10-Q

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, 2017
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________.

Commission File No.: 000-55242

Sun BioPharma, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

(952) 479-1196

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§231.205 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑   No ☐ *

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

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

On November 10, 2017, there were 3,670,443 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.	Condensed Consolidated Financial Statements.	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16
Item 3.	Quantitative and Qualitative Disclosure About Market Risk.	21
Item 4.	Controls and Procedures.	21
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	23
Item 1A.	Risk Factors.	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	25
Item 3.	Defaults Upon Senior Securities.	25
Item 4.	Mine Safety Disclosures.	25
Item 5.	Other Information.	25
Item 6.	Exhibits.	25

1

PART I – FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements.

Sun BioPharma, Inc.
Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

	September 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	943		$	438
Prepaid expenses and other current assets		250			118
Income tax receivable		340			321
Total current assets		1,533			877
Total assets	$	1,533		$	877
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	874		$	1,245
Accrued expenses		1,218			842
Convertible notes payable - current portion, net		—			2,733
Term debt		—			294
Demand notes payable		—			250
Accrued interest		57			155
Total current liabilities		2,149			5,519
Long-term liabilities:
Convertible notes payable, net		1,096			—
Term debt		300			—
Accrued interest		87			—
Total long-term liabilities		1,483			—
Commitments and contingencies (Note 7)
Stockholders’ deficit:
Preferred stock, $0.001 par value; 10,000,000 authorized; no shares issued or outstanding as of September 30, 2017 and December 31, 2016		—			—
Common stock, $0.001 par value; 100,000,000 authorized; 3,670,443 and 3,220,111 shares issued and outstanding, as of September 30, 2017 and December 31, 2016, respectively		4			3
Additional paid-in capital		25,059			14,058
Accumulated deficit		(26,992	)		(18,779	)
Accumulated comprehensive gain (loss), net		(170	)		76
Total stockholders’ deficit		(2,099	)		(4,642	)
Total liabilities and stockholders’ deficit	$	1,533		$	877

See accompanying notes to condensed consolidated financial statements.

2

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,
	2017			2016			2017			2016
Operating expenses:
General and administrative	$	515		$	499		$	2,252		$	1,399
Research and development		530			636			1,955			1,657
Operating loss		(1,045	)		(1,135	)		(4,207	)		(3,056	)
Other income (expense):
Interest income		1			—			1			2
Grant income		27			—			110			—
Interest expense		(474	)		(45	)		(1,145	)		(135	)
Loss on induced debt conversions		—			—			(3,696	)		—
Other income		75			56			264			63
Total other income (expense)		(371	)		11			(4,466	)		(70	)
Loss before income tax benefit	$	(1,416	)	$	(1,124	)	$	(8,673	)	$	(3,126	)
Income tax benefit		197			45			460			252
Net loss		(1,219	)		(1,079	)		(8,213	)		(2,874	)
Foreign currency translation adjustment loss		(62	)		(61	)		(246	)		(94	)
Comprehensive loss	$	(1,281	)	$	(1,140	)	$	(8,459	)	$	(2,968	)
Basic and diluted net loss per share	$	(0.33	)	$	(0.34	)	$	(2.33	)	$	(0.94	)
Weighted average shares outstanding – basic and diluted		3,670,443			3,201,700			3,518,839			3,069,195

See accompanying notes to condensed consolidated financial statements.

3

Sun BioPharma, Inc.

Condensed Consolidated Statements of Stockholders’ Deficit

(In thousands except share and per share amounts)

(Unaudited)

										Accumulated
					Additional					Other			Total
	Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders’
	Shares		Amount		Capital		Deficit			Gain (Loss)			Deficit
Balances at December 31, 2016		3,220,111	$	3	$	14,058	$	(18,779	)	$	76		$	(4,642	)
Conversion of convertible promissory notes		385,000		1		5,840		—			—			5,841
Conversion of demand notes		33,332		—		993		—			—			993
Charge for fair market value of beneficial conversion feature		—		—		2,954		—			—			2,954
Share-based compensation		—		—		1,167		—			—			1,167
Exercise of common stock options		22,000		—		28		—			—			28
Exercise of stock purchase warrants		10,000		—		19		—			—			19
Net loss		—		—		—		(8,213	)		—			(8,213	)
Foreign currency translation adjustment, net of taxes of $0		—		—		—		—			(246	)		(246	)
Balances at September 30, 2017		3,670,443	$	4	$	25,059	$	(26,992	)	$	(170	)	$	(2,099	)

See accompanying notes to consolidated financial statements.

4

Sun BioPharma, Inc.

Condensed Consolidated Statements of Cash Flows
(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net loss	$	(8,213	)	$	(2,874	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on induced debt conversions		3,696			—
Share-based compensation		1,167			—
Amortization of debt discount		961			—
Amortization of debt issuance costs		53			21
Non-cash interest expense		87			9
Changes in operating assets and liabilities:
Income and other tax receivables		9			512
Prepaid expenses and other current assets		(131	)		(25	)
Accounts payable		(654	)		377
Accrued liabilities		406			410
Net cash used in operating activities		(2,619	)		(1,570	)
Cash flows from financing activities:
Proceeds from the sale of convertible promissory notes, net of offering costs of $16		3,059			—
Proceeds from the exercise of stock options		28			—
Proceeds from the exercise of stock purchase warrants		19			—
Proceeds from issuance of common stock and warrants, net of offering costs of $152		—			1,873
Net cash provided by financing activities		3,106			1,873
Effect of exchange rate changes on cash and cash equivalents		18			1
Net increase in cash and cash equivalents		505			304
Cash and cash equivalents at beginning of period		438			925
Cash and cash equivalents at end of period	$	943		$	1,229
Supplemental disclosure of cash flow information:
Cash paid during period for interest	$	5		$	70
Supplemental disclosure of non-cash transactions:
Conversion of promissory notes and accrued interest into common stock		2,888			—
Intrinsic value of beneficial conversion feature in convertible notes		2,954			—
Conversion of demand notes into common stock		250			—
Deferred compensation exchanged for common stock and warrants		—			196
Issuance of common stock for services	$	—			75

See accompanying notes to condensed consolidated financial statements.

5

Sun BioPharma, Inc.
Notes to Condensed Consolidated Financial Statements

1. Business

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

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 (“TGA”) in Australia, the European Medicines Agency (“EMA”) 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 $27.0 million since our inception in 2011. For the nine months ended September 30, 2017, we incurred a net loss of $8.2 million, which includes a non-cash charge of $3.7 million related to the induced conversion of $2.9 million of convertible promissory notes and accrued interest, originally issued in 2013 and 2014, and $250,000 of demand notes, originally issued in September 2015, into shares of our common stock. We also incurred negative cash flows from operating activities of $2.6 million for this period. We expect to incur substantial losses for the foreseeable future, which will continue to generate negative net cash flows from operating activities, as we continue to pursue development activities and seek to commercialize our initial product candidate, SBP-101. As of September 30, 2017, we had cash and cash equivalents of $943,000, negative working capital of $616,000 and a stockholders’ deficit of $2.1 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 covering our 2016 financial statements dated March 30, 2017. 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 Management’s Plans.”

3. Basis of Presentation

We have prepared the accompanying interim condensed consolidated financial statements in accordance with US accounting principles generally accepted in the United States of America (“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 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, 2016 was derived from audited consolidated financial statements, but does not include all disclosures required by 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 Annual Report on Form 10-K filed with the SEC on March 30, 2017 and our other 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.

6

Effective November 7, 2017, we implemented a 1-for-10 reverse split of our common stock. As previously announced, the reverse stock split was approved by our stockholders as of September 12, 2017, and was intended to increase the market price per share of our common stock to a level that qualifies for listing on the Nasdaq Capital Market. Concurrent with the reverse stock split, there was a 50% reduction in the number of shares authorized for issuance by the Company. All references to share and per share amounts included in these condensed consolidated financial statements have been retroactively restated to reflect the reverse split. See Note 10 titled “Subsequent Events” for additional information.

Recently adopted accounting pronouncement

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The guidance in ASU 2016-09 is intended to simplify aspects of the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, statutory withholding requirements, and classification on the statement of cash flows. The standard is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. The adoption of this standard did not have a material impact on our financial condition and results of operations.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-11, during the nine months ended September 30, 2017, did not have any impact on the condensed consolidated financial statements and related disclosures.

4. Liquidity and Management Plans

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.

On July 3, 2017, we received a research and development tax incentive payment from the government of Australia related to the research activities of our Australian subsidiary during 2016. The incentive payment received was approximately $460,000.

7

During February and March 2017, we issued convertible promissory notes raising gross proceeds of approximately $3.1 million which are convertible into our common stock or other securities upon the completion of a qualified financing of at least $2.0 million on or before the maturity of the notes. In addition we negotiated the conversion of approximately $3.1 million of previously outstanding debt and accrued interest into 418,332 shares of our common stock. See Note 7 titled “Indebtedness.”

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

For convertible debt where the rate of conversion is below fair market value for our common stock, the Company records a "beneficial conversion feature (“BCF“) and related debt discount which is presented as a direct deduction from the carrying amount of the related debt. The discount is amortized to interest expense over the life of the 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.

8

Research and development costs

Research and development costs include expenses incurred in the conduct of our 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.

Share-based compensation

In accounting for share-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 grant date fair value of those awards. Calculating share-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. The performance date for non-employee awards is generally not met until the individual award vests. Accordingly we re-measure the current fair value each quarter until the award vests. Compensation expense for performance-based stock option awards is recognized when “performance” has occurred or is probable of occurring.

The fair value of share-based awards is estimated at the date of grant using the Black-Scholes option pricing model. The determination of the fair value of share-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.

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 presented within the stockholders’ deficit. During the three and nine month periods ended September 30, 2017 and 2016, any reclassification adjustments from accumulated other comprehensive loss to operations was inconsequential.

Grant Income

Grant income is derived from a one-time grant awarded to the Company by the National Institute of Diabetes and Digestive and Kidney Diseases of the National Institutes of Health “Grant Agreement”. The total grant awarded under the Grant Agreement was $225,000 and is intended to fund studies of SBP-101 as a potential treatment for pancreatitis. Grant income is recognized as a non-operating income when the related research and development expenses are incurred, terms of the grant have been complied with and the Company is eligible for reimbursement under the Grant Agreement.

9

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 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 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 summarizes the calculation of basic and diluted net loss per share for each of the periods presented (in thousands, except share and per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net loss	$	(1,219	)	$	(1,079	)	$	(8,213	)	$	(2,874	)
Weighted average shares outstanding—basic and diluted		3,670,443			3,201,700			3,518,839			3,069,195
Basic and diluted net loss per share	$	(0.33	)	$	(0.34	)	$	(2.33	)	$	(0.94	)

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:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Employee and non-employee stock options		683,960		316,360		683,960		316,360
Common shares issuable upon conversion of notes payable and accrued interest		315,356		246,667		315,356		246,667
Common shares issuable under common stock purchase warrants		351,500		366,050		351,500		366,050

6. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 30, 2017		December 31, 2016
Accrued compensation and related expenses	$	1,094	$	637
Clinical trial related expense		65		97
Professional services		55		70
Product and process development expenses		—		29
Other		4		9
Total accrued liabilities	$	1,218	$	842

Effective October 1, 2017, we amended the previously disclosed employment agreements, as amended, with our Executive Chairman, President and Chief Executive Officer, Chief Financial Officer and Chief Medical Officer (the “Employees”). These amendments discontinued the “accrued compensation” provision that was introduced with the prior amendments to the employment agreements between the Company and each of the Employees dated September 12, 2016. These amendments also include a provision whereby if the Company closes an underwritten public offering of its securities that include shares of common stock, then each of these Employees will, in lieu of cash payment for the previously accrued compensation, instead receive one or more equity awards under the Company’s 2016 Omnibus Equity Incentive plan. See Note 10 titled “Subsequent Events.”

10

7. Indebtedness

2017 Convertible notes payable

On each of February 17, March 3, March 10 and March 17, 2017, we entered into Note Purchase Agreements (the “Note Agreements”) with a number of accredited investors in private transactions. Pursuant to these Note Agreements, we sold convertible promissory notes (the “2017 Notes”) raising gross proceeds of approximately $3.1 million. The 2017 Notes are scheduled to mature on December 1, 2018 and bear interest at a rate of 5.0% per year. Principal and interest on the 2017 Notes are payable at maturity. The Company may prepay the 2017 Notes in whole or in part at any time without penalty or premium. The 2017 Notes are convertible into shares of common stock or other securities of the Company upon the occurrence of a Qualified Financing, including the sale of equity securities or a strategic partnership, raising gross proceeds of at least $2.0 million on or before the maturity of the 2017 Notes or upon the request of a holder of any 2017 Note at a fixed conversion rate of $10.10 per share. Upon issuance, the 2017 Notes were convertible into our common stock at a conversion rate of $10.10 per share. The fair market value of our stock on the dates of issuance ranged from $15.00 to $39.00 per share. Therefore the 2017 Notes contained a beneficial conversion feature with an aggregate intrinsic value of approximately $3.0 million, which is recorded as a debt discount and is presented as a direct deduction from the carrying value of the 2017 Notes and will be amortized through interest expense over the life of the 2017 Notes. Upon the occurrence of certain events of default, the 2017 Notes require the Company to repay the unpaid principal amount of the Notes and any unpaid accrued interest. The Company expects to use the net proceeds from the sales of the Notes for working capital and general corporate purposes. One of our stockholders, who beneficially owns more than 10% of our common stock, purchased $200,000 of the 2017 Notes.

2013 Convertible notes payable

In 2013, we initiated an offering of convertible promissory notes (the “2013 Notes”). In total, gross proceeds raised were $3.1 million. The 2013 Notes accrue interest at 5% per year, payable quarterly, are convertible into shares of common stock at $11.25 per share at the option of the holder and mature in December 2018. The Company had not paid the required quarterly interest for the 2013 Notes since the quarter ended March 31, 2016. This constituted an event of default under which the note holders could have demanded immediate payment of the outstanding principal and accrued but unpaid interest.

In March 2017, we offered to all holders of outstanding 2013 Notes, who were accredited investors, an opportunity to convert all outstanding principal and accrued interest through March 31, 2017 into shares of our common stock at a rate of $7.50 per share. The offered conversion rate represented a $3.75, or 33.3%, discount from the rate stated in the terms of the 2013 Notes, which at the time was $11.25 per share. Holders of $2,750,000 aggregate principal amount of the 2013 Notes accepted the offer to convert and on March 31, 2017 we issued 385,000 shares of common stock in exchange for the surrender of the 2013 Notes which included $138,000 of accrued but unpaid interest. The fair market value of the shares issued was $11.5 million, compared to $8.5 million under the original conversion terms, resulting in a loss on the induced debt conversion of approximately $3.0 million. One of our stockholders, who beneficially owns more than 10% of our common stock, converted $700,000 aggregate principal amount of 2013 Notes, along with $35,000 of accrued but unpaid interest, into 98,000 shares of our common stock. The shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act as securities exchanged by an issuer with existing security holders where no commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange.

Demand notes payable

In September 2015, we assumed $250,000 of unsecured demand notes in conjunction with our merger with Cimarron Medical, Inc. that were previously issued by Cimarron (the “Demand Notes”).

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We included the holders of Demand Notes in our offer to convert all outstanding principal into shares of our common stock at a rate of $7.50 per share. The Demand Notes had no conversion feature. The holders of all $250,000 aggregate principal amount of the Demand Notes accepted the offer to convert and on March 31, 2017 we issued 33,332 shares of common stock in exchange for the surrender of all Demand Notes. The fair market value of the shares issued was $1.0 million resulting in a loss on induced debt conversion of $700,000. The shares were issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act as securities exchanged by an issuer with existing security holders where no commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange.

The following table sets forth the changes in convertible and demand notes payable during the nine months ended September 30 2017 (in thousands):

	Convertible Notes Payable
	Principal			Accrued Interest			Demand Notes
Principal value at December 31, 2016	$	2,775		$	105		$	250
Accrued interest		—			120			—
Aggregate principal value of 2017 Notes sold		3,076			—			—
Aggregate principal value of 2013 Notes and accrued interest converted into common stock		(2,750	)		(138	)		—
Aggregate principal value of Demand Notes converted into common stock		—			—			(250	)
Principal value at September 30, 2017	S 3,101			$	87		$	—

Term debt

On October 26, 2012, we entered into an unsecured loan agreement (the “Agreement”) with the Institute for Commercialization of Public Research, Inc. (the "Institute"). Under the terms of the agreement, we borrowed $300,000 at a fixed interest rate of 4.125%. No principal or interest payments were due until the maturity date, October 26, 2017, unless a mandatory repayment event occurred.

Effective October 26, 2017, we entered into an amendment to our unsecured loan agreement with the Institute for Commercialization of Public Research, Inc. Under the terms of the amendment the maturity date of the note was extended to May 1, 2019 with monthly payments of $10,000 to begin on May 1, 2018 with the remaining balance due in full on May 1, 2019. The monthly payments will apply first to accrued and unpaid interest. Accordingly, the outstanding principal is presented as a long term liability in the September 30, 2017 balance sheet.

Debt issuance costs and discount

The following table summarizes the deferred financing costs which are presented as a direct deduction from the carrying amount of their related debt liabilities (in thousands):

	September 30, 2017						December 31, 2016
	Convertible Notes Payable			Term Debt			Convertible Notes Payable			Long-Term Debt
Loan principal amount	$	3,101		$	300		$	2,775		$	300
Deferred financing costs		16			37			105			37
Accumulated amortization		(4	)		(37	)		(63	)		(31	)
Unamortized balance		12			—			42			6
Discount on debt		2,954
Accumulated amortization		(961	)
Unamortized balance		1,993
Loan carrying amounts, net	$	1,096		$	300		$	2,733		$	294

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8. Stockholders’ Deficit

 Shares reserved

Shares of common stock reserved for future issuance are as follows:

	September 30, 2017
Stock options outstanding		683,960
Shares available for grant under equity incentive plan		1,110,400
Estimated common shares issuable upon conversion of notes payable and accrued interest		315,356
Common shares issuable under common stock purchase warrants		351,500
Total		2,461,216

9. Share-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 at our annual meeting of stockholders on May 17, 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 Plan have a maximum term of ten years. Under the Plan, a total of 1,500,000 shares of common stock are reserved for issuance. As of September 30, 2017, options to purchase 389,600 shares of common stock were outstanding under the 2016 Plan.

2011 Stock Option Plan

The Sun BioPharma, Inc. 2011 Stock Option Plan (the “2011 Plan”) was terminated in conjunction with stockholder approval of the 2016 Plan, although awards outstanding under the 2011 Plan will 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, 2017, options to purchase 294,360 shares of common stock remained outstanding under the 2011 Plan.

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

	Nine months Ended
	September 30, 2017		September 30, 2016
Research and development	$	229	$	—
General and administrative		938		—
Total share-based compensation	$	1,167	$	—

A summary of option activity is as follows:

	Shares Available for Grant			Shares Underlying Options			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balances at December 31, 2016		1,114,400			701,960		$	9.50	$	3,896,235
Granted		(4,000	)		4,000			10.10
Exercised		—			(22,000	)		1.25
Cancelled		—			—			—
Balances at September 30, 2017		1,110,400			683,960		$	9.77	$	2,121,985

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Information about stock options outstanding, vested and expected to vest as of September 30, 2017, is as follows:

			Outstanding, Vested and Expected to Vest						Options Vested and Exercisable
					Weighted Average						Weighted Average
					Remaining		Weighted				Remaining
Per Share					Contractual		Average		Options		Contractual
Exercise Price			Shares		Life (Years)		Exercise Price		Exercisable		Life (Years)
$0.88	–	1.10		38,360		5.08	$	1.00		38,360		5.08
2.28	–	2.50		42,000		6.37		2.47		42,000		6.37
	3.18			214,000		7.42		3.18		214,000		7.42
	10.10			4,000		4.28		10.10		—		—
	15.10			385,600		8.76		15.10		196,050		9.11
				683,960		7.96	$	9.77		490,410		7.83

As of September 30, 2017 total compensation expense related to unvested employee stock options not yet recognized was $1.1 million, which is expected to be allocated to expenses over a weighted-average period of approximately 1.2 years.

Nonemployee share-based compensation

We account for stock options granted to nonemployees in accordance with FASB ASC 505. In connection with stock options granted to nonemployees, we recorded $397,000 and $0 for nonemployee share-based compensation during the nine months ended September 30, 2017 and 2016, respectively. These amounts were based upon the fair values of the vested portion of the grants. Amounts expensed during the remaining vesting period will be determined based on the fair value at the time of vesting.

The estimated fair values of the stock options issued to employees and non-employees were calculated using the Black-Scholes valuation model, based on the following assumptions for the nine months ended September 30, 2017 and 2016:

	2017				2016
Common stock fair value		$10.00	–	$29.80		n/a
Risk-free interest rate		1.43%	–	1.93%		n/a
Expected dividend yield			0%			n/a
Expected option life (in years)		2.25	–	5.0		n/a
Expected stock price volatility		75.0	–	78.0%		n/a

10. Subsequent Events

Reverse stock split

Effective November 7, 2017, we implemented a 1-for-10 reverse split of our common stock. No fractional shares were issued in connection with the reverse stock split. Stockholders received a proportionate cash payment for any fractional shares based upon the closing price of our common stock on the effective date of the reverse stock split. The reverse stock split was intended to increase the market price per share of our common stock to a level that qualifies for listing on the Nasdaq Capital Market. The Company is taking additional actions to meet the remaining listing requirements. Until the Company meets the criteria for listing and an application for listing is accepted by Nasdaq, which may not happen within a reasonable time frame, if at all, its common stock will continue to be eligible for quotation on the OTCQB Venture Marketplace tier of the over-the-counter markets administered by the OTC Markets Group, Inc. under the symbol ”SNBP“. The reverse stock split did not affect the par value of our common stock, however, concurrent with the reverse stock split, the number of shares of common and preferred stock authorized for issuance by the Company was reduced by 50% to 100,000,000 and 10,000,000, respectively. Proportional adjustments were also made to the Company’s 2016 Omnibus Incentive Plan, outstanding stock options, warrants and outstanding convertible notes payable. The new CUSIP number for our common stock following the reverse stock split is 8666M 206. All references to share and per share amounts included in these condensed consolidated financial statements have been retroactively restated to reflect the reverse split.

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Amendment to employment agreements

Effective October 1, 2017, we entered into second amendments (collectively, the “Amendments”) to the previously disclosed employment agreements, as amended (the “Agreements”), with our Executive Chairman, Michael T. Cullen, M.D., M.B.A., our President and Chief Executive Officer, David B. Kaysen, our Chief Financial Officer, Scott Kellen and our Chief Medical Officer, Suzanne Gagnon, M.D. ( the “Employees”).

For Dr. Cullen, Mr. Kaysen and Dr. Gagnon, the Amendments established new annual base salaries representing a 25% reduction from prior levels. Mr. Kellen’s annual base salary remained unchanged. Each Amendment further discontinued the “accrued compensation” provision that was introduced with the prior amendments to the Agreements between the Company and each of the Employees dated September 12, 2016 (the “Prior Amendments”).

As a result of the Amendments, each of the Employees continues to be eligible to receive a cash payment in an amount equal to the amount that previously accumulated under the “accrued compensation” provision through September 30, 2017. The cash payment would become due upon a change of control (as defined in the Agreements) or the Company’s issuance of equity securities (including any securities that are convertible into or exercisable for equity securities) resulting in gross cash proceeds of $10,000,000 or more (a “Qualified Offering”). If neither a change of control nor a Qualified Offering occurs on or before June 30, 2018, then the right to cash payment will be forfeited. The potential cash payments as of September 30, 2017 for Dr. Cullen, Mr. Kaysen, Mr. Kellen, and Dr. Gagnon are $410,136; $201,599; $97,208; and $385,036, respectively.

If, on or before June 30, 2018, the Company closes an underwritten public offering of its securities that include shares of common stock (whether or not such offering is a Qualified Offering), then each of the Employees will, in lieu of cash payment, instead receive one or more equity awards under the Company’s 2016 Omnibus Equity Incentive plan (the “Plan”). The equity awards would be in the form of an option to purchase shares of common stock and a potential additional award of shares of common stock. Pursuant to the Amendments, each Employee has agreed to automatically waive their rights to the cash payment discussed above in exchange for the equity awards. The number of shares underlying the potential stock option will be determined at the time the Company closes an underwritten public offering and is to be based on the amount of each Employee’s potential cash payment amount (identified above) divided by the value of an option to purchase a single share of common stock determined using a Black-Scholes option valuation model. The exercise price for each option award will equal “fair market value” as of the grant date determined in accordance with the Plan. If the number of shares underlying the option award is limited by the Plan, then the remainder will be issued in the form of a stock award.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains various forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates” and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ materially from those anticipated, certain of which are beyond our control, are set forth herein and in Part I, Item 1A under the caption “Risk Factors” in our most recent Annual Report on Form 10-K.

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

Overview

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

In August 2015, the U.S. FDA granted an Investigational New Drug (“IND”) approval for our SBP-101 product candidate. We are currently concluding a clinical trial of SBP-101 in patients with previously treated locally advanced or metastatic pancreatic cancer. This is a Phase 1, first-in-human, dose-escalation, safety study. We began enrolling patients on January 4, 2016 and completed treatment of five patient cohorts totaling 25 patients. After review of the data from the fifth cohort patients by the independent Data Safety Monitoring Board (“DSMB”), dose limiting toxicities (“DLTs”) were deemed to have occurred in two patients enrolled in the fifth cohort. As a result, and consistent with the study protocol, the DSMB recommended that the Company de-escalate the dose level in the next cohort of patients. Accordingly, four additional patients were enrolled in a sixth patient cohort at a reduced dose level recommended by the DSMB. On October 9, 2017, we announced that patient enrollment has been completed for this study and the DSMB has recommended a safe and well-tolerated dose level for use in further clinical development. In addition, we have begun the development of a protocol for a new study to evaluate the use of SBP-101 in combination with gemcitabine and nab-paclitaxel in previously untreated patients with metastatic pancreatic cancer.

This study has been conducted at clinical sites in both Australia and the United States including The Mayo Clinic Scottsdale and HonorHealth in Scottsdale, AZ, the Austin Health Olivia Newton-John Cancer Wellness & Research Centre in Melbourne, Australia and the Ashford Cancer Centre in Adelaide, Australia.

Additional clinical trials will be required for FDA or other similar approvals if the results of the first clinical trial of our SBP-101 product candidate justify continued development. We estimate that the additional time and cost to obtain FDA and European Medicines Agency (“EMA”) approval and to bring our SBP-101 product candidate to market as a treatment for pancreatic cancer could be 6 to 7 years and cost up to $200 million.

Financial Overview

We have incurred losses of $27.0 million since our inception in 2011. For the nine months ended September 30, 2017, we incurred a net loss of $8.2 million, which includes a non-cash charge of $3.7 million related to the induced conversions of $2.9 million of convertible promissory notes, including accrued but unpaid interest, originally issued in 2013 and 2014, and $250,000 aggregate principal amount of demand notes originally issued in September 2015. We also incurred negative cash flows from operating activities of $2.6 million for this period. We expect to incur substantial losses, which will continue to generate negative net cash flows from operating activities, as we continue to pursue research and development activities and commercialize our SBP-101 product candidate.

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During February and March 2017, we issued convertible promissory notes raising gross proceeds of approximately $3.1 million which are convertible into our common stock or other securities upon the completion of a qualified financing of at least $2.0 million on or before the maturity of the notes. In addition, we negotiated the conversion of approximately $3.1 million of previously outstanding debt and accrued interest into 418,332 shares of our common stock. See Note 7 titled “Indebtedness” in the Condensed Consolidated Financial Statements elsewhere in this report.

On July 3, 2017, we received a research and development tax incentive payment from the government of Australia related to the research activities of our Australian subsidiary during 2016. The incentive payment received was approximately $460,000.

Our cash and cash equivalents were $943,000 as of September 30, 2017, compared to $438,000 as of December 31, 2016.

On March 1, 2016 we instituted substantial salary deferrals for all senior employees in order to conserve cash. Effective October 1, 2017, we entered into second amendments to the previously disclosed employment agreements, as amended, with our Executive Chairman, Michael T. Cullen, M.D., M.B.A., our President and Chief Executive Officer, David B. Kaysen, our Chief Financial Officer, Scott Kellen and our Chief Medical Officer, Suzanne Gagnon, M.D. ( the “Employees”). For Dr. Cullen, Mr. Kaysen and Dr. Gagnon, the Amendments established new annual base salaries representing a 25% reduction from prior levels. Mr. Kellen’s annual base salary remained unchanged. Each amendment further discontinued the salary deferrals. See Note 10 titled “Subsequent Events” in the Condensed Consolidated Financial Statements elsewhere in this report.

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

Results of Operations

Comparison of the three and nine months ended September 30, 2017 to the three and nine months ended September 30, 2016 (in thousands):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2017			2016			Percent Change			2017			2016			Percent Change
Operating expenses:
General and administrative	$	515		$	499			3.2	%	$	2,252		$	1,399			61.0	%
Research and development		530			636			(16.7	)		1,955			1,657			18.0
Total operating expenses		1,045			1,135			(7.9	)		4,207			3,056			37.7
Other income (expense), net		(371	)		11			nm			(4,466	)		(70	)		nm
Income tax benefit		197			45			337.8			460			252			82.5
Net loss	$	(1,219	)	$	(1,079	)		13.0	%	$	(8,213	)	$	(2,874	)		185.8	%

“nm” = not meaningful.

Research and development and general and administrative expenses include non-cash share-based compensation expense as a result 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, 2017 vest upon performance and time-based conditions. We expect to record additional noncash share-based compensation expense in the future, which may be significant.

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The following table summarizes the share-based compensation expense in our statements of operations and comprehensive loss for the nine months ended September 30, 2017. No share-based compensation was recorded during the comparable period in 2016. (in thousands):

	Nine months ended September 30, 2017
Research and development	$	229
General and administrative		938
Total share-based compensation	$	1,167

General and administrative expense

Our general and administrative (“G&A”) expenses increased 3.2% to $515,000 in the third quarter of 2017 up from $499,000 in the third quarter of 2016. G&A expenses increased 61.0% to $2.3 million in the nine months ended September 30, 2017 up from $1.4 million in the comparable period of 2016. These increases resulted primarily from increases in non-cash, share-based compensation expense during the current year partially offset current year reductions in legal and accounting costs.

Research and development expense

Our research and development (“R&D”) expenses decreased 16.7% to $530,000 in the third quarter of 2017, down from $636,000 in the third quarter of 2016. R&D expenses increased 18.0% to $2.0 million for the nine months ended September 30, 2017, up from $1.7 million in the nine months ended September 30, 2016. The current quarter decrease in R&D expense was due primarily to reduced costs of manufacturing and manufacturing process development, which was materially completed in 2016, and fewer study patient enrollments in the third quarter of 2017, partially offset by contract research costs incurred in conjunction with our NIH sponsored pancreatitis study. The increased costs for the nine months ended September 30, 2017 resulted primarily from the costs of our Phase 1 clinical trial and non-cash share-based compensation expense recorded during the current year. There was no share-based compensation expense recorded during the first nine months of 2016.

Other income (expense), net

Other expense, net, was $371,000 in the current quarter compared to other income, net, of $11,000 in the third quarter of 2017. Other expense, net, increased to $4.5 million for the nine months ended September 30, 2017, up from $70,000 in the same period of the prior year. The increase in the current quarter was primarily due to increased interest expense resulting from the amortization of the discount on the 2017 convertible notes payable, partially offset by grant income earned during the current year received under a research grant awarded to the Company in 2016. On a year-to-date basis, the increase was due primarily to charges recorded related to the induced conversion of debt and increased interest expense resulting from the amortization of the discount on the 2017 convertible notes payable. These expenses were partially offset by a foreign currency transaction gains recognized by our Australian subsidiary and grant income earned during the current year period.

Income tax benefit

Income tax benefit increased 337.8% to $197,000 and 82.5% to $460,000 for the three and nine months ended September 30, 2017, respectively. Our income tax benefit is derived primarily from refundable tax credits associated with our R&D activities conducted in Australia.

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Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of September 30, 2017 and December 31, 2016 and our cash flow data for the nine months ended September 30, 2017 and 2016 and is intended to supplement the more detailed discussion that follows (in thousands):

Liquidity and Capital Resources	September 30, 2017		December 31, 2016
Cash	$	943	$	438
Working capital deficit	$	616	$	4,642

	Nine months Ended September 30,
Cash Flow Data	2017			2016
Cash provided by (used in):
Operating activities	$	(2,619	)	$	(1,570	)
Financing activities		3,106			1,873
Effect of exchange rate changes on cash and cash equivalents		18			1
Net increase in cash and cash equivalents	$	505		$	304

Working Capital

Our total cash was $943,000 as of September 30, 2017, compared to $438,000 as of December 31, 2016. We had $2.1 million in current liabilities, and negative working capital of $616,000 as of September 30, 2017, compared to $5.5 million in current liabilities and a working capital deficit of $4.6 million as of December 31, 2016.

Cash Flows

Net Cash Used in Operating Activities

Net cash used in operating activities was $2.6 million in the nine months ended September 30, 2017 compared to $1.6 million in the nine months ended September 30, 2016. 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. In the nine months ended September 30, 2017, the net loss is also offset by a non-cash charge of $3.7 million related to the induced conversions of $2.9 million of convertible promissory notes, including accrued but unpaid interest, and $250,000 aggregate principal amount of demand notes and a non-cash charge of $961,000 related to the amortization of the discount on the 2017 convertible notes payable.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $3.1 million for the nine months ended September 30, 2017, which was comprised primarily of net proceeds from the sale of convertible promissory notes. During the nine months ended September 30, 2016, net cash provided by financing activities was $1.9 million which resulted from net proceeds received in the sale of common stock and warrants.

Capital Requirements

We expect to incur substantial losses, which will continue to generate negative net cash flows from operating activities, as we continue to pursue research and development activities and commercialize our SBP-101 product candidate.

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

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

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

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

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

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

● the effect of competing technological and market developments;

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

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● 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.

Although we do not have any current capital commitments, we expect that we will increase our projected expenditures once we have additional capital on hand in order to continue our efforts to grow our business and continue to conduct clinical trials for our SBP-101 product candidate. Accordingly, we expect to make additional expenditures in completing our Phase 1 clinical trial and related support activities. With sufficient capital, we also expect to invest in research and development efforts of follow-on products. However, we do not have any definitive plans as to the exact amounts or particular uses at this time, and the exact amounts and timing of any expenditure may vary significantly from our current intentions.

We will need to obtain additional funds to continue our operations and execute our business plans, including completing our current Phase 1 clinical, planning for required future 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 we are likely to seek additional financing through similar means, 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, 2017, we did not have any existing credit facilities under which we could borrow funds.

During February and March 2017, we sold convertible promissory notes raising gross proceeds of approximately $3.1 million which are mandatorily convertible into our common stock upon a completion of a qualified financing of at least $2.0 million. In March 2017, we converted approximately $3.1 million of outstanding debt and accrued interest into our common stock. See note 7 titled “Indebtedness” in the Condensed Consolidated Financial Statements elsewhere in this report.

If we are unable to obtain additional financing when needed, we will need to reduce our operations by taking actions which may include, among other things, reducing use of outside professional service providers, reducing staff or further reduce staff compensation, significantly modifying or delaying the development of our SBP-101 product candidate, licensing rights to third parties, including the right to commercialize our SBP-101 product candidate for pancreatic cancer, acute pancreatitis 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. In particular, specific rights granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any of these events could adversely affect our ability to achieve our regulatory approvals and commercialization goals and harm our business.

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

20

Indebtedness

As of September 30, 2017 we had $3.1 million aggregate principal amount of convertible promissory notes outstanding. Of this amount, $3,076,000 aggregate principal amount was outstanding under the 2017 Notes, which accrue interest at 5.0% per year and are convertible into common stock or other securities upon the completion of a qualified financing of at least $2.0 million on or before the maturity of the 2017 Notes, or upon the request of a holder at a fixed conversion rate of $10.10 per share. The 2017 Notes mature in December 2018 at which time all principal and interest are payable. One 2013 Note remains outstanding in a principal amount of $25,000, which accrues interest of 5% per year, payable quarterly, and is convertible into common stock at $11.25 per share. The 2013 Note matures in December 2018. We also had $300,000 outstanding in an unsecured loan that accrues annual interest of 4.125%. The terms of this loan were amended in October 2017 to extend the maturity date to May 1, 2019 with monthly payments of $10,000 commencing on May 1, 2108.

Critical Accounting Policies and Estimates

Our significant accounting policies are set forth in notes accompanying the condensed consolidated financial statements included in this document. The accounting policies used in preparing our interim fiscal 2017 condensed consolidated financial statements are the same as those described in our Annual Report on Form 10-K filed with the SEC on March 30, 2017.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

As of the end of the period covered by this quarterly report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017, 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.

21

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.

22

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

Other than as set forth below, there have been no other material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on March 30, 2017.

We face significant risks in our product candidate development efforts.

Our business depends on the successful development and commercialization of our product candidates. We are currently focused on developing our initial product candidate, SBP-101, for the treatment of Pancreatic ductal adenocarcinoma (“PDA”) and are not permitted to market it in the United States until we receive approval of a new drug application (“NDA”) from the FDA, or in any foreign jurisdiction until we receive the requisite approvals from such jurisdiction. The process of developing new drugs and/or therapeutic products is inherently complex, unpredictable, time-consuming, expensive and uncertain. We must make long-term investments and commit significant resources before knowing whether our development programs will result in drugs that will receive regulatory approval and achieve market acceptance. A product candidate that appears to be promising at all stages of development may not reach the market for a number of reasons that may not be predictable based on results and data from the clinical program. A product candidates may be found ineffective or may cause harmful side effects during clinical trials, may take longer to progress through clinical trials than had been anticipated, may not be able to achieve the pre-defined clinical endpoints even though clinical benefit may have been achieved, may fail to receive necessary regulatory approvals, may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality, or may fail to achieve market acceptance.

We cannot predict whether or when we will obtain regulatory approval to commercialize our initial product candidate and we cannot, therefore, predict the timing of any future revenues from this or other product candidates, if any. The FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. For example, the FDA:

● could determine that the information provided by us was inadequate, contained clinical deficiencies or otherwise failed to demonstrate the safety and effectiveness of any of our product candidates for any indication;

● may not find the data from clinical trials sufficient to support the submission of an NDA or to obtain marketing approval in the United States, including any findings that the clinical and other benefits of our product candidates outweigh their safety risks;

● may disagree with our trial design or our interpretation of data from preclinical studies or clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our trials;

● may identify deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we enter into agreements for the manufacturing of our product candidates;

● may approve our product candidates for fewer or more limited indications than we request, or may grant approval contingent on the performance of costly post-approval clinical trials;

● may change its approval policies or adopt new regulations; or

● may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of our product candidates. 

Any failure to obtain regulatory approval of our initial product candidate or future product candidates we develop, if any, would significantly limit our ability to generate revenues, and any failure to obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenues.

23

The results of pre-clinical studies and completed clinical trials are not necessarily predictive of future results, and our current product candidates may not have favorable results in later studies or trials.

Pre-clinical studies and Phase 1 and Phase 2 clinical trials are not primarily designed to test the efficacy of a product candidate in the general population, but rather to test initial safety, to study pharmacokinetics and pharmacodynamics, to study limited efficacy in a small number of study patients in a selected disease population, and to identify and attempt to understand the product candidate’s side effects at various doses and dosing schedules. Success in pre-clinical studies or completed clinical trials does not ensure that later studies or trials, including continuing pre-clinical studies and large-scale clinical trials, will be successful nor does it necessarily predict future results. Favorable results in early studies or trials may not be repeated in later studies or trials, and product candidates in later stage trials may fail to show acceptable safety and efficacy despite having progressed through earlier trials.

We lack sales, marketing and distribution capabilities and currently expect to rely on third parties to market and distribute our product candidate, which may harm or delay our commercialization efforts.

We currently have no sales, marketing, or distribution capabilities and do not currently intend to develop such capabilities in the foreseeable future. If we are unable to partner with a larger pharmaceutical organization having the expertise and capacity to perform these functions, then we may be unable to sell any product that we develop. We may not be able to enter into any necessary arrangements, including marketing or distribution agreements, on acceptable terms, if at all. Should our strategic partners, if any, be unable to effectively sell our products, then our ability to generate revenues will be significantly harmed.

We may not be able to list our common stock on a national securities exchange.

As of November 6, 2017, the closing price for our common stock as reported on the OTCQB Marketplace was $1.39 per share. We cannot assure you that the reverse stock split, by itself, will be sufficient to allow us to accomplish our objective to obtain a listing on a national securities exchange. We cannot assure you that the market price of our common stock will not decrease to its pre-split level or that we will satisfy the other listing criteria or will be able to obtain a listing on any national securities exchange, or to maintain such listing for any meaningful period of time. In addition to specific listing and maintenance standards, the Nasdaq Capital Market has broad discretionary authority over the initial and continued listing of securities, which it could exercise with respect to the listing of our common stock. If we are unable to meet the minimum bid price requirement of The Nasdaq Capital Market or are otherwise unable to obtain a listing on a national securities exchange, then our common will continue to be quoted on the over-the-counter markets indefinitely. Unless our common stock becomes listed on a national securities exchange or it qualifies for another exception, our common stock will generally remain a “penny stock.”

The reverse stock split could decrease the liquidity of our stock.

The number of shares held by each individual stockholder was be reduced as a result of the reverse stock split. This may have also reduced the number of stockholders who hold more than a “round lot,” or 100 shares. This has two disadvantages. For example, decreasing our number of round lot stockholders may impair our ability to comply with the rules of a national securities exchange like the Nasdaq Capital Market, which requires companies applying for listing to have at least 300 round lot stockholders. Additionally, the transaction costs to stockholders selling “odd lots” are typically higher on a per share basis. Although our Board believes that the decrease in the number of shares of our common stock outstanding as a consequence of the reverse stock split and the resulting increase in the market price of our common stock has likely encouraged interest in our common stock and promoted greater liquidity for our stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. As a result, there can be no assurance that the reverse stock split will result in the intended benefits described above or that the market price of our common stock will not decrease in the future.

The trading price of our common stock may not be high enough to attract new investors, including institutional investors, and may not satisfy the investing requirements of those investors. Consequently, the trading liquidity of our common stock may not improve as a result of the reverse stock split.

There can be no assurance that the reverse stock split has resulted in a share price that will attract new investors, including institutional investors, or that the share price will satisfy the investing requirements of those investors. As a result, the trading liquidity of our common stock may not necessarily improve, our share price may decline and you may lose all or part of your investment.

24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

Exhibit No.	Description	Manner of Filing
3.1	Certificate of Incorporation of Sun BioPharma, Inc., as amended through May 12, 2016 (incorporated by reference to Exhibit 3.1 to quarterly report on Form 10-Q for the quarter ended June 30, 2016)	Incorporated by Reference
3.2	Bylaws of Sun BioPharma, Inc., as amended through May 12, 2016 (incorporated by reference to Exhibit 3.2 to quarterly report on Form 10-Q for the quarter ended June 30, 2016)	Incorporated by Reference
10.1*	Second Amendment to Employment Agreement with Michael T. Cullen, effective as of October 1, 2017 (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed October 13, 2017)	Incorporated by Reference
10.2*	Second Amendment to Employment Agreement with David B. Kaysen, effective as of October 1, 2017 (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed October 13, 2017)	Incorporated by Reference
10.3*	Second Amendment to Employment Agreement with Scott Kellen, effective as of October 1, 2017 (incorporated by reference to Exhibit 10.3 to current report on Form 8-K filed October 13, 2017)	Incorporated by Reference
10.4*	Second Amendment to Employment Agreement with Suzanne Gagnon, effective as of October 1, 2017 (incorporated by reference to Exhibit 10.4 to current report on Form 8-K filed October 13, 2017)	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, 2017, formatted in XBRL: (i) the Balance Sheets, (ii) the Statements of Operations and Comprehensive Loss, (iii) the Statements of Cash Flows, and (iv) the Notes to Financial Statements.	Filed Electronically

* Management compensatory plan or arrangement required to be filed as an exhibit to this report.

25

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 14, 2017	/s/ David B. Kaysen
	David B. Kaysen Chief Executive Officer
	(Principal Executive Officer)
Date: November 14, 2017	/s/ Scott Kellen
	Scott Kellen Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

26

EX-31.1

Exhibit 31.1

CERTIFICATION 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

I, David B. Kaysen, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Sun BioPharma, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the condensed consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its condensed consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of condensed consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 14, 2017	/s/ David B. Kaysen
	David B. Kaysen
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION 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

I, Scott Kellen, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Sun BioPharma, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the condensed consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its condensed consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of condensed consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 14, 2017	/s/ Scott Kellen
	Scott Kellen
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, David B. Kaysen, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Quarterly Report on Form 10-Q of Sun BioPharma, Inc. for the quarter ended September 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Sun BioPharma, Inc.

Dated: November 14, 2017

/s/ David B. Kaysen

David B. Kaysen

President and Chief Executive Officer

(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott Kellen, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Quarterly Report on Form 10-Q of Sun BioPharma, Inc. for the quarter ended September 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Sun BioPharma, Inc.

Dated: November 14, 2017

/s/ Scott Kellen

Scott Kellen

Chief Financial Officer

(Principal Financial Officer and Principal

Accounting Officer)

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Nov. 10, 2017
Document Information [Line Items]
Entity Registrant Name	Sun BioPharma, Inc.
Entity Central Index Key	0001029125
Trading Symbol	snbp
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		3,670,443
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 943,000	$ 438,000
Prepaid expenses and other current assets	250,000	118,000
Income tax receivable	340,000	321,000
Total current assets	1,533,000	877,000
Total assets	1,533,000	877,000
Current liabilities:
Accounts payable	874,000	1,245,000
Accrued expenses	1,218,000	842,000
Convertible notes payable - current portion, net		2,733,000
Term debt		294,000
Demand notes payable		250,000
Accrued interest	57,000	155,000
Total current liabilities	2,149,000	5,519,000
Long-term liabilities:
Convertible notes payable, net	1,096,000
Term debt	300,000
Accrued interest	87,000
Total long-term liabilities	1,483,000
Commitments and contingencies (Note 7)
Stockholders’ deficit:
Preferred stock, $0.001 par value; 10,000,000 authorized; no shares issued or outstanding as of September 30, 2017 and December 31, 2016
Common stock, $0.001 par value; 100,000,000 authorized; 3,670,443 and 3,220,111 shares issued and outstanding, as of September 30, 2017 and December 31, 2016, respectively	4,000	3,000
Additional paid-in capital	25,059,000	14,058,000
Accumulated deficit	(26,992,000)	(18,779,000)
Accumulated comprehensive gain (loss), net	(170,000)	76,000
Total stockholders’ deficit	(2,099,000)	(4,642,000)
Total liabilities and stockholders’ deficit	$ 1,533,000	$ 877,000

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Sep. 30, 2017	Dec. 31, 2016
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	10,000,000	10,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	100,000,000	100,000,000
Common stock, shares issued (in shares)	3,670,443	3,220,111
Common stock, shares outstanding (in shares)	3,670,443	3,220,111

XML

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Operating expenses:
General and administrative	$ 515,000	$ 499,000	$ 2,252,000	$ 1,399,000
Research and development	530,000	636,000	1,955,000	1,657,000
Operating loss	(1,045,000)	(1,135,000)	(4,207,000)	(3,056,000)
Other income (expense):
Interest income	1,000		1,000	2,000
Grant income	27,000		110,000
Interest expense	(474,000)	(45,000)	(1,145,000)	(135,000)
Loss on induced debt conversions			(3,696,000)
Other income	75,000	56,000	264,000	63,000
Total other income (expense)	(371,000)	11,000	(4,466,000)	(70,000)
Loss before income tax benefit	(1,416,000)	(1,124,000)	(8,673,000)	(3,126,000)
Income tax benefit	197,000	45,000	460,000	252,000
Net loss	(1,219,000)	(1,079,000)	(8,213,000)	(2,874,000)
Foreign currency translation adjustment loss	(62,000)	(61,000)	(246,000)	(94,000)
Comprehensive loss	$ (1,281,000)	$ (1,140,000)	$ (8,459,000)	$ (2,968,000)
Basic and diluted net loss per share (in dollars per share)	$ (0.33)	$ (0.34)	$ (2.33)	$ (0.94)
Weighted average shares outstanding – basic and diluted (in shares)	3,670,443	3,201,700	3,518,839	3,069,195

XML

Condensed Consolidated Statements of Stockholders' Deficit (Unaudited) - 9 months ended Sep. 30, 2017 - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Total
Balances (in shares) at Dec. 31, 2016	3,220,111
Balances at Dec. 31, 2016	$ 3	$ 14,058	$ (18,779)	$ 76	$ (4,642)
Conversion of convertible promissory notes (in shares)	385,000
Conversion of convertible promissory notes	$ 1	5,840			5,841
Conversion of demand notes (in shares)	33,332
Conversion of demand notes		993			993
Charge for fair market value of beneficial conversion feature		2,954			2,954
Share-based compensation		1,167			$ 1,167
Exercise of common stock options (in shares)	22,000				22,000
Exercise of common stock options		28			$ 28
Exercise of stock purchase warrants (in shares)	10,000
Exercise of stock purchase warrants		19			19
Net loss			(8,213)		(8,213)
Foreign currency translation adjustment, net of taxes of $0				(246)	(246)
Balances (in shares) at Sep. 30, 2017	3,670,443
Balances at Sep. 30, 2017	$ 4	$ 25,059	$ (26,992)	$ (170)	$ (2,099)

XML

Condensed Consolidated Statements of Stockholders' Deficit (Unaudited) (Parentheticals) $ in Thousands	9 Months Ended
	Sep. 30, 2017 USD ($)
AOCI Attributable to Parent [Member]
Foreign currency translation, tax	$ 0

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash flows from operating activities:
Net loss	$ (8,213,000)	$ (2,874,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Induced Conversion of Convertible Debt Expense	3,696,000
Share-based compensation	1,167,000
Amortization of debt discount	961,000
Amortization of debt issuance costs	53,000	21,000
Non-cash interest expense	87,000	9,000
Changes in operating assets and liabilities:
Income and other tax receivables	9,000	512,000
Prepaid expenses and other current assets	(131,000)	(25,000)
Accounts payable	(654,000)	377,000
Accrued liabilities	406,000	410,000
Net cash used in operating activities	(2,619,000)	(1,570,000)
Cash flows from financing activities:
Proceeds from the sale of convertible promissory notes, net of offering costs of $16	3,059,000
Proceeds from the exercise of stock options	28,000
Proceeds from the exercise of stock purchase warrants	19,000
Proceeds from issuance of common stock and warrants, net of offering costs of $152		1,873,000
Net cash provided by financing activities	3,106,000	1,873,000
Effect of exchange rate changes on cash and cash equivalents	18,000	1,000
Net increase in cash and cash equivalents	505,000	304,000
Cash and cash equivalents at beginning of period	438,000	925,000
Cash and cash equivalents at end of period	943,000	1,229,000
Supplemental disclosure of cash flow information:
Cash paid during period for interest	5,000	70,000
Supplemental disclosure of non-cash transactions:
Conversion of promissory notes and accrued interest into common stock	2,888,000
Intrinsic value of beneficial conversion feature in convertible notes	2,954,000
Conversion of demand notes into common stock	250,000
Deferred compensation exchanged for common stock and warrants		196,000
Issuance of common stock for services		$ 75,000

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) (Parentheticals) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Proceeds from the sale of convertible promissory notes, offering costs	$ 16	$ 16
Proceeds from issuance of common stock and warrants, issuance costs	$ 152	$ 152

XML

Note 1 - Business

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1. Business

Sun BioPharma, Inc. and its wholly-owned subsidiary Sun BioPharma Australia Pty Ltd. (collectively “we,” “us,” “our,” and the “Company”) exist for the primary purpose of advancing the commercial development of a proprietary polyamine analogue for pancreatic cancer and for a

second

indication in chronic pancreatitis. We have exclusively licensed the worldwide rights to this compound, which has been designated as SBP-

101,

from the University of Florida Research Foundation, Inc. (“UFRF”).

XML

Note 2 - Risks and Uncertainties

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Nature of Operations [Text Block]

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 (“TGA”) in Australia, the European Medicines Agency (“EMA”) 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

$27.0

million since our inception in

2011.

For the

nine

months ended

September 30, 2017,

we incurred a net loss of

$8.2

million, which includes a non-cash charge of

$3.7

million related to the induced conversion of

$2.9

million of convertible promissory notes and accrued interest, originally issued in

2013

and

2014,

and

$250,000

of demand notes, originally issued in

September 2015,

into shares of our common stock. We also incurred negative cash flows from operating activities of

$2.6

million for this period. We expect to incur substantial losses for the foreseeable future, which will continue to generate negative net cash flows from operating activities, as we continue to pursue development activities and seek to commercialize our initial product candidate, SBP-

101

. As of

September 30, 2017,

we had cash and cash equivalents of

$943,000,

negative working capital of

$616,000

and a stockholders’ deficit of

$2.1

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 condensedconsolidated 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 covering our

2016

financial statements dated

March 30, 2017.

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 Management’s Plans

.”

XML

Note 3 - Basis of Presentation

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

3. Basis of Presentation

We have prepared the accompanying interim

condensed consolidated financial statements in accordance with US accounting principles generally accepted in the United States of America (“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 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, 2016

was derived from audited consolidated financial statements, but does

not

include all disclosures required by 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 Annual Report on Form

10

-K filed with the SEC on

March 30, 2017

and our other 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.

Effect

ive

November 7, 2017,

we implemented a

1

-for-

10

reverse split of our common stock. As previously announced, the reverse stock split was approved by our stockholders as of

September 12, 2017,

and was intended to increase the market price per share of our common stock to a level that qualifies for listing on the Nasdaq Capital Market. Concurrent with the reverse stock split, there was a

50%

reduction in the number of shares authorized for issuance by the Company. All references to share and per share amounts included in these condensed consolidated financial statements have been retroactively restated to reflect the reverse split. See Note

10

titled “

Subsequent Events

” for additional information.

Recently

a

dopted

a

ccounting

p

ronouncement

In

March 2016,

the

Financial Accounting Standards Board (“FASB”) issued ASU

No.

2016

-

09,

Improvements to Employee Share-Based Payment Accounting. The guidance in ASU

2016

-

09

is intended to simplify aspects of the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, statutory withholding requirements, and classification on the statement of cash flows. The standard is effective for interim and annual periods beginning after

December 15, 2016,

with early adoption permitted. The adoption of this standard did

not

have a material impact on our financial condition and results of operations.

In

July 2017,

the FASB issued ASU

2017

-

11,

Earnings Per Share (Topic

260

), Distinguishing Liabilities from Equity (Topic

480

) and Derivatives and Hedging (Topic

815

): I. Accounting for Certain Financial Instruments with Down Round Features;

and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic

480,

Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do

not

have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after

December 15, 2018,

with early adoption permitted. The adoption of ASU

2017

-

11,

during the

nine

months ended

September 30, 2017,

did

not

have any impact on the condensed consolidated financial statements and related disclosures.

XML

Note 4 - Liquidity and Management Plans

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Substantial Doubt about Going Concern [Text Block]

4. Liquidity and Management Plans

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.

On

July 3, 2017,

we received a research and development tax incentive payment from the government of Australia related to the research activities of our Australian subsidiary during

2016.

The incentive payment received was approximately

$460,000.

During

February

and

March 2017,

we issued convertible promissory notes raising gross proceeds of approximately

$3.1

million which are convertible into our common stock or other securities upon the completion of a qualified financing of at least

$2.0

million on or before the maturity of the notes. In addition we negotiated the conversion of approximately

$3.1

million of previously outstanding debt and accrued interest into

418,332

shares of our common stock. See Note

7

titled “

Indebtedness

.”

If we are unable to obtain additional financing when needed, we will need to reduce our operations by taking actions that

may

include, among other things, reducing use of outside professional service providers, reducing staff or further reducing staff compensation, significantly modifying or delaying the development of our SBP-

101

product candidate, licensing rights to

third

parties, including the right to commercialize our SBP-

101

product candidate for pancreatic cancer, acute pancreatitis or other applications that we would otherwise seek to pursue, or 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

XML

Note 5 - Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Significant Accounting Policies [Text Block]

5 . 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 our wholly-owned subsidiary. 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

c

onversion

f

eature

For convertible debt where the rate of conversion is below fair market value for our common stock, the Company records a "beneficial conversion featur

e (“BCF“) and related debt discount which is presented as a direct deduction from the carrying amount of the related debt. The discount is amortized to interest expense over the life of the 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 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.

Share-based

compensation

In accounting for share-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 grant date fair value of those awards. Calculating share-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. The performance date for non-employee awards is generally

not

met until the individual award vests. Accordingly we re-measure the current fair value each quarter until the award vests. Compensation expense for performance-based stock option awards is recognized when “performance” has occurred or is probable of occurring.

The fair value of share-based awards is estimated at the date of grant using the Black-Scholes option pricing model. The determination of the fair value of share-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.

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 presented within the stockholders’ deficit. During the

three

and

nine

month periods ended

September 30, 2017

and

2016,

any reclassification adjustments from accumulated other comprehensive loss to operations was inconsequential.

Grant Income

Grant income is derived from a

one

-time grant awarded to the Company by the National Institute of Diabetes and Digestive and Kidney Diseases of the National Institutes of Health “Grant Agreement”. The total grant awarded under the Grant Agreement was

$225,000

and is intended to fund studies of SBP-

101

as a potential treatment for pancreatitis.

Grant income is recognized as a non-operating income when the related research and development expenses are incurred, terms of the grant have been complied with and the Company is eligible for reimbursement under the Grant Agreement.

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 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 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 summarizes the calculation of basic and diluted net loss per share for each of the periods presented (in thousands, except share and per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net loss	$	(1,219	)	$	(1,079	)	$	(8,213	)	$	(2,874	)
Weighted average shares outstanding —basic and diluted		3,670,443			3,201,700			3,518,839			3,069,195
Basic and diluted net loss per share	$	(0.33	)	$	(0.34	)	$	(2.33	)	$	(0.94	)

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:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Employee and non-employee stock options		683,960		316,360		683,960		316,360
Common shares issuable upon conversion of notes payable and accrued interest		315,356		246,667		315,356		246,667
Common shares issuable under common stock purchase warrants		351,500		366,050		351,500		366,050

XML

Note 6 - Accrued Liabilities

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Accrued Liabilities [Text Block]

6. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 30 , 20 17		December 31, 2016
Accrued compensation and related expenses	$	1,094	$	637
Clinical trial related expense		65		97
Professional services		55		70
Product and process development expenses		—		29
Other		4		9
Total a ccrued liabilities	$	1,218	$	842

Effective

October 1, 2017

, we amended the previously disclosed employment agreements, as amended, with our Executive Chairman, President and Chief Executive Officer, Chief Financial Officer and Chief Medical Officer (the “Employees”). These amendments discontinued the “accrued compensation” provision that was introduced with the prior amendments to the employment agreements between the Company and each of the Employees dated

September 12, 2016.

These amendments also include a provision whereby if the Company closes an underwritten public offering of its securities that include shares of common stock, then each of these Employees will, in lieu of cash payment for the previously accrued compensation, instead receive

one

or more equity awards under the Company’s

2016

Omnibus Equity Incentive plan. See Note

10

titled “

Subsequent Events

.”

XML

Note 7 - Indebtedness

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Debt Disclosure [Text Block]

7 . Indebtedness

2017

Convertible notes payable

On each of

February 17,

March 3,

March 10

and

March 17, 2017,

we entered into Note Purchase Agreements (the “Note Agreements”) with a number of accredited

investors in private transactions. Pursuant to these Note Agreements, we sold convertible promissory notes (the

“2017

Notes”) raising gross proceeds of approximately

$3.1

million. The

2017

Notes are scheduled to mature on

December 1, 2018

and bear interest at a rate of

5.0%

per year. Principal and interest on the

2017

Notes are payable at maturity. The Company

may

prepay the

2017

Notes in whole or in part at any time without penalty or premium. The

2017

Notes are convertible into shares of common stock or other securities of the Company upon the occurrence of a Qualified Financing, including the sale of equity securities or a strategic partnership, raising gross proceeds of at least

$2.0

million on or before the maturity of the

2017

Notes or upon the request of a holder of any

2017

Note at a fixed conversion rate of

$10.10

per share. Upon issuance, the

2017

Notes were convertible into our common stock at a conversion rate of

$10.10

per share. The fair market value of our stock on the dates of issuance ranged from

$15.00

to

$39.00

per share. Therefore the

2017

Notes contained a beneficial conversion feature with an aggregate intrinsic value of approximately

$3.0

million, which is recorded as a debt discount and is presented as a direct deduction from the carrying value of the

2017

Notes and will be amortized through interest expense over the life of the

2017

Notes. Upon the occurrence of certain events of default, the

2017

Notes require the Company to repay the unpaid principal amount of the Notes and any unpaid accrued interest. The Company expects to use the net proceeds from the sales of the Notes for working capital and general corporate purposes. One of our stockholders, who beneficially owns more than

10%

of our common stock, purchased

$200,000

of the

2017

Notes.

2013

Convertible notes payable

In

2013,

we initiated an offering of convertible promissory notes (the

“2013

Notes”). In total, gross proceeds raised were

$3.1

million. The

2013

Notes accrue interest at

5%

per year, payable quarterly, are convertible into shares of common stock at

$11.25

per share at the option of the holder and mature in

December 2018.

The Company had

not

paid the required quarterly interest for the

2013

Notes since the quarter ended

March 31, 2016.

This constituted an event of default under which the note holders could have demanded immediate payment of the outstanding principal and accrued but unpaid interest.

In

March 2017,

we offered to all holders of outstanding

2013

Notes, who were accredited investors, an opportunity to convert all outstanding principal and accrued

interest through

March 31, 2017

into shares of our common stock at a rate of

$7.50

per share. The offered conversion rate represented a

$3.75,

or

33.3%,

discount from the rate stated in the terms of the

2013

Notes, which at the time was

$11.25

per share. Holders of

$2,750,000

aggregate principal amount of the

2013

Notes accepted the offer to convert and on

March 31, 2017

we issued

385,000

shares of common stock in exchange for the surrender of the

2013

Notes which included

$138,000

of accrued but unpaid interest. The fair market value of the shares issued was

$11.5

million, compared to

$8.5

million under the original conversion terms, resulting in a loss on the induced debt conversion of approximately

$3.0

million. One of our stockholders, who beneficially owns more than

10%

of our common stock, converted

$700,000

aggregate principal amount of

2013

Notes, along with

$35,000

of accrued but unpaid interest, into

98,000

shares of our common stock. The shares were issued in reliance on the exemption from registration set forth in Section

3

(a)(

9

) of the Securities Act as securities exchanged by an issuer with existing security holders where

no

commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange.

Demand notes payable

In

September 2015

, we assumed

$250,000

of unsecured demand notes in conjunction with our merger with Cimarron Medical, Inc. that were previously issued by Cimarron (the “Demand Notes”).

We included the holders of Demand Notes in our offer to convert all outstanding principal into shares of our common stock at a rate of $

7.50

per share. The Demand Notes had

no

conversion feature. The holders of all

$250,000

aggregate principal amount of the Demand Notes accepted the offer to convert and on

March 31, 2017

we issued

33,332

shares of common stock in exchange for the surrender of all Demand Notes. The fair market value of the shares issued was

$1.0

million resulting in a loss on induced debt conversion of

$700,000.

The shares were issued in reliance on the exemption from registration set forth in Section

3

(a)(

9

) of the Securities Act as securities exchanged by an issuer with existing security holders where

no

commission or other remuneration is paid or given directly or indirectly by the issuer for soliciting such exchange.

The following table sets forth the changes in convertible and demand notes payable during the

nine

months ended

September 30 2017 (

in thousands):

	Convertible Notes Payable
	Principal			Accrued Interest			Demand Notes
Principal value at December 31, 2016	$	2,775		$	105		$	250
Accrued interest		—			120			—
Aggregate principal value of 2017 Notes sold		3,076			—			—
Aggregate principal value of 2013 Notes and accrued interest converted into common stock		(2,750	)		(138	)		—
Aggregate principal value of Demand Notes converted into common stock		—			—			(250	)
Principal value at September 30, 2017	S 3,101			$	87		$	—

Term debt

On

October 26, 2012,

we entered into an unsecured loan agreement (the “Agreement”) with the Institute for Commercialization of Public Research, Inc. (the "Institute"). Under the terms of the agreement, we borrowed

$300,000

at a fixed interest rate of

4.125%.

No

principal or interest payments

were due until the maturity date,

October 26, 2017,

unless a mandatory repayment event occurred.

Effective

October 26, 2017,

we entered into an amendment to our unsecured loan agreement with the Institute for Commercialization of Public Research, Inc.

Under the terms of the amendment the maturity date of the note was extended to

May 1, 2019

with monthly payments of

$10,000

to begin on

May 1, 2018

with the remaining balance due in full on

May 1, 2019.

The monthly payments will apply

first

to accrued and unpaid interest. Accordingly, the outstanding principal is presented as a long term liability in the

September 30, 2017

balance sheet.

Debt issuance costs

and discount

The following table summarizes

the deferred financing costs which are presented as a direct deduction from the carrying amount of their related debt liabilities (in thousands):

	September 30 , 2017						December 31, 2016
	Convertible Notes Payable			Term Debt			Convertible Notes Payable			Long-Term Debt
Loan principal amount	$	3,101		$	300		$	2,775		$	300
Deferred financing costs		16			37			105			37
Accumulated amortization		(4	)		(37	)		(63	)		(31	)
Unamortized balance		12			—			42			6
Discount on debt		2,954
Accumulated amortization		(961	)
Unamortized balance		1,993
Loan carrying amounts, net	$	1,096		$	300		$	2,733		$	294

XML

Note 8 - Stockholders' Deficit

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

8 . Stockholder s’ Deficit

 

Shares reserved

Shares of common stock reserved for future issuance are as follows:

	September 30 , 201 7
Stock options outstanding		683,960
Shares available for grant under equity incentive plan		1,110,400
Estimated common shares issuable upon conversion of notes payable and accrued interest		315,356
Common shares issuable under common stock purchase warrants		351,500
Total		2,461,216

XML

Note 9 - Stock-based Compensation

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

9 . Share-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 at our annual meeting of stockholders on

May 17, 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 Plan have a maximum term of

ten

years. Under the Plan, a total of

1

,500,000

 shares of common stock are reserved for issuance. As of

September 30, 2017,

options to purchase

389,600

shares of common stock were outstanding under the

2016

Plan.

2011

Stock Option Plan

The Sun BioPharma, Inc.

2011

Stock Option Plan (the

“2011

Plan”) was

terminated in conjunction with stockholder approval of the

2016

Plan, although awards outstanding under the

2011

Plan will 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, 2017,

options to purchase

294,360

shares of common stock remained outstanding under the

2011

Plan.

Share-based

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

	Nine months Ended
	September 30 , 2017		September 30 , 2016
Research and development	$	229	$	—
G eneral and administrative		938		—
Total share-based compensation	$	1,167	$	—

A summary of option activity is as follows:

	Shares Available for Grant			Shares Underlying Options			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balances at December 31, 2016		1,114,400			701,960		$	9.50	$	3,896,235
Granted		(4,000	)		4,000			10.10
Exercised		—			(22,000	)		1.25
Cancelled		—			—			—
Balances at September 30, 2017		1,110,400			683,960		$	9.77	$	2,121,985

Information about stock options outstanding, vested and expected to vest as of

September 30, 2017,

is as follows:

			Outstanding, Vested and Expected to Vest						Options Vested and Exercisable
					Weighted Average						Weighted Average
					Remaining		Weighted				Remaining
Per Share					Contractual		Average		Options		Contractual
Exercise Price			Shares		Life (Years)		Exercise Price		Exercisable		Life (Years)
$0.88	–	1.10		38,360		5.08	$	1.00		38,360		5.08
2.28	–	2.50		42,000		6.37		2.47		42,000		6.37
	3.18			214,000		7.42		3.18		214,000		7.42
	10.10			4,000		4.28		10.10		—		—
	15.10			385,600		8.76		15.10		196,050		9.11
				683,960		7.96	$	9.77		490,410		7.83

As of

September 30, 2017

total compensation expense related to unvested employee stock options

not

yet recognized was

$1.1

million, which is expected to be allocated to expenses over a weighted-average period of approximately

1.2

years.

Nonemployee

share-based

compensation

We account for stock options granted to nonemployees in accordance with FASB ASC

505.

In connection with stock options granted to nonemployees, we recorded $

397,000

and

$0

for nonemployee share-based compensation during the

nine

months ended

September 30, 2017

and

2016,

respectively. These amounts were based upon the fair values of the vested portion of the grants. Amounts expensed during the remaining vesting period will be determined based on the fair value at the time of vesting.

The estimated fair values of the stock options

issued to employees and non-employees were calculated using the Black-Scholes valuation model, based on the following assumptions for the

nine

months ended

September 30, 2017

and

2016:

	2017				2016
Common stock fair value		$10.00	–	$29.80		n/a
Risk-free interest rate		1.43%	–	1.93%		n/a
Expected dividend yield			0%			n/a
Expected option life (in years)		2.25	–	5.0		n/a
Expected stock price volatility		75.0	–	78.0%		n/a

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Note 10 - Subsequent Events

9 Months Ended

Sep. 30, 2017

Notes to Financial Statements

Subsequent Events [Text Block]

10 . Subsequent Events

Reverse stock split

Effect

ive

November 7, 2017,

we implemented a

1

-for-

10

reverse split of our common stock.

No

fractional shares were issued in connection with the reverse stock split. Stockholders received a proportionate cash payment for any fractional shares based upon the closing price of our common stock on the effective date of the reverse stock split. The reverse stock split was intended to increase the market price per share of our common stock to a level that qualifies for listing on the Nasdaq Capital Market. The Company is taking additional actions to meet the remaining listing requirements. Until the Company meets the criteria for listing and an application for listing is accepted by Nasdaq, which

may

not

happen within a reasonable time frame, if at all, its common stock will continue to be eligible for quotation on the OTCQB Venture Marketplace tier of the over-the-counter markets administered by the OTC Markets Group, Inc. under the symbol ”SNBP“. The reverse stock split did

not

affect the par value of our common stock, however, concurrent with the reverse stock split, the number of shares of common and preferred stock authorized for issuance by the Company was reduced by

50%

to

100,000,000

and

10,000,000,

respectively. Proportional adjustments were also made to the Company’s

2016

Omnibus Incentive Plan, outstanding stock options, warrants and outstanding convertible notes payable. The new CUSIP number for our common stock following the reverse stock split is

8666M

206.

All references to share and per share amounts included in these condensed consolidated financial statements have been retroactively restated to reflect the reverse split.

Amendment to employment agreements

Effective

October 1, 2017,

we entered into

second

amendments (collectively, the “Amendments”) to the previously disclosed employment agreements, as amended (the “Agreements”), with our Executive Chairman, Michael T. Cullen, M.D., M.B.A., our President and Chief Executive Officer, David B. Kaysen, our Chief Financial Officer, Scott Kellen and our Chief Medical Officer, Suzanne Gagnon, M.D. ( the “Employees”).

For Dr. Cullen, Mr. Kaysen and Dr. Gagnon, the Amendments established new annual base salaries representing a

25%

reduction from prior levels. Mr. Kellen

’s annual base salary remained unchanged. Each Amendment further discontinued the “accrued compensation” provision that was introduced with the prior amendments to the Agreements between the Company and each of the Employees dated

September 12, 2016 (

the “Prior Amendments”).

As a result of the Amendments, each of the

Employees continues to be eligible to receive a cash payment in an amount equal to the amount that previously accumulated under the “accrued compensation” provision through

September 30, 2017.

The cash payment would become due upon a change of control (as defined in the Agreements) or the Company’s issuance of equity securities (including any securities that are convertible into or exercisable for equity securities) resulting in gross cash proceeds of

$10,000,000

or more (a “Qualified Offering”). If neither a change of control nor a Qualified Offering occurs on or before

June 30, 2018,

then the right to cash payment will be forfeited. The potential cash payments as of

September 30, 2017

for Dr. Cullen, Mr. Kaysen, Mr. Kellen, and Dr. Gagnon are

$410,136;

$201,599;

$97,208;

and

$385,036,

respectively.

If, on or before

June 30, 2018,

the Company closes an underwritten public offering of its securities that include shares of common stock (whether or

not

such offering is a Qualified Offering), then each of the

Employees will, in lieu of cash payment, instead receive

one

or more equity awards under the Company’s

2016

Omnibus Equity Incentive plan (the “Plan”). The equity awards would be in the form of an option to purchase shares of common stock and a potential additional award of shares of common stock. Pursuant to the Amendments, each Employee has agreed to automatically waive their rights to the cash payment discussed above in exchange for the equity awards. The number of shares underlying the potential stock option will be determined at the time the Company closes an underwritten public offering and is to be based on the amount of each Employee’s potential cash payment amount (identified above) divided by the value of an option to purchase a single share of common stock determined using a Black-Scholes option valuation model. The exercise price for each option award will equal “fair market value” as of the grant date determined in accordance with the Plan. If the number of shares underlying the option award is limited by the Plan, then the remainder will be issued in the form of a stock award.

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of consolidation

The accompanying

condensed consolidated financial statements include the assets, liabilities and expenses of Sun BioPharma, Inc. and our wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

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 Feature, Policy [Policy Text Block]

Beneficial

c

onversion

f

eature

For convertible debt where the rate of conversion is below fair market value for our common stock, the Company records a "beneficial conversion featur

e (“BCF“) and related debt discount which is presented as a direct deduction from the carrying amount of the related debt. The discount is amortized to interest expense over the life of the debt.

Debt Issuance Costs [Policy Text Block]

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 Expense, Policy [Policy Text Block]

Research and development costs

Research and development costs include expenses incurred in the conduct of our 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.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Share-based

compensation

In accounting for share-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 grant date fair value of those awards. Calculating share-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. The performance date for non-employee awards is generally

not

met until the individual award vests. Accordingly we re-measure the current fair value each quarter until the award vests. Compensation expense for performance-based stock option awards is recognized when “performance” has occurred or is probable of occurring.

The fair value of share-based awards is estimated at the date of grant using the Black-Scholes option pricing model. The determination of the fair value of share-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.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

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 presented within the stockholders’ deficit. During the

three

and

nine

month periods ended

September 30, 2017

and

2016,

any reclassification adjustments from accumulated other comprehensive loss to operations was inconsequential.

Grant Income Policy [Policy Text Block]

Grant Income

Grant income is derived from a

one

-time grant awarded to the Company by the National Institute of Diabetes and Digestive and Kidney Diseases of the National Institutes of Health “Grant Agreement”. The total grant awarded under the Grant Agreement was

$225,000

and is intended to fund studies of SBP-

101

as a potential treatment for pancreatitis.

Grant income is recognized as a non-operating income when the related research and development expenses are incurred, terms of the grant have been complied with and the Company is eligible for reimbursement under the Grant Agreement.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive loss

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

Earnings Per Share, Policy [Policy Text Block]

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 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 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 summarizes the calculation of basic and diluted net loss per share for each of the periods presented (in thousands, except share and per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net loss	$	(1,219	)	$	(1,079	)	$	(8,213	)	$	(2,874	)
Weighted average shares outstanding —basic and diluted		3,670,443			3,201,700			3,518,839			3,069,195
Basic and diluted net loss per share	$	(0.33	)	$	(0.34	)	$	(2.33	)	$	(0.94	)

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:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Employee and non-employee stock options		683,960		316,360		683,960		316,360
Common shares issuable upon conversion of notes payable and accrued interest		315,356		246,667		315,356		246,667
Common shares issuable under common stock purchase warrants		351,500		366,050		351,500		366,050

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Note 5 - Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net loss	$	(1,219	)	$	(1,079	)	$	(8,213	)	$	(2,874	)
Weighted average shares outstanding —basic and diluted		3,670,443			3,201,700			3,518,839			3,069,195
Basic and diluted net loss per share	$	(0.33	)	$	(0.34	)	$	(2.33	)	$	(0.94	)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Employee and non-employee stock options		683,960		316,360		683,960		316,360
Common shares issuable upon conversion of notes payable and accrued interest		315,356		246,667		315,356		246,667
Common shares issuable under common stock purchase warrants		351,500		366,050		351,500		366,050

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Note 6 - Accrued Liabilities (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	September 30 , 20 17		December 31, 2016
Accrued compensation and related expenses	$	1,094	$	637
Clinical trial related expense		65		97
Professional services		55		70
Product and process development expenses		—		29
Other		4		9
Total a ccrued liabilities	$	1,218	$	842

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Note 7 - Indebtedness (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Debt Activity [Table Text Block]

	Convertible Notes Payable
	Principal			Accrued Interest			Demand Notes
Principal value at December 31, 2016	$	2,775		$	105		$	250
Accrued interest		—			120			—
Aggregate principal value of 2017 Notes sold		3,076			—			—
Aggregate principal value of 2013 Notes and accrued interest converted into common stock		(2,750	)		(138	)		—
Aggregate principal value of Demand Notes converted into common stock		—			—			(250	)
Principal value at September 30, 2017	S 3,101			$	87		$	—

Schedule of Long-term Debt Instruments [Table Text Block]

	September 30 , 2017						December 31, 2016
	Convertible Notes Payable			Term Debt			Convertible Notes Payable			Long-Term Debt
Loan principal amount	$	3,101		$	300		$	2,775		$	300
Deferred financing costs		16			37			105			37
Accumulated amortization		(4	)		(37	)		(63	)		(31	)
Unamortized balance		12			—			42			6
Discount on debt		2,954
Accumulated amortization		(961	)
Unamortized balance		1,993
Loan carrying amounts, net	$	1,096		$	300		$	2,733		$	294

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Note 8 - Stockholders' Deficit (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Common Stock Reserved for Future Issuance [Table Text Block]

	September 30 , 201 7
Stock options outstanding		683,960
Shares available for grant under equity incentive plan		1,110,400
Estimated common shares issuable upon conversion of notes payable and accrued interest		315,356
Common shares issuable under common stock purchase warrants		351,500
Total		2,461,216

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Note 9 - Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2017

Notes Tables

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Nine months Ended
	September 30 , 2017		September 30 , 2016
Research and development	$	229	$	—
G eneral and administrative		938		—
Total share-based compensation	$	1,167	$	—

Share-based Compensation, Stock Options, Activity [Table Text Block]

	Shares Available for Grant			Shares Underlying Options			Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balances at December 31, 2016		1,114,400			701,960		$	9.50	$	3,896,235
Granted		(4,000	)		4,000			10.10
Exercised		—			(22,000	)		1.25
Cancelled		—			—			—
Balances at September 30, 2017		1,110,400			683,960		$	9.77	$	2,121,985

Schedule of Share-based Compensation, Shares Authorized under Stock Option Plans, by Exercise Price Range [Table Text Block]

			Outstanding, Vested and Expected to Vest						Options Vested and Exercisable
					Weighted Average						Weighted Average
					Remaining		Weighted				Remaining
Per Share					Contractual		Average		Options		Contractual
Exercise Price			Shares		Life (Years)		Exercise Price		Exercisable		Life (Years)
$0.88	–	1.10		38,360		5.08	$	1.00		38,360		5.08
2.28	–	2.50		42,000		6.37		2.47		42,000		6.37
	3.18			214,000		7.42		3.18		214,000		7.42
	10.10			4,000		4.28		10.10		—		—
	15.10			385,600		8.76		15.10		196,050		9.11
				683,960		7.96	$	9.77		490,410		7.83

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	2017				2016
Common stock fair value		$10.00	–	$29.80		n/a
Risk-free interest rate		1.43%	–	1.93%		n/a
Expected dividend yield			0%			n/a
Expected option life (in years)		2.25	–	5.0		n/a
Expected stock price volatility		75.0	–	78.0%		n/a

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Note 2 - Risks and Uncertainties (Details Textual) - USD ($)		1 Months Ended	3 Months Ended		9 Months Ended		81 Months Ended
	Mar. 31, 2017	Sep. 30, 2015	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Dec. 31, 2016	Dec. 31, 2015
Net Income (Loss) Attributable to Parent			$ (1,219,000)	$ (1,079,000)	$ (8,213,000)	$ (2,874,000)	$ (27,000,000)
Induced Conversion of Convertible Debt Expense					3,696,000
Net Cash Provided by (Used in) Operating Activities					(2,619,000)	(1,570,000)
Cash and Cash Equivalents, at Carrying Value			943,000	$ 1,229,000	943,000	$ 1,229,000	943,000	$ 438,000	$ 925,000
Working Capital			(616,000)		(616,000)		(616,000)
Stockholders' Equity Attributable to Parent			$ (2,099,000)		(2,099,000)		$ (2,099,000)	$ (4,642,000)
Unsecured Debt [Member] | Demand Notes [Member]
Induced Conversion of Convertible Debt Expense	$ 700,000
Notes Assumed		$ 250,000
Conversion of 2013 Notes into Common Stock [Member]
Debt Conversion, Original Debt, Amount Including Accrued, but Unpaid Interest					$ 2,900,000

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Note 3 - Basis of Presentation (Details Textual) - Subsequent Event [Member]	Nov. 07, 2017
Reduction of Shares Authorized, Percent	50.00%
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio	10

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Note 4 - Liquidity and Management Plans (Details Textual) - USD ($)		2 Months Ended	9 Months Ended
	Jul. 03, 2017	Mar. 31, 2017	Sep. 30, 2017	Sep. 30, 2016	Mar. 17, 2017	Dec. 31, 2016
Proceeds from Incentive Payment Received	$ 460,000
Proceeds from Convertible Debt		$ 3,100,000	$ 3,059,000
Convertible Debt [Member]
Proceeds from Convertible Debt			3,076,000
Long-term Debt, Gross		$ 3,100,000	$ 3,101,000			$ 2,775,000
Debt Conversion, Converted Instrument, Shares Issued		418,332
Convertible Debt [Member] | The 2017 Notes [Member]
Debt Instrument, Qualified Financing, Minimum Proceeds		$ 2,000,000			$ 2,000,000

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Note 5 - Summary of Significant Accounting Policies (Details Textual) - USD ($) xbrli-pure in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate	0.00%
Grant Agreement, Total Grants	$ 225,000

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Note 5 - Summary of Significant Accounting Policies - Calculation of Net Loss per Common Share (Details) - USD ($)	3 Months Ended		9 Months Ended		81 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017
Net loss	$ (1,219,000)	$ (1,079,000)	$ (8,213,000)	$ (2,874,000)	$ (27,000,000)
Weighted average shares outstanding – basic and diluted (in shares)	3,670,443	3,201,700	3,518,839	3,069,195
Basic and diluted net loss per share (in dollars per share)	$ (0.33)	$ (0.34)	$ (2.33)	$ (0.94)

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Note 5 - Summary of Significant Accounting Policies - Anti-dilutive Securities (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Stock Compensation Plan [Member]
Anti-dilutive securities (in shares)	683,960	316,360	683,960	316,360
Convertible Debt Securities [Member]
Anti-dilutive securities (in shares)	315,356	246,667	315,356	246,667
Warrant [Member]
Anti-dilutive securities (in shares)	351,500	366,050	351,500	366,050

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Note 6 - Accrued Liabilities - Accrued Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Accrued liabilities	$ 1,218	$ 842
Accrued Compensation and Related Expenses [Member]
Accrued liabilities	1,094	637
Clinical Trial Related Expense [Member]
Accrued liabilities	65	97
Professional Services [Member]
Accrued liabilities	55	70
Product and Process Development [Member]
Accrued liabilities		29
Other Accrued Liabilities [Member]
Accrued liabilities	$ 4	$ 9

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Note 7 - Indebtedness (Details Textual) - USD ($)				1 Months Ended		2 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	Oct. 26, 2017	Mar. 31, 2017	Mar. 17, 2017	Mar. 31, 2017	Sep. 30, 2015	Mar. 31, 2017	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2013	Oct. 26, 2012
Share Price
Proceeds from Convertible Debt						$ 3,100,000			$ 3,059,000
Induced Conversion of Convertible Debt Expense									$ 3,696,000
Institute [Member]
Debt Instrument, Interest Rate, Stated Percentage												4.125%
Debt Instrument, Face Amount												$ 300,000
Conversion of 2013 Notes into Common Stock [Member]
Debt Conversion, Original Debt, Amount		$ 2,750,000
Debt Conversion, Converted Instrument, Shares Issued		385,000
Debt Conversion, Original Debt, Amount of Accrued but Unpaid Interest		$ 138,000
Debt Conversion, Converted Instrument, Amount		11,500,000
Debt Conversion, Converted Instrument, Initial Agreement Amount		8,500,000		$ 8,500,000		$ 8,500,000
Conversion of 2013 Notes into Common Stock by Stockholder [Member]
Debt Conversion, Original Debt, Amount		$ 700,000
Debt Conversion, Converted Instrument, Shares Issued		98,000
Debt Conversion, Original Debt, Amount of Accrued but Unpaid Interest		$ 35,000
Conversion of Demand Notes into Common Stock [Member]
Debt Conversion, Original Debt, Amount		$ 250,000
Debt Conversion, Converted Instrument, Shares Issued		33,332
Debt Conversion, Converted Instrument, Amount		$ 1,000,000
Debt Conversion, Conversion Price		$ 7.50		$ 7.50		$ 7.50
Minimum [Member]
Share Price			$ 15				$ 10		$ 10
Maximum [Member]
Share Price			$ 39				$ 29.80		$ 29.80
Convertible Debt [Member]
Proceeds from Convertible Debt									$ 3,076,000
Debt Conversion, Original Debt, Amount									2,750,000
Debt Conversion, Converted Instrument, Shares Issued						418,332
Debt Conversion, Original Debt, Amount of Accrued but Unpaid Interest									138,000
Unsecured Debt [Member]
Debt Conversion, Original Debt, Amount									$ 250,000
The 2017 Notes [Member]
Proceeds from Convertible Debt, Gross			$ 3,100,000
The 2017 Notes [Member] | One Stockholder [Member]
Proceeds from Convertible Debt			$ 200,000
The 2017 Notes [Member] | Convertible Debt [Member]
Debt Instrument, Interest Rate, Stated Percentage			5.00%
Debt Instrument, Qualified Financing, Minimum Proceeds		$ 2,000,000	$ 2,000,000	$ 2,000,000		$ 2,000,000
Debt Instrument, Convertible, Conversion Price			$ 10.10
Debt Instrument, Convertible, Beneficial Conversion Feature			$ 3,000,000
The 2013 Notes [Member]
Proceeds from Convertible Debt, Gross											$ 3,100,000
The 2013 Notes [Member] | Convertible Debt [Member]
Debt Instrument, Interest Rate, Stated Percentage											5.00%
Debt Instrument, Convertible, Conversion Price		$ 11.25		$ 11.25		$ 11.25
Debt Instrument, Debt Default, Settlement Offer Conversion Rate				7.50
Debt Instrument, Convertible, Conversion Price, Discount				$ 3.75
Debt Instrument, Convertible, Conversion Price, Discount rate		33.30%		33.30%		33.30%
Induced Conversion of Convertible Debt Expense		$ 3,000,000
Demand Notes [Member] | Unsecured Debt [Member]
Induced Conversion of Convertible Debt Expense		$ 700,000
Notes Assumed					$ 250,000
Amended Unsecured Loan Agreement [Member] | Institute [Member] | Subsequent Event [Member]
Debt Instrument, Periodic Payment	$ 10,000

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Note 7 - Indebtedness - Changes in Debt (Details) - USD ($)	2 Months Ended	9 Months Ended
	Mar. 31, 2017	Sep. 30, 2017	Sep. 30, 2016
Proceeds from the sale of convertible promissory notes, net of offering costs of $16	$ 3,100,000	$ 3,059,000
Convertible Debt [Member]
Principal value		2,775,000
Accrued interest		105,000
Accrued interest		120,000
Proceeds from the sale of convertible promissory notes, net of offering costs of $16		3,076,000
Aggregate principal value of notes converted into common stock		(2,750,000)
Accrued interest converted into common stock		(138,000)
Principal value	$ 3,100,000	3,101,000
Accrued interest		87,000
Unsecured Debt [Member]
Principal value		250,000
Aggregate principal value of notes converted into common stock		(250,000)
Principal value

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Note 7 - Indebtedness - Deferred Financing Costs (Details) - USD ($)	Sep. 30, 2017	Mar. 31, 2017	Dec. 31, 2016
Loan carrying amounts, net, convertible notes payable	$ 1,096,000
Convertible Debt [Member]
Long-term Debt, Gross	3,101,000	$ 3,100,000	2,775,000
Deferred financing costs, convertible notes payable	16,000		105,000
Accumulated amortization, convertible notes payable	(4,000)		(63,000)
Unamortized balance, convertible notes payable	12,000		42,000
Discount on debt, convertible notes payable	2,954,000
Accumulated amortization, convertible notes payable	(961,000)
Unamortized balance, convertible notes payable	1,993,000
Loan carrying amounts, net, convertible notes payable	1,096,000		2,733,000
Long-term Debt, Net [Member]
Long-term Debt, Gross	300,000		300,000
Deferred financing costs, convertible notes payable	37,000		37,000
Accumulated amortization, convertible notes payable	(37,000)		(31,000)
Unamortized balance, convertible notes payable			6,000
Loan carrying amounts, net, long term debt	$ 300,000		$ 294,000

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Note 8 - Stockholders' Deficit - Common Stock Reserved for Future Issuance (Details) - shares	Sep. 30, 2017	Dec. 31, 2016
Stock options outstanding (in shares)	683,960
Shares available for grant under equity incentive plan (in shares)	1,110,400	1,114,400
Estimated common shares issuable upon conversion of notes payable and accrued interest (in shares)	315,356
Common shares issuable under common stock purchase warrants (in shares)	351,500
Total (in shares)	2,461,216

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Note 9 - Stock-based Compensation (Details Textual) - USD ($)	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Common Stock, Capital Shares Reserved for Future Issuance	2,461,216
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	683,960		701,960
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options	$ 1,100,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition	1 year 73 days
Share-based Goods and Nonemployee Services Transaction, Compensation Expense	$ 397,000	$ 0
Sun BioPharma, Inc. 2016 Omnibus Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period	10 years
Common Stock, Capital Shares Reserved for Future Issuance	389,600
Sun BioPharma, Inc. 2016 Omnibus Incentive Plan [Member] | Employee Stock Option [Member]
Common Stock, Capital Shares Reserved for Future Issuance	1,500,000
Sun BioPharma, Inc. 2011 Stock Option Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period	10 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	294,360
Sun BioPharma, Inc. 2011 Stock Option Plan [Member] | Employee Stock Option [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	0 years
Sun BioPharma, Inc. 2011 Stock Option Plan [Member] | Employee Stock Option [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	2 years

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Note 9 - Stock-based Compensation - Share-based Compensation Expense (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Share-based compensation expense	$ 1,167
Research and Development Expense [Member]
Share-based compensation expense	229
General and Administrative Expense [Member]
Share-based compensation expense	$ 938

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Note 9 - Stock-based Compensation - Summary of Option Activity (Details) - USD ($)	9 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Balance, shares available for grant (in shares)	1,114,400
Balance, shares underlying options (in shares)	701,960
Balance, weighted average exercise price per share (in dollars per share)	$ 9.50
Aggregate intrinsic value	$ 2,121,985	$ 3,896,235
Granted, shares available for grant (in shares)	(4,000)
Granted, shares underlying options (in shares)	4,000
Granted, weighted average exercise price per share (in dollars per share)	$ 10.10
Exercised, shares underlying options (in shares)	(22,000)
Exercised, weighted average exercise price per share (in dollars per share)	$ 1.25
Cancelled, shares underlying options (in shares)
Cancelled, weighted average exercise price per share (in dollars per share)
Balance, shares available for grant (in shares)	1,110,400
Balance, shares underlying options (in shares)	683,960
Balance, weighted average exercise price per share (in dollars per share)	$ 9.77

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Note 9 - Stock-based Compensation - Options Outstanding (Details)	9 Months Ended
	Sep. 30, 2017 $ / shares shares
Stock options outstanding (in shares)	683,960
Options outstanding, weighted average remaining contractual life (Year)	7 years 350 days
Options outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 9.77
Options exercisable (in shares)	490,410
Options exercisable, weighted average remaining contractual life (Year)	7 years 302 days
Exercise Price Range 1 [Member]
Per share exercise price, lower limit (in dollars per share) | $ / shares	$ 0.88
Per share exercise price, upper limit (in dollars per share) | $ / shares	$ 1.10
Stock options outstanding (in shares)	38,360
Options outstanding, weighted average remaining contractual life (Year)	5 years 29 days
Options outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 1
Options exercisable (in shares)	38,360
Options exercisable, weighted average remaining contractual life (Year)	5 years 29 days
Exercise Price Range 2 [Member]
Per share exercise price, lower limit (in dollars per share) | $ / shares	$ 2.28
Per share exercise price, upper limit (in dollars per share) | $ / shares	$ 2.50
Stock options outstanding (in shares)	42,000
Options outstanding, weighted average remaining contractual life (Year)	6 years 135 days
Options outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 2.47
Options exercisable (in shares)	42,000
Options exercisable, weighted average remaining contractual life (Year)	6 years 135 days
Exercise Price Range 3 [Member]
Stock options outstanding (in shares)	214,000
Options outstanding, weighted average remaining contractual life (Year)	7 years 153 days
Options outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 3.18
Options exercisable (in shares)	214,000
Options exercisable, weighted average remaining contractual life (Year)	7 years 153 days
Exercise Price Range 4 [Member]
Stock options outstanding (in shares)	4,000
Options outstanding, weighted average remaining contractual life (Year)	4 years 102 days
Options outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 10.10
Options exercisable (in shares)
Options exercisable, weighted average remaining contractual life (Year)
Exercise Price Range 5 [Member]
Stock options outstanding (in shares)	385,600
Options outstanding, weighted average remaining contractual life (Year)	8 years 277 days
Options outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 15.10
Options exercisable (in shares)	196,050
Options exercisable, weighted average remaining contractual life (Year)	9 years 40 days

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Note 9 - Stock-based Compensation - Assumptions Used in Calculating Fair Value of Options (Details) - $ / shares	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Mar. 17, 2017
Common stock fair value (in dollars per share)
Risk-free interest rate
Expected dividend yield	0.00%
Expected option life (in years) (Year)
Expected stock price volatility
Minimum [Member]
Common stock fair value (in dollars per share)	$ 10		$ 15
Risk-free interest rate	1.43%
Expected option life (in years) (Year)	2 years 91 days
Expected stock price volatility	75.00%
Maximum [Member]
Common stock fair value (in dollars per share)	$ 29.80		$ 39
Risk-free interest rate	1.93%
Expected option life (in years) (Year)	5 years
Expected stock price volatility	78.00%

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Note 10 - Subsequent Events (Details Textual)	Nov. 07, 2017	Oct. 01, 2017 USD ($)	Sep. 30, 2017 shares	Dec. 31, 2016 shares
Common Stock, Shares Authorized | shares			100,000,000	100,000,000
Preferred Stock, Shares Authorized | shares			10,000,000	10,000,000
Subsequent Event [Member]
Reduction of Shares Authorized, Percent	50.00%
Subsequent Event [Member] | Employment Agreements [Member]
Proceeds from Issuance of Equity Securities, Minimum Requirement for Compensation Payment		$ 10,000,000
Subsequent Event [Member] | Executive Chairman, President and Chief Medical Officer [Member] | Employment Agreements [Member]
Reduction in Annual Base Salary, Percent		25.00%
Subsequent Event [Member] | Board of Directors Chairman [Member] | Employment Agreements [Member]
Cash Payment Forfeited If Requirement Not Met By Deadline		$ 410,136
Subsequent Event [Member] | President [Member] | Employment Agreements [Member]
Cash Payment Forfeited If Requirement Not Met By Deadline		201,599
Subsequent Event [Member] | Chief Financial Officer [Member] | Employment Agreements [Member]
Cash Payment Forfeited If Requirement Not Met By Deadline		97,208
Subsequent Event [Member] | Chief Medical Officer [Member] | Employment Agreements [Member]
Cash Payment Forfeited If Requirement Not Met By Deadline		$ 385,036
Subsequent Event [Member] | Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio	10