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 March 31, 2020

or

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

For the transition period from ________ to ________.

Commission File No.: 000-55242

Sun BioPharma, Inc.

(Exact Name of Registrant as Specified in its Charter)

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

(952) 479-1196

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☑
	Emerging growth company ☐

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

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

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

On May 8, 2020, there were 6,631,308 shares of the registrant’s common stock, par value $0.001, outstanding.

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

Page

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13
Item 3.	Quantitative and Qualitative Disclosure About Market Risk.	17
Item 4.	Controls and Procedures.	17
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	18
Item 1A.	Risk Factors.	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	18
Item 3.	Defaults Upon Senior Securities.	18
Item 4.	Mine Safety Disclosures.	18
Item 5.	Other Information.	18
Item 6.	Exhibits.	19

2

PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements.

Sun BioPharma, Inc.
Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

	March 31, 2020			December 31, 2019
	(Unaudited)
ASSETS
Current assets:
Cash	$	1,296		$	2,449
Prepaid expenses and other current assets		389			283
Income tax receivable		406			361
Total current assets		2,091			3,093
Other noncurrent assets		45			51
Total assets	$	2,136		$	3,144
LIABILITITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	271		$	597
Accrued expenses		308			304
Term debt		91			116
Unsecured promissory note payable		742			742
Total current liabilities		1,412			1,759
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 authorized; no shares issued or outstanding as of March 31, 2020 and December 31 2019		-			-
Common stock, $0.001 par value; 100,000,000 authorized; 6,631,308 shares issued and outstanding as of both March 31, 2020 and December 31, 2019		7			7
Additional paid-in capital		42,671			42,331
Accumulated deficit		(43,056	)		(41,258	)
Accumulated comprehensive income		1,102			305
Total stockholders' equity		724			1,385
Total liabilities and stockholders' equity	$	2,136		$	3,144

See accompanying notes to condensed consolidated financial statements.

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Sun BioPharma, Inc.

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

 (Unaudited)

	Three Months Ended March 31,
	2020			2019
Operating expenses:
General and administrative	$	468		$	303
Research and development		598			350
Operating loss		(1,066	)		(653	)
Other (expense) income:
Interest expense		(4	)		(1,033	)
Other(expense) income		(820	)		34
Total other expense		(824	)		(999	)
Loss before income tax benefit		(1,890	)		(1,652	)
Income tax benefit		92			71
Net loss		(1,798	)		(1,581	)
Foreign currency translation adjustment		797			(32	)
Comprehensive loss	$	(1,001	)	$	(1,613	)
Basic and diluted net loss per share	$	(0.27	)	$	(0.31	)
Weighted average shares outstanding - basic and diluted		6,631,308			5,072,397

See accompanying notes to condensed consolidated financial statements.

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Sun BioPharma, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited) 

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

	For the Three Months Ended March 31, 2020
	Common Stock				Additional Paid-In		Accumulated			Accumulated Other Comprehensive		Total Stockholders'
	Shares		Amount		Capital		Deficit			Gain		Equity
Balances as of January 1, 2020		6,631	$	7	$	42,331	$	(41,258	)	$	305	$	1,385
Warrants issued for future services		-		-		228		-			-		228
Stock-based compensation		-		-		112		-			-		112
Net loss		-		-		-		(1,798	)		-		(1,798	)
Foreign currency translation adjustment		-		-		-		-			797		797
Balances at March 31, 2020		6,631	$	7	$	42,671	$	(43,056	)	$	1,102	$	724

See accompanying notes to condensed consolidated financial statements.

5

Sun BioPharma, Inc.

Condensed Consolidated Statements of Cash Flows
(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(1,798	)	$	(1,581	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		112			10
Amortization of debt discount		-			974
Amortization of debt issuance costs		-			6
Non-cash interest expense		-			48
Changes in operating assets and liabilities:
Income tax receivable		(97	)		(74	)
Prepaid expenses and other current assets		97			38
Accounts payable		546			(193	)
Accrued liabilities		20			(11	)
Net cash used in operating activities		(1,120	)		(783	)
Cash flows from financing activities:
Proceeds from the sale of convertible promissory notes, net of debt issuance costs of $7		-			810
Repayment of demand note		-			(25	)
Repayments of term debt		(26	)		(27	)
Net cash provided by financing activities		(26	)		758
Effect of exchange rate changes on cash		(7	)		(1	)
Net change in cash		(1,153	)		(26	)
Cash at beginning of period		2,449			1,405
Cash at end of period	$	1,296		$	1,379
Supplemental disclosure of cash flow information:
Cash paid during period for interest	$	2		$	5
Supplemental disclosure of non-cash transactions:
Warrants issued for future services	$	228
Beneficial conversion feature on convertible notes	$	-		$	353
Warrants issued with convertible notes	$	-		$	419
Common stock converted into convertible notes payable	$	-		$	25

See accompanying notes to condensed consolidated financial statements.

6

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 the treatment of patients with pancreatic cancer. We have exclusively licensed the worldwide rights to this compound, which has been designated as SBP-101, from the University of Florida Research Foundation, Inc. (“UFRF”).

2.     Risks and Uncertainties

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

We have incurred losses of $42.6 million since our inception in 2011. For the three months ended March 31, 2020, we incurred a net loss of $1.8 million, which includes a foreign currency loss of $0.8 million. We also incurred negative cash flows from operating activities of $1.2 million for this period. As we continue to pursue development activities and seek commercialization of our initial product candidate, SBP-101, we expect to incur substantial losses, which are likely to generate negative net cash flows from operating activities. As of March 31, 2020, we had cash of $1.3 million, working capital of $0.7 million, (current assets less current liabilities) and stockholders’ equity of $0.7 million. The Company’s principal sources of cash have historically included the issuance of convertible debt and equity securities.

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts of liabilities that might result from the outcome of these uncertainties. Our current independent registered public accounting firm included a paragraph emphasizing this going concern uncertainty in their audit report regarding our 2019 financial statements dated March 24, 2020. Our ability to continue as a going concern, realize the carrying value of our assets and discharge our liabilities in the ordinary course of business is dependent upon a number of factors, including our ability to obtain additional financing, the success of our development efforts, our ability to obtain marketing approval for our SBP-101 product candidate in the United States, Australia, the European Union or other markets and ultimately our ability to market and sell our SBP-101 product candidate. These factors, among others, raise substantial doubt about our ability to continue operations as a going concern. See Note 4 titled “Liquidity and Business Plan.”

On March 11, 2020, the World Health Organization declared the spread of a novel strain of coronavirus (“COVID-19”) a global pandemic and continued widespread infection in the United States is a possibility. Actions have been taken by federal, state and local governmental authorities to combat the spread of COVID-19, including through issuances of “stay-at-home” directives and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.  These measures, while intended to protect human life, have led to significantly reduced economic activity. The rapid development and uncertainty of the situation precludes any prediction as to the ultimate impact COVID-19 will have on the Company's business, financial condition, results of operation and cash flows, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-19 outbreak in the United States and Australia.  On April 3, 2020, we initiated a temporary pause in the enrollment of new patients in our ongoing clinical trial.  We anticipate resumption of new patient enrollment in Q2 2020 once conditions allow.  We continue to treat patients already enrolled. 

3.     Basis of Presentation

We have prepared the accompanying interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim condensed consolidated financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly our consolidated financial position, consolidated results of operations and consolidated cash flows for the periods and as of the dates presented. Our fiscal year ends on December 31. The condensed consolidated balance sheet as of December 31, 2019 was derived from audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in our most recent filed Annual Report on Form 10-K and our subsequent filings with the SEC. The nature of our business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.

7

4.     Liquidity and Business Plan

We 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.

If we are unable to obtain additional financing, we believe that 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, or other applications that we would otherwise seek to pursue, or discontinuing operations entirely.

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

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

5.     Summary of Significant Accounting Policies

Principles of consolidation

The accompanying condensed consolidated financial statements include the assets, liabilities, and expenses of the Company. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of estimates

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of expenses during the reporting period. Actual results could differ from those estimates.

Research and development costs

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

8

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

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

We expense costs associated with obtaining licenses for patented technologies when it is determined there is no alternative future use of the intellectual property subject to the license.

Stock-based compensation

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

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

Foreign currency translation adjustments

The functional currency of Sun BioPharma Australia Pty Ltd is the Australian Dollar. Accordingly, assets and liabilities, and equity transactions of Sun BioPharma Australia Pty Ltd are translated into U.S. dollars at period-end exchange rates. Revenues and expenses are translated at the average exchange rate in effect for the period. The resulting translation gains and losses are recorded as a component of accumulated comprehensive loss presented within the stockholders’ equity (deficit). During the three-month periods ended March 31, 2020 and 2019, any reclassification adjustments from accumulated other comprehensive loss to operations were inconsequential.

Comprehensive loss

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

Net loss per share

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

9

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

	March 31,
	2020		2019
Employee and non-employee stock options		1,745,811		1,032,211
Estimated common shares issuable upon conversion of notes payable and accrued interest		-		636,234
Common stock issuable under common stock purchase warrants		3,497,099		2,509,477
		5,242,910		4,177,922

6.     Indebtedness

Term debt

The terms of our unsecured loan (the “Term Debt”) payable to the Institute for Commercialization of Public Research, Inc. (the “Institute”) which was amended in December of 2019 to extend the maturity date from December 31, 2019 to December 31, 2020, remain unchanged as of March 31, 2020.  The fair market value of the warrants issued in 2019 in exchange for modification of the terms is being amortized to interest expense over the remaining term of the loan. The amendment requires the continuation of monthly payments of principal and interest totaling $10,000. The unpaid principal balance at March 31, 2020 was $90,000.

Deferred financing costs

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

	March 31, 2020			December 31, 2019
	Term Debt			Term Debt
Loan principal Amount	$	97		$	126
Deferred Financing Costs		51			51
Accumulated Amortization		(44	)		(41	)
Unamortized balance		7			10
Discount on Debt		-			-
Accumulated Amortization		-			-
Unamortized balance		-			-
Loan carrying amounts, net	$	90		$	116

7.     Stockholders’ Deficit

Warrants to purchase common stock issued for future services

On February 21, 2020, the Company issued to a service provider a five-year warrant to purchase 75,000 shares of common stock at an exercise price of $6.49 per share. The fair market value of the warrants issued of approximately $228,000 was capitalized and will be charged against future proceeds.

10

Shares of common stock reserved for future issuance were as follows as of March 31, 2020:

Stock options outstanding	1,745,811
Shares available for grant under equity incentive plan	18,549
Common shares issuable under outstanding common stock purchase warrants	3,497,099
	5,261,459

8.     Stock-based Compensation

2016 Omnibus Incentive Plan

The Sun BioPharma, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) was adopted by our Board of Directors in March 2016 and approved by our stockholders in May 2016. The 2016 Plan permits the granting of incentive and non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other stock awards to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the 2016 Plan at no less than the fair market value of the underlying common stock as of the date of grant. Options granted under the 2016 Plan have a maximum term of ten years. Under the 2016 Plan, a total of 1,500,000 shares of common stock were initially reserved for issuance. As of March 31, 2020, options to purchase 1,481,451shares of common stock were outstanding under the 2016 Plan and 18,549 shares remained available for future awards.

2011 Stock Option Plan

Our Board of Directors ceased making awards under the Sun BioPharma, Inc. 2011 Stock Option Plan (the “2011 Plan”) upon the receipt of stockholder approval for the 2016 Plan. Awards outstanding under the 2011 Plan remain outstanding in accordance with and pursuant to the terms thereof. Options granted under the 2011 Plan have a maximum term of ten years and generally vest over zero to two years for employees. As of March 31, 2020, options to purchase 264,360 shares of common stock remained outstanding under the 2011 Plan.

Stock-based Compensation Expense

General and administrative (“G&A”) and research and development (“R&D”) expenses include non-cash stock-based compensation expense as a result of our issuance of stock options. The terms and vesting schedules for stock-based awards vary by type of grant and the employment status of the grantee. The awards granted through March 31, 2020 vest based upon time-based and performance conditions. There was approximately $229,000 unamortized stock-based compensation expense related to options granted to employees as of March 31, 2020.

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

	Three Months Ended March 31,
	2020		2019
General and Administrative		99		10
Research and Development		13		-
		112		10

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Details of options granted, exercised, cancelled or forfeited during the three months ended March 31, 2020 follows:

	Shares Available for Grant			Shares Underlying Options
Balance at January 1, 2020		19,549			1,744,811
Granted		(1,000	)		1,000
Exercised		-			-
Cancelled		-			-
Forfeitures		-			-
Balance at March 31, 2020		18,549			1,745,811

Information about stock options outstanding, vested and expected to vest as of March 31, 2020, is as follows:

			Outstanding, Vested and Expected to Vest						Options Vested and Excercisable
Per Share Exercise Price			Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Options Excercisable		Weighted Average Remaining Contractual Life (Years)
$0.875	-	$1.10		26,360		2.75	$	1.029		26,360		2.75
$2.275	-	$2.50		38,000		3.87	$	2.464		38,000		3.87
$2.95	-	$3.70		774,100		8.07	$	3.040		411,525		7.11
$4.95	-	$8.10		539,300		7.73	$	6.739		506,500		7.67
$10.00	-	$10.10		54,000		7.30	$	10.007		54,000		7.30
$15.10				314,051		6.16	$	15.100		310,551		6.21
Totals				1,745,811		7.43	$	6.525		1,346,936		6.94

9. Subsequent Event

On May 1, 2020, the Company the Company executed an unsecured promissory note with a lender as a part of the Payroll Protection Program (“PPP”) in the Coronavirus Aid, Relief, and Economic Security Act. Funds totaling approximately $102,000 will be used to support Company payroll. The note may be forgiven in part and bears an interest rate of 1% per annum after a six-month deferment period.

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

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

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially and adversely from the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: (i) our ability to obtain additional funding to complete Phase 1 clinical trial; (ii) progress and success of our Phase 1 clinical trial; (iii) the impact of the current COVID-19 pandemic on our ability to complete enrollment in our current clinical trial; (iv) our ability to demonstrate the safety and effectiveness of our SBP-101 product candidate (v) our ability to obtain regulatory approvals for our SBP-101 product candidate in the United States, the European Union or other international markets; (vi) the market acceptance and level of future sales of our SBP-101 product candidate; (vii) the cost and delays in product development that may result from changes in regulatory oversight applicable to our SBP-101 product candidate; (viii) the rate of progress in establishing reimbursement arrangements with third-party payors; (ix) the effect of competing technological and market developments; (x) the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims; and (xi) such other factors as discussed in Part I, Item 1A under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, any additional risks presented in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K.

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

Overview

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

In August 2015, the Food and Drug Administration of the United States (“FDA”) granted an Investigational New Drug (“IND”) approval for our SBP-101 product candidate. From January 2016 through September 2017, we enrolled twenty-nine patients into six cohorts, or groups, in the dose-escalation phase of a Phase 1 safety trial and published results in the Spring of 2018. The Company’s second trial, a Phase 1a/1b combination of SBP-101 with gemcitabine and nab-paclitaxel in patients previously untreated for metastatic pancreatic ductal adenocarcinoma (“PDA”), began dosing patients in June of 2018. The Phase 1a portion of this study has a total of 4 dosing levels, cohorts, and determined a recommended dose (and schedule) of SBP-101 to be given in combination with standard treatment. The Company completed enrollment of the fourth cohort in the quarter ended March 31, 2020, this cohort is evaluating an alternative dosing schedule for the administration of SBP 101. Enrollment in the expansion (1b) phase of the trial began immediately after enrollment in the fourth cohort, Due to the COVID 19 pandemic, the Company made a decision in early April to pause enrollment in the expansion phase of the study until conditions allow for us to resume enrollment. All subjects enrolled at the time of the pause continued to be treated. Promising interim results were presented in a poster presentation at ASCO-GI; the poster contained data as of January 4, 2020 in the response-evaluable subjects in cohorts 2 and 3 (N=13). The conclusions at that time reflected (i) an objective response rate of 62%; 4 PRs were observed after 2 cycles of therapy and 4 PRs were observed after 4 cycles of therapy and (ii) a disease control rate (DCR) of 85% by Response Evaluation Criteria in Solid Tumors (“RECIST”) criteria (at least SD for ≥ 16 weeks); 4 subjects had not reached week 16 scans.

We are currently evaluating the appropriate timing and form of the next clinical trial to be initiated at the completion of the Phase 1b expansion of the current study. It is expected to be a randomized phase 2 trial for patients with metastatic PDA. Additional funds will be required to complete the current study. Additional clinical trials will likely be required for FDA or other similar approvals if the results of the current clinical trial of our SBP-101 product candidate remain positive. The cost and timing of additional clinical trials are highly dependent on the nature and size of the trials. However, it is estimated that the next steps in the approval process could cost between $20 and $40 million.

Financial Overview 

We have incurred losses of $42.6 million since inception. For the three months ended March 31, 2020, we incurred a net loss of $1.8 million. We also incurred negative cash flows from operating activities of $1.1 million for this period. We expect to continue to incur substantial losses, which will generate negative net cash flows from operating activities, as we continue to pursue research and development activities and commercialize our SBP-101 product candidate.

Our cash was approximately $1.3 million and $2.4 million as of March 31, 2020 and December 31, 2019, respectively.

A decrease of $1.1 million in cash for the three months ended March 31, 2020 was primarily due to negative cash flow from operations.

Other than the temporary pause in enrollment in our current clinical trial, the Company has not experienced any significant disruptions to our operations as the result of the COVID-19 pandemic. We anticipate resuming enrollment as soon as conditions allow. The Company was not required to change management practices as it was decentralized prior to the current pandemic.

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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, and laboratory studies to explore potential indications in other cancer types. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually.

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

Results of Operations

Comparison of the results of operations (in thousands):

	Three Months Ended March 31,
	2020			2019			Percent Change
Operating Expenses
General and administrative	$	468		$	303			54.5	%
Research and development		598			350			70.9	%
Total operating expenses		1,066			653			63.2	%
Other expenses, net		(824	)		(999	)		-17.5	%
Income tax benefit		92			71			29.6	%
Net Loss	$	(1,798	)	$	(1,581	)		13.7	%

Research and development (“R&D”) and general and administrative (“G&A”) expenses include non-cash share-based compensation expense because of our issuance of stock options. We expense the fair value of equity awards over their vesting periods. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. The awards granted through March 31, 2020 vest upon performance and time-based conditions. We expect to record additional non-cash share-based compensation expense in the future, which may be significant.

The following table summarizes the stock-based compensation expense in our statements of comprehensive loss for the three months ended March 31, 2020 and March 31, 2019 (in thousands):

	Three Months Ended March 31,
	2020		2019
General and administative	$	99	$	10
Research and Development		13		-
Total Stock based compensation	$	112	$	10

General and administrative expense

Our G&A expenses increased 54.5% to $468,000 in the first quarter of 2020 up from $303,000 in the first quarter of 2019. The increase is due in part to increased salary costs as employees had taken a voluntary reduction of salaries for a part of the first quarter of 2019; increased stock compensation expense, legal expenses made up the remaining increase.

Research and development expense

Our R&D expenses increased 70.9% to $598,000 in the first quarter of 2020 up from $350,000 in the first quarter of 2019 the increase is due primarily to increased clinical trial costs in the first quarter of 2020. 

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Other expense, net

Other expense, net, was $824,000 and $999,000 for the three months ended March 31, 2020 and 2019, respectively. The net expense in the quarter ended March 31, 2020 is composed primarily of a foreign currency exchange loss on the intercompany receivable balance, The net expense in the quarter ended March 31, 2019 is primarily the amortization of debt discount on convertible notes sold in December 2018 and January 2019, all of which converted into equity securities in 2019.

Income tax benefit

Income tax benefit increased to $92,000 for the three months ended March 31, 2020 up from $71,000 during the three months ended March 31, 2019. Our income tax benefit is derived primarily from refundable tax credits associated with our R&D activities conducted in Australia and was increased due to increased eligible R&D activities in the first three months of 2020 versus the first three months of 2019.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of March 31, 2020 and December 31, 2019 and our cash flow data for the three months ended March 31, 2020 and 2019 and is intended to supplement the more detailed discussion that follows (in thousands):

Liquidity and Capital Resources
	March 31, 2020		December 31, 2019
Cash	$	1,296	$	2,449
Working capital	$	679	$	2,076

Cash Flow Data	Three Months Ended March 31,
	2020			2019
Cash Provided by (Used in):
Operating Activities	$	(1,120	)	$	(783	)
Investment Activities		-			-
Financing Activities		(26	)		758
Effect of exchange rate changes on cash		(7	)		(1	)
Net (decrease) increase in cash	$	(1,153	)	$	(26	)

Working Capital

Our total cash was $1.3 million and $2.4 million as of March 31, 2020 and December 31, 2019, respectively. We had $1.4 million in current liabilities and working capital of $0.7 million as of March 31, 2020, compared to $1.8 million in current liabilities and a working capital of $1.3 as of December 31, 2019.

Cash Flows

Net Cash Used in Operating Activities

Net cash used in operating activities was $1.1 million in the three months ended March 31, 2020 compared to $0.8 million in the three months ended March 31, 2019. The net cash used in each of these periods primarily reflects the net loss for these periods and is partially offset by the effects of changes in operating assets and liabilities.

15

Net Cash Provided by Financing Activities

Net cash used by financing activities was $26,000 for the three months ended March 31, 2020 and net cash provided by financing activities was $0.8 million for the three months ended March 31, 2019. The cash provided for the three months ended March 31, 2019 represents the gross proceeds from the sale of the Notes sold during the quarter.

Capital Requirements

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

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

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

● the impact of the current COVID-19 pandemic on our ability to monitor and complete enrollment in our current clinical trial;

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

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

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

● the market acceptance and 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; and

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

To date, we have used primarily convertible debt and equity financings to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future. As of March 31, 2020, we did not have any existing credit facilities under which we could borrow funds.

We expect that we will increase our projected expenditures once we have additional capital on hand in order to continue our efforts to grow our business and complete our Phase 1a clinical trial for our SBP-101 product candidate. Accordingly, we expect to make additional expenditures in performing our Phase 1a /1b clinical trial and related support activities. With sufficient capital, we also expect to invest in additional R&D efforts on mechanism of action, biomarkers and secondary indications in other cancer types. 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 trial, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. This risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually.

If we are unable to obtain additional financing when needed, we will likely need to reduce our operations by taking actions 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 patients with pancreatic cancer, or other applications that we would otherwise seek to pursue, or discontinuing operations entirely.

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

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

Indebtedness

As of March 31, 2020, we had $90,0000 outstanding in an unsecured loan that accrues interest of 4.125% per year and is scheduled to mature on December 31, 2020. In accordance with the terms of this loan we commenced with monthly payments of $10,000 on May 1, 2018.

Critical Accounting Policies and Estimates

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

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As of the end of the period covered by this quarterly report, the Company’s management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2020, our disclosure controls and procedures were effective in ensuring that information relating to the Company required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes to Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

In our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 the following risk was identified:

Our business is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness. The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe, and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain and the manufacture or shipment of both drug substance and finished drug product for our product candidates for preclinical testing and clinical trials and adversely impact our business, financial condition or results of operations. We often attend and present clinical updates at various medical and investor conferences throughout the year. The COVID-19 outbreak has caused, and is likely to continue to cause, cancellations or reduced attendance of these conferences and we may need to seek alternate methods to present clinical updates and to engage with the medical and investment communities. The spread of COVID-19 may also slow potential enrollment of clinical trials and reduce the number of eligible patients for our clinical trials. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition and our potential to conduct financings on terms acceptable to us, if at all. The extent to which the COVID-19 outbreak impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact.

Subsequent to the filing of our Form 10-K for the year ended December 31, 2019, on April 3, 2020, as a result of the COVID-19 pandemic, the Company announced a temporary pause in enrollment in our current clinical study.  This Company will evaluate resuming enrollment in May of 2019, but at this time continued uncertainty remains regarding possible risk to our clinical monitoring access, supply chain and limitation on the resources of our investigational sites.

Other than noted above, there have been no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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

 On February 21, 2020, the company issued to a service provider a five-year warrant to purchase 75,000 shares at an exercise price of $6.49 per share. We relied on exemptions from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), without the use of any general solicitations or advertising to market or otherwise offer the securities for sale.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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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, 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, 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
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 March 31, 2020, formatted in XBRL: (i) the Balance Sheets, (ii) the Statements of Operations and Comprehensive Loss, (iii) the Statements of Stockholders’ Equity (Deficit), (iv) the Statements of Cash Flows, and (v) the Notes to Financial Statements.	Filed Electronically

19

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: May 12, 2020	/s/ Michael T. Cullen, MD
	Michael T. Cullen Chief Executive Officer
	(Duly Authorized Officer)
Date: May 12, 2020	/s/ Susan Horvath
	Susan Horvath Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

20

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, Michael T. Cullen, 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:  May 12, 2020			/s/ Michael T. Cullen, MD
			Michael T. Cullen
			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, Susan Horvath, 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: May 12, 2020			/s/ Susan Horvath
			Susan Horvath
			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, Michael T. Cullen, 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 March 31, 2020 (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: May 12, 2020

/s/ Michael T. Cullen, MD

Michael T. Cullen

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, Susan Horvath, 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 March 31, 2020 (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: May 12, 2020

/s/ Susan Horvath

Susan Horvath

Chief Financial Officer

(Principal Financial Officer and Principal

Accounting Officer)

XML

Note 5 - Summary of Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

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

	March 31,
	2020		2019
Employee and non-employee stock options		1,745,811		1,032,211
Estimated common shares issuable upon conversion of notes payable and accrued interest		-		636,234
Common stock issuable under common stock purchase warrants		3,497,099		2,509,477
		5,242,910		4,177,922

XML

Note 7 - Stockholders' Deficit

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

7

.     

S

tock

holders’

Deficit

Warrants to purchase common stock issued for future services

On

February 21, 2020,

the Company issued to a service provider a

five

-year warrant to purchase

75,000

shares of common stock at an exercise price of

$6.49

per share. The fair market value of the warrants issued of approximately

$228,000

was capitalized and will be charged against future proceeds.

Shares

of common stock reserved for future issuance were as follows as of

March 31,

20

20

:

Stock options outstanding	1,745,811
Shares available for grant under equity incentive plan	18,549
Common shares issuable under outstanding common stock purchase warrants	3,497,099
	5,261,459

XML

Note 8 - Stock-based Compensation - Options Outstanding (Details)	3 Months Ended
	Mar. 31, 2020 $ / shares shares
Options outstanding (in shares) | shares	1,745,811
Options outstanding, weighted average remaining contractual life (Year)	7 years 156 days
Options outstanding, weighted average exercise price (in dollars per share)	$ 6.525
Options excercisable (in shares) | shares	1,346,936
Options excercisable, weighted average remaining contractual life (Year)	6 years 343 days
Exercise Price Range 1 [Member]
Per share exercise price, lower limit (in dollars per share)	$ 0.875
Per share exercise price, upper limit (in dollars per share)	$ 1.10
Options outstanding (in shares) | shares	26,360
Options outstanding, weighted average remaining contractual life (Year)	2 years 273 days
Options outstanding, weighted average exercise price (in dollars per share)	$ 1.029
Options excercisable (in shares) | shares	26,360
Options excercisable, weighted average remaining contractual life (Year)	2 years 273 days
Exercise Price Range 2 [Member]
Per share exercise price, lower limit (in dollars per share)	$ 2.275
Per share exercise price, upper limit (in dollars per share)	$ 2.50
Options outstanding (in shares) | shares	38,000
Options outstanding, weighted average remaining contractual life (Year)	3 years 317 days
Options outstanding, weighted average exercise price (in dollars per share)	$ 2.464
Options excercisable (in shares) | shares	38,000
Options excercisable, weighted average remaining contractual life (Year)	3 years 317 days
Exercise Price Range 3 [Member]
Per share exercise price, lower limit (in dollars per share)	$ 2.95
Per share exercise price, upper limit (in dollars per share)	$ 3.70
Options outstanding (in shares) | shares	774,100
Options outstanding, weighted average remaining contractual life (Year)	8 years 25 days
Options outstanding, weighted average exercise price (in dollars per share)	$ 3.04
Options excercisable (in shares) | shares	411,525
Options excercisable, weighted average remaining contractual life (Year)	7 years 40 days
Exercise Price Range 4 [Member]
Per share exercise price, lower limit (in dollars per share)	$ 4.95
Per share exercise price, upper limit (in dollars per share)	$ 8.10
Options outstanding (in shares) | shares	539,300
Options outstanding, weighted average remaining contractual life (Year)	7 years 266 days
Options outstanding, weighted average exercise price (in dollars per share)	$ 6.739
Options excercisable (in shares) | shares	506,500
Options excercisable, weighted average remaining contractual life (Year)	7 years 244 days
Exercise Price Range 5 [Member]
Per share exercise price, lower limit (in dollars per share)	$ 10
Per share exercise price, upper limit (in dollars per share)	$ 10.10
Options outstanding (in shares) | shares	54,000
Options outstanding, weighted average remaining contractual life (Year)	7 years 109 days
Options outstanding, weighted average exercise price (in dollars per share)	$ 10.007
Options excercisable (in shares) | shares	54,000
Options excercisable, weighted average remaining contractual life (Year)	7 years 109 days
Exercise Price Range 6 [Member]
Per share exercise price, lower limit (in dollars per share)	$ 15.10
Options outstanding (in shares) | shares	314,051
Options outstanding, weighted average remaining contractual life (Year)	6 years 58 days
Options outstanding, weighted average exercise price (in dollars per share)	$ 15.10
Options excercisable (in shares) | shares	310,551
Options excercisable, weighted average remaining contractual life (Year)	6 years 76 days

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Current assets:
Cash	$ 1,296	$ 2,449
Prepaid expenses and other current assets	389	283
Income tax receivable	406	361
Total current assets	2,091	3,093
Other noncurrent assets	45	51
Total assets	2,136	3,144
Current liabilities:
Accounts payable	271	597
Accrued expenses	308	304
Term debt	91	116
Unsecured promissory note payable	742	742
Total current liabilities	1,412	1,759
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 authorized; no shares issued or outstanding as of March 31, 2020 and December 31 2019	0	0
Common stock, $0.001 par value; 100,000,000 authorized; 6,631,308 shares issued and outstanding as of both March 31, 2020 and December 31, 2019	7	7
Additional paid-in capital	42,671	42,331
Accumulated deficit	(43,056)	(41,258)
Accumulated comprehensive income	1,102	305
Total stockholders' equity	724	1,385
Total liabilities and stockholders' equity	$ 2,136	$ 3,144

XML

Note 7 - Stockholders' Deficit (Details Textual) - Warrants Issued for Future Services [Member]	Feb. 21, 2020 USD ($) $ / shares shares
Class of Warrant or Right, Expiration Term (Year)	5 years
Class of Warrant or Right, Number of Securities Called by Warrants or Rights (in shares) | shares	75,000
Class of Warrant or Right, Exercise Price of Warrants or Rights (in dollars per share) | $ / shares	$ 6.49
Warrants and Rights Outstanding | $	$ 228,000

XML

Note 2 - Risks and Uncertainties (Details Textual) - USD ($) $ in Thousands	3 Months Ended		111 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Mar. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Net Income (Loss) Attributable to Parent, Total	$ (1,798)	$ (1,581)	$ (42,600)
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax, Total	797	(32)
Net Cash Provided by (Used in) Operating Activities, Total	(1,120)	(783)
Cash and Cash Equivalents, at Carrying Value, Ending Balance	1,296	1,379	1,296	$ 2,449	$ 1,405
Working Capital	700		700
Stockholders' Equity Attributable to Parent, Ending Balance	$ 724	$ (588)	$ 724	$ 1,385	$ 268

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash flows from operating activities:
Net loss	$ (1,798)	$ (1,581)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation	112	10
Amortization of debt discount		974
Amortization of debt issuance costs		6
Non-cash interest expense		48
Changes in operating assets and liabilities:
Income tax receivable	(97)	(74)
Prepaid expenses and other current assets	97	38
Accounts payable	546	(193)
Accrued liabilities	20	(11)
Net cash used in operating activities	(1,120)	(783)
Cash flows from financing activities:
Proceeds from the sale of convertible promissory notes, net of debt issuance costs of $7		810
Repayment of demand note		(25)
Repayments of term debt	(26)	(27)
Net cash provided by financing activities	(26)	758
Effect of exchange rate changes on cash	(7)	(1)
Net change in cash	(1,153)	(26)
Cash at beginning of period	2,449	1,405
Cash at end of period	1,296	1,379
Supplemental disclosure of cash flow information:
Cash paid during period for interest	2	5
Supplemental disclosure of non-cash transactions:
Warrants issued for future services	228
Beneficial conversion feature on convertible notes		353
Warrants issued with convertible notes		419
Common stock converted into convertible notes payable		$ 25

XML

Note 8 - Stock-based Compensation - Summary of Option Activity (Details)	3 Months Ended
	Mar. 31, 2020 shares
Balance, shares available for grant (in shares)	19,549
Balance, shares underlying options (in shares)	1,744,811
Granted, shares available for grant (in shares)	(1,000)
Granted, shares underlying options (in shares)	1,000
Balance, shares available for grant (in shares)	18,549
Balance, shares underlying options (in shares)	1,745,811

XML

Note 8 - Stock-based Compensation - Stock-based Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Share-based compensation expense	$ 112	$ 10
General and Administrative Expense [Member]
Share-based compensation expense	99	10
Research and Development Expense [Member]
Share-based compensation expense	$ 13

XML

Note 6 - Indebtedness - Schedule of Debt (Details) - Term Debt [Member] - USD ($)	Mar. 31, 2020	Dec. 31, 2019
Loan principal Amount	$ 97,000	$ 126,000
Deferred Financing Costs	51,000	51,000
Accumulated Amortization	(44,000)	(41,000)
Unamortized balance	7,000	10,000
Loan carrying amounts, net	$ 90,000	$ 116,000

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Mar. 31, 2020	Dec. 31, 2019
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)	6,631,308	6,631,308
Common stock, shares outstanding (in shares)	6,631,308	6,631,308

XML

Note 1 - Business

3 Months Ended

Mar. 31, 2020

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 the treatment of patients with pancreatic cancer. We have exclusively licensed the worldwide rights to this compound, which has been designated as SBP-

101,

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

XML

Note 8 - Stock-based Compensation (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

Share-based Payment Arrangement, Expensed and Capitalized, Amount [Table Text Block]

	Three Months Ended March 31,
	2020		2019
General and Administrative		99		10
Research and Development		13		-
		112		10

Share-based Payment Arrangement, Option, Activity [Table Text Block]

	Shares Available for Grant			Shares Underlying Options
Balance at January 1, 2020		19,549			1,744,811
Granted		(1,000	)		1,000
Exercised		-			-
Cancelled		-			-
Forfeitures		-			-
Balance at March 31, 2020		18,549			1,745,811

Share-based Payment Arrangement, Option, Exercise Price Range [Table Text Block]

			Outstanding, Vested and Expected to Vest						Options Vested and Excercisable
Per Share Exercise Price			Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Options Excercisable		Weighted Average Remaining Contractual Life (Years)
$0.875	-	$1.10		26,360		2.75	$	1.029		26,360		2.75
$2.275	-	$2.50		38,000		3.87	$	2.464		38,000		3.87
$2.95	-	$3.70		774,100		8.07	$	3.040		411,525		7.11
$4.95	-	$8.10		539,300		7.73	$	6.739		506,500		7.67
$10.00	-	$10.10		54,000		7.30	$	10.007		54,000		7.30
$15.10				314,051		6.16	$	15.100		310,551		6.21
Totals				1,745,811		7.43	$	6.525		1,346,936		6.94

XML

Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of consolidation

The accompanying condensed consolidated financial statements include the assets, liabilities, and expenses of the Company. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates, 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.

Research and Development Expense, Policy [Policy Text Block]

Research and development costs

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

second

Phase

1

human clinical trial, for

third

-party service providers performing various testing and accumulating data related to our preclinical studies; sponsored research agreements; developing and scaling the manufacturing process necessary to produce sufficient amounts of the SBP-

101

compound for use in our pre-clinical studies and human clinical trials; consulting resources with specialized expertise related to execution of our development plan for our SBP-

101

product candidate; personnel costs, including salaries, benefits and share-based compensation; and costs to license and maintain our licensed intellectual property.

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

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

We expense costs associated with obtaining licenses for patented technologies when it is determined there is

no

alternative future use of the intellectual property subject to the license.

Share-based Payment Arrangement [Policy Text Block]

Stock

-based compensation

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

The fair value of stock-based awards is estimated at the date of grant using the Black-Scholes option pricing model. The determination of the fair value of stock-based awards is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. Risk free interest rates are based upon U.S. Treasury rates appropriate for the expected term of each award. Expected volatility rates are based primarily on the volatility rates of a set of guideline companies, which consist of public and recently public biotechnology companies. The assumed dividend yield is zero, as we do

not

expect to declare any dividends in the foreseeable future. The expected term of options granted is determined using the “simplified” method. Under this approach, the expected term is presumed to be the mid-point between the average vesting date and the end of the contractual term.

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. 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’ equity (deficit). During the

three

-month periods ended

March 31, 2020

and

2019,

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

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 of common shares outstanding during the period plus dilutive potential common shares calculated using the treasury stock method. Such potentially dilutive shares are excluded when the effect would be anti-dilutive or reduce a net loss per share. The Company’s potential dilutive shares, which include convertible debt, outstanding common stock options, and warrants, have

not

been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.

The following table sets forth the potential shares of common stock that were

not

included in the calculation of diluted net loss per share as their effects would have been anti-dilutive as of:

	March 31,
	2020		2019
Employee and non-employee stock options		1,745,811		1,032,211
Estimated common shares issuable upon conversion of notes payable and accrued interest		-		636,234
Common stock issuable under common stock purchase warrants		3,497,099		2,509,477
		5,242,910		4,177,922

5,242,910 4,177,922

XML

Note 6 - Indebtedness

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Debt Disclosure [Text Block]

6.

     

Indebtedness

Term debt

The terms of our unsecured loan (the “Term Debt”) payable to the Institute for Commercialization of Public Research, Inc. (the “Institute”) which was amended in

December

of

2019

to extend the maturity date from

December 31, 2019

to

December 31, 2020,

remain unchanged as of

March 31, 2020. 

The fair market value of the warrants issued in

2019

in exchange for modification of the terms is being amortized to interest expense over the remaining term of the loan. The amendment requires the continuation of monthly payments of principal and interest totaling

$10,000.

The unpaid principal balance at

March 31, 2020

was

$90,000.

Deferred financing costs

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

	March 31, 2020			December 31, 2019
	Term Debt			Term Debt
Loan principal Amount	$	97		$	126
Deferred Financing Costs		51			51
Accumulated Amortization		(44	)		(41	)
Unamortized balance		7			10
Discount on Debt		-			-
Accumulated Amortization		-			-
Unamortized balance		-			-
Loan carrying amounts, net	$	90		$	116

XML

Note 9 - Subsequent Events (Details Textual)	May 01, 2020 USD ($)
Subsequent Event [Member]
Proceeds from Paycheck Protection Program Under CARES Act	$ 102,000

XML

Note 3 - Basis of Presentation

3 Months Ended

Mar. 31, 2020

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 accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 

10

-Q and Regulation S-

X

of the Securities and Exchange Commission (“SEC”). Accordingly, they do

not

include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim condensed consolidated financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly our consolidated financial position, consolidated results of operations and consolidated cash flows for the periods and as of the dates presented. Our fiscal year ends on

December 31.

The condensed consolidated balance sheet as of

December 31, 2019

was derived from audited consolidated financial statements but does

not

include all disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in our most recent filed Annual Report on Form

10

-K and our subsequent filings with the SEC. The nature of our business is such that the results of any interim period

may

not

be indicative of the results to be expected for the entire year.

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2020	May 08, 2020
Document Information [Line Items]
Entity Registrant Name	Sun BioPharma, Inc.
Entity Central Index Key	0001029125
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Interactive Data Current	Yes
Entity Common Stock, Shares Outstanding (in shares)		6,631,308
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Mar. 31, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Note 7 - Stockholders' Deficit - Common Stock Reserved for Future Issuance (Details) - shares	Mar. 31, 2020	Dec. 31, 2019
Stock options outstanding (in shares)	1,745,811
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant (in shares)	18,549	19,549
Common shares issuable under outstanding common stock purchase warrants (in shares)	3,497,099
Common Stock, Capital Shares Reserved for Future Issuance	5,261,459

XML

Note 5 - Summary of Significant Accounting Policies - Anti-dilutive Securities (Details) - shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Anti-dilutive securities (in shares)	5,242,910	4,177,922
Share-based Payment Arrangement [Member]
Anti-dilutive securities (in shares)	1,745,811	1,032,211
Convertible Debt Securities [Member]
Anti-dilutive securities (in shares)		636,234
Warrant [Member]
Anti-dilutive securities (in shares)	3,497,099	2,509,477

XML

Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) - USD ($) shares in Thousands, $ 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, 2018	5,077
Balances at Dec. 31, 2018	$ 5	$ 35,038	$ (35,058)	$ 283	$ 268
Beneficial conversion feature		353			353
Warrants issued with sale of convertible notes payable		419			419
Common stock converted into convertible notes payable (in shares)	(7)
Common stock converted into convertible notes payable		(25)			(25)
Stock-based compensation		10			10
Net loss			(1,581)		(1,581)
Foreign currency translation adjustment				(32)	(32)
Balances (in shares) at Mar. 31, 2019	5,070
Balances at Mar. 31, 2019	$ 5	35,795	(36,639)	251	(588)
Balances (in shares) at Dec. 31, 2019	6,631
Balances at Dec. 31, 2019	$ 7	42,331	(41,258)	305	1,385
Common stock converted into convertible notes payable
Stock-based compensation		112			112
Net loss			(1,798)		(1,798)
Foreign currency translation adjustment				797	797
Warrants issued for future services		228			228
Balances (in shares) at Mar. 31, 2020	6,631
Balances at Mar. 31, 2020	$ 7	$ 42,671	$ (43,056)	$ 1,102	$ 724

XML

Note 8 - Stock-based Compensation

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

8

.

S

tock

-based

Compensation

2016

Omnibus Incentive Plan

The Sun BioPharma, Inc.

2016

Omnibus Incentive Plan (the

“2016

Plan”) was adopted by our Board of Directors in

March 2016

and approved by our stockholders in

May 2016.

The

2016

Plan permits the granting of incentive and non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other stock awards to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the

2016

Plan at

no

less than the fair market value of the underlying common stock as of the date of grant. Options granted under the

2016

Plan have a maximum term of

ten

years. Under the

2016

Plan, a total of

1,500,000

 shares of common stock were initially reserved for issuance. As of

March 31, 2020,

options to purchase

1,481,451shares

of common stock were outstanding under the

2016

Plan and

18,549

shares remained available for future awards.

2011

Stock Option Plan

Our Board of Directors ceased making awards under the Sun BioPharma, Inc.

2011

Stock Option Plan (the

“2011

Plan”) upon the receipt of stockholder approval for the

2016

Plan. Awards outstanding under the

2011

Plan remain outstanding in accordance with and pursuant to the terms thereof. Options granted under the

2011

Plan have a maximum term of

ten

years and generally vest over

zero

to

two

years for employees. As of

March 31, 2020,

options to purchase

264,360

shares of common stock remained outstanding under the

2011

Plan.

Stock

-based Compensation

Expense

General and administrative (“G&A”) and research and development (“R&D”) expenses include non-cash stock-based compensation expense as a result of our issuance of stock options. The terms and vesting schedules for stock-based awards vary by type of grant and the employment status of the grantee. The awards granted through

March 31, 2020

vest based upon time-based and performance conditions. There was approximately

$229,000

unamortized stock-based compensation expense related to options granted to employees as of

March 31, 2020.

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

	Three Months Ended March 31,
	2020		2019
General and Administrative		99		10
Research and Development		13		-
		112		10

Details of options granted, exercised, cancelled or forfeited during the

three

months ended

March 31, 2020

follows:

	Shares Available for Grant			Shares Underlying Options
Balance at January 1, 2020		19,549			1,744,811
Granted		(1,000	)		1,000
Exercised		-			-
Cancelled		-			-
Forfeitures		-			-
Balance at March 31, 2020		18,549			1,745,811

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

March 31, 2020,

is as follows:

			Outstanding, Vested and Expected to Vest						Options Vested and Excercisable
Per Share Exercise Price			Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Options Excercisable		Weighted Average Remaining Contractual Life (Years)
$0.875	-	$1.10		26,360		2.75	$	1.029		26,360		2.75
$2.275	-	$2.50		38,000		3.87	$	2.464		38,000		3.87
$2.95	-	$3.70		774,100		8.07	$	3.040		411,525		7.11
$4.95	-	$8.10		539,300		7.73	$	6.739		506,500		7.67
$10.00	-	$10.10		54,000		7.30	$	10.007		54,000		7.30
$15.10				314,051		6.16	$	15.100		310,551		6.21
Totals				1,745,811		7.43	$	6.525		1,346,936		6.94

XML

Note 4 - Liquidity and Business Plan

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Substantial Doubt about Going Concern [Text Block]

4.

     Liquidity and

Business

Plan

We 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.

If we are unable to obtain additional financing, we believe that 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, 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.

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Note 6 - Indebtedness (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

Schedule of Short-term Debt [Table Text Block]

	March 31, 2020			December 31, 2019
	Term Debt			Term Debt
Loan principal Amount	$	97		$	126
Deferred Financing Costs		51			51
Accumulated Amortization		(44	)		(41	)
Unamortized balance		7			10
Discount on Debt		-			-
Accumulated Amortization		-			-
Unamortized balance		-			-
Loan carrying amounts, net	$	90		$	116

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Note 7 - Stockholders' Deficit (Tables)

3 Months Ended

Mar. 31, 2020

Notes Tables

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

Stock options outstanding	1,745,811
Shares available for grant under equity incentive plan	18,549
Common shares issuable under outstanding common stock purchase warrants	3,497,099
	5,261,459

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Note 9 - Subsequent Events

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Subsequent Events [Text Block]

9.

Subsequent Event

On

May 1, 2020,

the Company the Company executed an unsecured promissory note with a lender as a part of the Payroll Protection Program (“PPP”) in the Coronavirus Aid, Relief, and Economic Security Act. Funds totaling approximately

$102,000

will be used to support Company payroll. The note

may

be forgiven in part and bears an interest rate of

1%

per annum after a

six

-month deferment period.

12

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Note 5 - Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

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 the Company. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of estimates

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of expenses during the reporting period. Actual results could differ from those estimates.

Research and development costs

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

second

Phase

1

human clinical trial, for

third

-party service providers performing various testing and accumulating data related to our preclinical studies; sponsored research agreements; developing and scaling the manufacturing process necessary to produce sufficient amounts of the SBP-

101

compound for use in our pre-clinical studies and human clinical trials; consulting resources with specialized expertise related to execution of our development plan for our SBP-

101

product candidate; personnel costs, including salaries, benefits and share-based compensation; and costs to license and maintain our licensed intellectual property.

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

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

We expense costs associated with obtaining licenses for patented technologies when it is determined there is

no

alternative future use of the intellectual property subject to the license.

Stock

-based compensation

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

The fair value of stock-based awards is estimated at the date of grant using the Black-Scholes option pricing model. The determination of the fair value of stock-based awards is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. Risk free interest rates are based upon U.S. Treasury rates appropriate for the expected term of each award. Expected volatility rates are based primarily on the volatility rates of a set of guideline companies, which consist of public and recently public biotechnology companies. The assumed dividend yield is zero, as we do

not

expect to declare any dividends in the foreseeable future. The expected term of options granted is determined using the “simplified” method. Under this approach, the expected term is presumed to be the mid-point between the average vesting date and the end of the contractual term.

Foreign currency translation adjustments

The functional currency of Sun BioPharma Australia Pty Ltd is the Australian Dollar. Accordingly, assets and liabilities, and equity transactions of Sun BioPharma Australia Pty Ltd are translated into U.S. dollars at period-end exchange rates. Revenues and expenses are translated at the average exchange rate in effect for the period. The resulting translation gains and losses are recorded as a component of accumulated comprehensive loss presented within the stockholders’ equity (deficit). During the

three

-month periods ended

March 31, 2020

and

2019,

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

Comprehensive loss

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

Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is based on the weighted average of common shares outstanding during the period plus dilutive potential common shares calculated using the treasury stock method. Such potentially dilutive shares are excluded when the effect would be anti-dilutive or reduce a net loss per share. The Company’s potential dilutive shares, which include convertible debt, outstanding common stock options, and warrants, have

not

been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.

The following table sets forth the potential shares of common stock that were

not

included in the calculation of diluted net loss per share as their effects would have been anti-dilutive as of:

	March 31,
	2020		2019
Employee and non-employee stock options		1,745,811		1,032,211
Estimated common shares issuable upon conversion of notes payable and accrued interest		-		636,234
Common stock issuable under common stock purchase warrants		3,497,099		2,509,477
		5,242,910		4,177,922

5,242,910 4,177,922

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Note 8 - Stock-based Compensation (Details Textual) - USD ($)	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Common Stock, Capital Shares Reserved for Future Issuance (in shares)	5,261,459
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance (in shares)	1,745,811	1,744,811
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant (in shares)	18,549	19,549
Share-based Payment Arrangement, Nonvested Award, Option, Cost Not yet Recognized, Amount	$ 229,000
Sun BioPharma, Inc. 2016 Omnibus Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period (Year)	10 years
Common Stock, Capital Shares Reserved for Future Issuance (in shares)	1,500,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance (in shares)	1,481,451
Sun BioPharma, Inc. 2016 Omnibus Incentive Plan [Member] | Share-based Payment Arrangement, Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant (in shares)	18,549
Sun BioPharma, Inc. 2011 Stock Option Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period (Year)	10 years
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Ending Balance (in shares)	264,360
Sun BioPharma, Inc. 2011 Stock Option Plan [Member] | Share-based Payment Arrangement, Option [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period (Year)	0 years
Sun BioPharma, Inc. 2011 Stock Option Plan [Member] | Share-based Payment Arrangement, Option [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period (Year)	2 years

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Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Operating expenses:
General and administrative	$ 468	$ 303
Research and development	598	350
Operating loss	(1,066)	(653)
Other (expense) income:
Interest expense	(4)	(1,033)
Other(expense) income	(820)	34
Total other expense	(824)	(999)
Loss before income tax benefit	(1,890)	(1,652)
Income tax benefit	92	71
Net loss	(1,798)	(1,581)
Foreign currency translation adjustment	797	(32)
Comprehensive loss	$ (1,001)	$ (1,613)
Basic and diluted net loss per share (in dollars per share)	$ (0.27)	$ (0.31)
Weighted average shares outstanding - basic and diluted (in shares)	6,631,308	5,072,397

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Note 6 - Indebtedness (Details Textual) - Term Debt [Member] - USD ($)	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Debt Instrument, Periodic Payment, Total	$ 10,000
Short-term Debt, Total	$ 90,000	$ 116,000

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Note 2 - Risks and Uncertainties

3 Months Ended

Mar. 31, 2020

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 in Australia, the European Medicines Agency in the European Union, and comparable agencies in other countries. Obtaining approval for a new pharmaceutical product is never certain,

may

take many years, and is normally expected to involve substantial expenditures.

We have incurred losses of

$42.6

million since our inception in

2011.

For the

three

months ended

March 31, 2020,

we incurred a net loss of

$1.8

million, which includes a foreign currency loss of

$0.8

million. We also incurred negative cash flows from operating activities of

$1.2

million for this period. As we continue to pursue development activities and seek commercialization of our initial product candidate, SBP-

101,

we expect to incur substantial losses, which are likely to generate negative net cash flows from operating activities. As of

March 31, 2020,

we had cash of

$1.3

million, working capital of

$0.7

million, (current assets less current liabilities) and stockholders’ equity of

$0.7

 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 regarding our

2019

financial statements dated

March 24, 2020.

Our ability to continue as a going concern, realize the carrying value of our assets and discharge our liabilities in the ordinary course of business is dependent upon a number of factors, including our ability to obtain additional financing, the success of our development efforts, our ability to obtain marketing approval for our SBP-

101

product candidate in the United States, Australia, the European Union or other markets and ultimately our ability to market and sell our SBP-

101

product candidate. These factors, among others, raise substantial doubt about our ability to continue operations as a going concern. See Note

4

titled “Liquidity and Business Plan.”

On

March 11, 2020,

the World Health Organization declared the spread of a novel strain of coronavirus (“COVID-

19”

) a global pandemic and continued widespread infection in the United States is a possibility. Actions have been taken by federal, state and local governmental authorities to combat the spread of COVID-

19,

including through issuances of “stay-at-home” directives and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.  These measures, while intended to protect human life, have led to significantly reduced economic activity. The rapid development and uncertainty of the situation precludes any prediction as to the ultimate impact COVID-

19

will have on the Company's business, financial condition, results of operation and cash flows, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-

19

outbreak in the United States and Australia.  On

April 3, 2020,

we initiated a temporary pause in the enrollment of new patients in our ongoing clinical trial.  We anticipate resumption of new patient enrollment in

Q2

2020

once conditions allow.  We continue to treat patients already enrolled.