, (iii) the Statements of Stockholders’ Equity (Deficit), (iv) the Statements of Cash Flows, and (v) the Notes to Financial Statements.	Filed Electronically

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SUN BIOPHARMA, INC.

Date: November 13, 2019	/s/ Michael T. Cullen, MD
	Michael T. Cullen, MD, MBA President and Chief Executive Officer
	(Duly Authorized Officer)

Date: November 13, 2019	/s/ Susan Horvath
	Susan Horvath Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)