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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-27578
__________________
SUNPHARM CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE F593097048
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4651 SALISBURY ROAD, SUITE 205
JACKSONVILLE, FLORIDA 32256
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (904) 296-3320
__________________
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None
__________________
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, par value $.0001 per share
Redeemable Common Stock Purchase Warrants
Units consisting of Common Stock and Redeemable Common Stock Purchase Warrants
__________________
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. / /
Registrant's revenues for its most recent fiscal year: $1,000,000.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on February 28, 1997 was $13,997,830, based on the closing sales
price of the registrant's common stock on the Nasdaq Small Cap Market on such
date of $4.50 per share. For purposes of the preceding sentence only, all
directors, executive officers and beneficial owners of ten percent or more of
the common stock are assumed to be affiliates. As of March 20, 1997,
3,708,879 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: CERTAIN SECTIONS OF THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT RELATING TO THE REGISTRANT'S 1997 ANNUAL MEETING OF
STOCKHOLDERS, WHICH PROXY STATEMENT WILL BE FILED UNDER THE SECURITIES AND
EXCHANGE ACT OF 1934 WITHIN 120 DAYS OF THE END OF THE REGISTRANT'S FISCAL YEAR
ENDED DECEMBER 31, 1996, ARE INCORPORATED BY REFERENCE INTO PART III OF THIS
FORM 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes / /; No /X/.
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PART I
WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE," "EXPECT," "PROJECT"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY
FROM THOSE ANTICIPATED, EXPECTED, ESTIMATED OR PROJECTED. FOR ADDITIONAL
DISCUSSION OF SUCH RISKS, UNCERTAINTIES AND ASSUMPTIONS, SEE "ITEM 1.
DESCRIPTION OF BUSINESS--RISK FACTORS."
ITEM 1. DESCRIPTION OF BUSINESS.
SunPharm Corporation ("SunPharm" or the "Company") is a development
stage company engaged in the development of small molecule pharmaceutical
products, consisting of novel polyamine analogues and other proprietary
compounds invented at the University of Florida and licensed exclusively
worldwide to the Company. The Company's drug development efforts are centered
around three main areas: (i) cancer, (ii) acquired immunodeficiency syndrome
("AIDS") and (iii) gastrointestinal disorders. The Company currently has 13
potential products in various stages of research or development.
Three of the Company's polyamine analogue products are in Phase I or II
human clinical trials. Diethylhomospermine ("DEHOP") is currently in Phase
II human clinical trials for the treatment of AIDS-related chronic diarrhea.
DEHOP is also in a Phase I clinical trial for cancer, commenced in September
1996 under the supervision of the University of Wisconsin through a federal
grant from the National Cancer Institute. Another of the Company's products,
diethylnorspermine ("DENSPM"), recently reached the maximum tolerated dose in
a Phase I human clinical trial for the treatment of refractory solid cancer.
The Investigational New Drug ("IND") application relating DENSPM was
transferred to the Company's strategic alliance partner, Warner-Lambert
Company ("Warner-Lambert"). Warner-Lambert is expected to commence Phase II
clinical trials of DENSPM in the second half of 1997.
The Company is also conducting preclinical studies of the Company's
other potential compounds and indications through its sponsored research
agreement with the University of Florida and through collaborations with
other leading research institutions. In October 1995, the Company and the
Clarke Institute of Psychiatry at the University of Toronto (the "University
of Toronto") commenced a collaboration to conduct a preclinical investigation
of the possible use of DENSPM to treat Alzheimer's disease. The Company has
also entered into an agreement with the Mayo Foundation for Medical Education
and Research (the "Mayo Clinic") to test the Company's polyamine analogues IN
VITRO for effects on beta amyloid, the suggested cause of Alzheimer's
disease. In addition, the Company continues to investigate the possible use
of DENSPM and DEHOP for the treatment of skin disorders such as psoriasis;
the use of a derivative of DEHOP for the treatment of certain carcinomas; and
cyclic analogues, for their possible anti-inflammatory and cardiovascular
effects.
In October 1995, the Company and the University of Florida Research
Foundation, Inc. (the "Foundation"), the technology transfer arm of the
University of Florida, entered into a license agreement under which the
Company holds an exclusive license to the patent rights to a proprietary
process used to make synthetic desferrioxamine ("DFO"). DFO is a compound
that is essential in binding and execreting iron in patients suffering from
iron overload. Ciba-Geigy Ltd. ("Ciba-Geigy") markets DFO, which is
currently manufactured using a fermentation process which has been found to
cause allergic reaction in some patients. The Company intends to
sub-contract the manufacturing and marketing of DFO to third parties. For
this purpose the Company has entered into an agreement with Shanghai
Institute of Organic Chemistry for the scale-up and production of DFO.
The Company's strategy is to develop products both independently and
through strategic alliances, pursuant to which the Company will seek
financial, preclinical and clinical trial and marketing assistance from
larger pharmaceutical companies for drugs with broad market potential, while
retaining parallel manufacturing and/or marketing rights for all or part of
those markets. Consistent with this strategy, the Company sublicensed
worldwide rights (excluding Japan) to manufacture and market DENSPM for all
cancer applications to Warner-Lambert in May 1993 and sublicensed such rights
in Japan to Nippon Kayaku Co., Ltd. ("Nippon Kayaku") in February 1994.
Warner-Lambert and Nippon Kayaku have agreed to make staged payments to
SunPharm for license fees and research
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and development milestones, of which an aggregate of $2.85 million has been
paid to date, and to pay royalties for sales of products incorporating
DENSPM. In addition, Warner-Lambert and Nippon Kayaku have agreed to fund
and administer all further human clinical trials which may be conducted for
DENSPM.
The Company was incorporated in Delaware in 1990 as Lexigen, Incorporated
and in 1991 changed its name to SunPharm Corporation. The Company's principal
executive offices are located at 4651 Salisbury Road, Suite 205, Jacksonville,
Florida 32256 (telephone number (904) 296-3320). SunPharm supports a principal
research facility at the University of Florida in Gainesville, Florida.
TECHNOLOGY OVERVIEW
DEVELOPMENT OF THE COMPANY'S POLYAMINE ANALOGUE TECHNOLOGY
For the last fourteen years, the inventor of the Company's polyamine
analogues, Dr. Raymond Bergeron, has conducted research towards the development
of polyamine analogues as potential anti-cancer agents at the University of
Florida. This research has been supported by in excess of $6 million of funding
under National Cooperative Drug Discovery Group grants from the National Cancer
Institute and, since 1992, approximately $4 million of funding from the Company
through December 31, 1996.
CHARACTERISTICS AND FUNCTIONS OF POLYAMINES
Human cells contain three essential, naturally occurring polyamines:
putrescine, spermidine and spermine. In contrast to building blocks such as
amino acids, nucleotides and sugars, polyamines do not incorporate into
macromolecules, but remain as metabolically distinct entities within cells.
Research indicates that these polyamines bind to nucleic acids and promote
the integrity and fidelity of many of their functions, such as replication,
supercoiling, ribonucleic acid ("RNA") transcription and processing and
protein synthesis. These functions of polyamines are necessary for cellular
proliferation to occur.
Human cells employ a family of enzymes to maintain the proper balance or
equilibrium of polyamines. Included in this family of enzymes are ornithine
decarboxylase ("ODC") and S-adenosylmethionine decarboxylase ("SAMDC"), which
make or synthesize polyamines for the cell, and spermidine/spermine
N1-acetyltransferase ("SSAT"), which controls the export of polyamines from
the cell. All three of these enzymes are short-lived, rapidly inducible
proteins, and are tightly regulated by intracellular polyamine pools.
Working together, these enzymes function in a highly coordinated manner to
maintain polyamine pools within a very narrow range of concentration inside
the cell.
The Company's polyamine analogue compounds are structurally similar to
(hence, "analogues" of) the cell's naturally occurring polyamines. Because
of this similarity, these analogues are recognized as natural polyamines by
the cell's polyamine uptake system and thus gain entry into the cell. Once
inside the cell, the Company's polyamine analogues disrupt the cell's
polyamine balance and biosynthetic network, causing the cell to shut down the
enzymes ODC and SAMDC that would normally make natural polyamines, and to
increase production of SSAT, the enzyme which is responsible for the
breakdown and export of natural polyamines from the cell. The combined
effect on the enzymes controlling the proper level of polyamines in the cell
results is a substantial reduction in the amount of polyamines in the cell
and a corresponding increase in the amount of analogues in the cell. Because
cancer cells have a high rate of polyamine biosynthesis and contain higher
concentrations of essential polyamines than normal cells, the Company
believes that the substitution of its polyamine analogues for the naturally
occurring polyamines will counteract the increased level of polyamines
present in the cancer cells, thereby reducing the ability of the cancer cells
to proliferate.
The Company has discovered, through its sponsored research at the
University of Florida, that certain polyamine analogues modify other
cell-related activities besides cell proliferation. For example, Company
sponsored work on uncovering DEHOP's mechanism of action in arresting
diarrhea has shown that DEHOP interacts with several receptor complexes,
including the N-methyl-D-aspartate ("NMDA") receptor, which control
neuromuscular function. Additional evidence suggests that DEHOP also
stimulates nitric oxide release, which could be responsible for DEHOP's
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promotion of the relaxation of smooth muscles in the gastrointestinal tract.
This is consistent with studies indicating that the smooth muscle relaxation
promoted by DEHOP is inhibited by the nitric oxide synthase inhibitor L-NAME.
PRODUCTS UNDER DEVELOPMENT
The Company currently has 13 potential products in various stages of
research or development, including three that are in Phase I or II clinical
trials. These products are based upon novel polyamine analogue compounds
developed at the University of Florida and licensed exclusively to the
Company. Additional compounds and/or indications discovered and developed by
Dr. Bergeron and his staff will also be licensed to the Company on an
exclusive worldwide basis pursuant to the terms of the Company's sponsored
research agreement with the University of Florida. The following table
summarizes the current product portfolio, or pipeline, which has resulted
from the license agreement and sponsored research agreement with the
University of Florida:
PRODUCT PIPELINE
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DISEASE AREA COMPOUND INDICATION STATUS
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Cancer DENSPM all cancers Maximum tolerated dose
reached 3rd Qtr. 1996; IND
transferred to Warner-
Lambert December 31, 1996.
DEHOP all cancers Phase I commenced October 1996
DEHOP pancreatic
derivative carcinoma Preclinical development
Parabactin cancers Preclinical development
Research
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AIDS DEHOP AIDS-related Phase II, projected to be
diarrhea completed 3rd Qtr. 1997
SUN101 HIV Research
SUN 102 HIV Research
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Gastrointestinal DEHOP Ulcerative IND allowed
Disorders Colitis
Cyclic GI-inflammation Preclinical development
analogues
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Others DENSPM psoriasis Preclinical development
DFO iron overload Manufacturing scale-up;
marketing partner
DENSPM Alzheimer's Research
disease
DEHOP Preclinical development
Pulmonary
hypertension
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CANCER
BACKGROUND. The American Cancer Society estimates that more than 1.4
million new cases of cancer will be diagnosed and more than 500,000 people will
die of cancer in 1997 in the United States. Chemotherapy, surgery and radiation
are the major components in the treatment of cancer. Chemotherapy is usually
the primary treatment for cancers, such as hematologic malignancies, which
cannot be excised by surgery. In addition, chemotherapy is
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increasingly being used as an adjunct to radiation and surgery to improve
efficacy and address metastases (the spread of cancer), and as primary
therapy for some solid tumors. The standard strategy for chemotherapy is to
destroy the malignant cells by exposing them to as much drug as the patient
can tolerate. Clinicians attempt to design a combination of drugs, dosing
schedule and method of administration that increases the probability that
malignant cells will be destroyed, while minimizing the harm to healthy cells.
Most current anti-cancer drugs have significant limitations. Certain
cancers, such as colon, lung, kidney and pancreatic cancers, are inherently
unresponsive to chemotherapeutic agents. Certain other cancers may initially
respond to a chemotherapeutic agent, but cease to respond as the cancer cells
acquire resistance to the drug during the course of therapy. As such cancer
cells develop resistance to a specific chemotherapeutic agent, they often
simultaneously become resistant to a wide variety of structurally unrelated
agents through a phenomenon known as "multi-drug resistance." Finally,
current anti-cancer drugs are generally highly toxic, with effects including
bone marrow suppression and irreversible cardiotoxicity, which can prevent
their administration in therapeutic doses.
DENSPM. Phase I human clinical trials for DENSPM in refractory solid
cancer commenced in January 1994 at the University of Florida, Johns Hopkins
University and Roswell Park Cancer Institute. The protocol allowed for one,
two and three times per day dosing regimens at each center, respectively, in
order to determine DENSPM's maximum tolerated dose and side effects. The
Company and Warner-Lambert, its sublicensee, have agreed that the maximum
tolerated dose has been determined at all dosage regimens. In December 1996,
the Company received the remaining $500,000 of the $1,000,000 milestone
payment due from Warner-Lambert upon reaching that milestone, and transferred
the IND for the clinical trial to Warner-Lambert. Warner-Lambert is expected
to commence Phase II clinical trials of DENSPM in the second half of 1997.
Warner-Lambert is responsible for all subsequent clinical development of the
compound (excluding Japan).
The Company expects that its licensees will target Phase II clinical
trials of DENSPM on the treatment of specific cancers (E.G., melanoma and
pancreatic cancer), although the targets of such trials will be determined in
their discretion.
DEHOP. DEHOP was first tested at the University of Florida in five cancer
patients during 1988 and 1989. The purpose of the study was to determine a safe
dosage for DEHOP in cancer patients, and no drug related side effects were
observed except for constipation. This led the Company and its researchers at
the University of Florida to test DEHOP for use in treating AIDS patients who
suffer from chronic diarrhea. See "--Gastrointestinal Disorders" below.
Recent studies conducted by the Company demonstrated that DEHOP may have
anti-proliferative properties and may be effective on different cancers at
lower dosage levels than DENSPM. As a result, the Company filed an IND in
March 1996 for a Phase I clinical trial to test DEHOP in cancer patients.
The study which commenced in October 1996 is being conducted by Dr. George
Wilding at the University of Wisconsin Comprehensive Cancer Center, with
funding under a federal grant from the National Cancer Institute. The study
is a dose ranging trial conducted in cancer patients to determine safety,
pharmacokinetics, and maximum tolerated dose in subsequent human trials.
PARABACTIN. A rate-limiting step in the synthesis and replication of
genetic material is an enzyme responsible for the generation of the building
blocks making up deoxyribonucleic acid ("DNA"), the genetic code, from RNA.
This enzyme, ribonucleotide reductase, is particularly important in cancerous
and viral development and is found in mammalian cells, viruses of the herpes
virus family and vaccinia, yeast and some prokaryotes. Ribonucleotide
reductase, which is dependent on iron for its activity, is also the only
enzyme in this metabolic pathway that is sensitive to iron deprivation.
Recently published data shows that Parabactin, an additional polyamine
analogue to which the Company has an exclusive license under its license
agreement with the University of Florida, is more efficacious in inhibiting
ribonucleotide reductase, as shown by the growth inhibition of mouse mammary
tumor cells, than other competing compounds and that it is insensitive to
multidrug resistance in these cell lines. Previous results have also shown
that ribonucleotide reductase loses complete activity in mouse leukemia cells
when treated with Parabactin.
Parabactin has demonstrated anti-herpes activity similar to that of
acyclovir and FIAC (2-fluoro-5-iodo-arabinofuranosylcytosine, a nucleoside
analogue) in IN VITRO studies conducted at The University of Florida.
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Furthermore, it appears non-toxic to monkey kidney cell monolayers used in a
test which fully inhibits herpes replication. Finally, the drug has
characteristics that allow it to penetrate cell membranes and exert its
antineoplastic and antiviral activity.
Preclinical studies on Parabactin in the anti-cancer area are continuing.
In addition, work at the University of Florida has published that Parabactin has
potent bacteriostatic effect on a number of microorganisms. Studies to
determine possible roles of the iron chelator for use in combating bacterial and
fungal microorganisms are currently underway and are scheduled to be completed
in the second half of 1997.
There is emerging evidence from a number of research laboratories to
demonstrate that several neurodegenerative and gastrointestinal inflammatory
diseases including Alzheimer's disease, Parkinson's Disease, Amyotrophic Lateral
Sclerosis, Ulcerative Colitis, and others may occur as a result from cellular
damage secondary to IN SITU free radical formation. Several authors have
postulated that long term iron chelation may be useful in patients affected with
these debilitating conditions since free iron greatly increases intracellular
free radical formation by acting as a free radical catalyst. Preclinical animal
studies are currently underway at the University of Florida to test several iron
chelators, including DFO and Parabactin, in the rat model for inflammatory bowel
disease. No good animal model for the neurodegenerative diseases is readily
available today.
DEHOP DERIVATIVE. Preclinical studies have shown that a derivative of
DEHOP may be useful in treatment of pancreatic carcinoma. Several animal
studies have demonstrated that this compound concentrates in the exocrine
pancreas and after a relatively short use causes almost complete atrophy of the
pancreas. Because the pancreatic cells are irreversibly altered by the
compound, this finding is expected to be relevant to the treatment of pancreatic
carcinoma, a rapid and invariably fatal neoplastic disease. Preclinical IN
VITRO and IN VIVO efficacy studies relevant to this indication are anticipated
to be completed by mid-year 1997. Preclinical safety studies can commence
shortly thereafter, provided the efficacy results warrant continued development.
AIDS
BACKGROUND. AIDS, which is a disease caused by human immunodeficiency
virus ("HIV"), is a devastating viral infection that destroys the immune system
of affected patients. The Company believes that approximately one million
people in the United States and over 15 million people worldwide are infected
with HIV. In the United States alone, over 500,000 AIDS cases had been reported
by June 1996.
Disorders of the gastrointestinal tract are common in AIDS patients. It is
estimated that between 10% to 20% of all AIDS and HIV-positive patients suffer
from several bouts of chronic diarrhea during the course of their disease. Most
of these patients have periods of stable weight interspersed with episodes of
heavy diarrhea and rapid wasting that often occur during active secondary
infections. Over time, the recovery from bouts of diarrhea is less complete,
producing long-term loss of body cell mass. The causes of AIDS-related diarrhea
and weight loss are poorly understood and the condition is often unresponsive to
medical therapy. It is estimated that, of the HIV-positive patients with
chronic diarrhea, a pathogen can be identified as the cause in 50% of the cases,
and that, among those patients with an identifiable pathogen, approximately 50%
(or only 25% of all HIV-positive patients with chronic diarrhea) can be treated
with antibiotic therapy. Treatment is therefore empiric and uses a combination
of anti-diarrheal agents including opiates, loperamide, octreotide and
diphenoxylate.
Furthermore, the doses at which AIDS patients need to take the currently
available over-the-counter ("OTC") antidiarrheal drugs cause significant
drowsiness, a frequent side effect associated with these drugs. The results of
IN VITRO drug screens and clinical trials to date lead the Company to believe
that DEHOP will not show any of the nervous system side effects, such as
drowsiness, normally associated with existing OTC anti-diarrheal drugs.
A 1994 quality of life study conducted by researchers at Stanford
University School of Medicine showed that the annual charge to patients with
AIDS was 70% higher ($24,567 versus $14,471) for patients with diarrhea than for
those without such symptoms. These patients also suffered more significant work
loss and reported a greater need for assistance in the home.
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DEHOP. In January, 1994, the FDA allowed an Investigator IND submitted by
the University of Florida to conduct Phase I human clinical trials of DEHOP as a
possible treatment for chronic refractory diarrhea associated with AIDS
patients. The first segment of the Phase I human clinical trial, to determine
side effects, was completed in June 1994. Five AIDS patients, for whom
treatments with other antidiarrheal medications had been unsuccessful, received
doses which were three- to five-fold lower than those doses previously given to
cancer patients in a previous study of DEHOP for cancer conducted in 1989. All
five patients experienced a significant reduction in stool volume with no
measurable adverse side effects. An expanded segment of the Phase I clinical
trial in a total of fifteen evaluable patients, to determine safety, route of
administration and dosage regimen, was completed in December 1995. Across the
three dose levels tested, nine responded positively to the drug. No adverse
events were reported.
The current Phase II clinical trials being conducted under a sponsored
IND, which was allowed by the FDA in January 1996, are required to establish
safety and appropriate dosing regimens for use in the expanded Phase III
clinical trials. The first five patients have completed administration of DEHOP
at the 12.5 mg/day dose level which is one fourth of the lowest dose tested in
the Phase I clinical study. Since good response was observed, an additional ten
patients will be treated at this level. Depending on the results from these
patients, strategies for Phase III clinical testing of the drug will be
determined.
During the Phase III human clinical trials of DEHOP, for which the Company
expects to complete patient enrollment within approximately 18 months after
their commencement, the Company may seek treatment IND status for DEHOP. If the
FDA approved such status, the Company could commence limited commercial
distribution of DEHOP prior to its submission of a New Drug Application (an
"NDA") for DEHOP. No assurance can be made, however, that the Phase III
clinical trials of DEHOP would be successful, that patient enrollment could be
completed within 18 months, or that, in any event, the FDA would approve
treatment IND status for DEHOP.
SUN 101 AND 102. The HIV-1 virus has nine known genes that contain the
information for viral structural, enzymatic and regulatory proteins necessary
for intracellular viral replication and assembly. HIV medicines in use today
are directed toward the viral enzymes, reverse transcriptase and protease.
These enzymes are necessary for conversion of viral RNA to DNA and assembly of
viral components into infective virus, respectively. Despite the effectiveness
of currently available HIV drugs in reducing the levels of HIV, progression of
the disease continues to occur in treated patients, with decreases in CD4+ T
lymphocytes levels, the onset of opportunistic infections, and ultimate
progression to death. Hypotheses for the ultimate failure of these drugs
include: (i) the drugs become overwhelmed by the amount of HIV present; (ii) the
virus develops resistance to the drugs; and (iii) the inhibition of one or two
molecular targets (e.g., reverse transcriptase and/or protease) is insufficient
to control the virus. Although treatment with a combination of reverse
transcriptase and protease inhibitors has been shown to reduce the level of HIV
RNA in the blood to undetectable levels in some patients, HIV DNA continues to
persist in the tissues of these patients. In addition, 25% of patients who have
received combination therapy with reverse transcriptase and protease inhibitors
do not respond to the treatment, either because of the patient's inability to
take the combination therapy due to side effects or the failure of the
combination therapy to produce an antiviral effect.
The Company, through its funded research at The University of Florida, is
currently investigating another possible therapeutic approach to HIV. The
viral rev gene is a regulatory gene that is required for the production of viral
structural components by the infected cell. The product of the viral rev gene
combines in the nucleus with cellular EIF 5A, an initiation factor necessary for
protein synthesis. This combination moves across the nuclear membrane to the
cytoplasm where it binds with the rev responsive element on the viral envelope
messenger RNA. The viral message contained in the envelope message is then read
or translated by the cell to produce viral proteins necessary for viral survival
and propagation.
The Company has funded research at The University of Florida to investigate
several proprietary analogue compounds that may alter EIF 5A in such a way as to
inhibit its combination with the rev gene product or the ability of the
combination to bind to the envelope messenger. Without this important phase of
the viral life-cycle, HIV cannot survive and infect new lymphocytes Although
the HIV virus has a tremendous ability to mutate, this approach may represent an
"Achilles heel" in the virus' life cycle where mutation may be unimportant and
may lead to new drugs for the treatment of AIDS.
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GASTROINTESTINAL DISORDERS
DEHOP. Ulcerative colitis is an idiopathic form of inflammatory bowel
disease affecting approximately two million people in the United States.
Ulcerative colitis consists of a diffuse, continuous, inflammatory process that
always involves the rectum, varies in its proximal extent, but never involves
the small intestines. The etiology of ulcerative colitis remains uncertain, but
genetic, infectious, immunological, and psychological factors have been
implicated as possible pathogenetic mechanisms in producing the chronic mucosal
inflammatory condition and its resulting ulcerative and hemorrhagic sequelae.
To date the disease is treated with sulfasalazine, other 5-ASA compounds and/or
rectal corticosteroids. None of these treatments are very effective in
alleviating the signs and symptoms of ulcerative colitis.
Preclinical investigation with DEHOP in animal models for inflammatory
bowel disease (ulcerative colitis) indicates that the compound exerts protective
and anti-inflammatory effects in the mucosa of the colon. Therefore, DEHOP,
owing to its biochemical, antimotility, antisecretory and mucosal protective
properties, may palliate or attenuate colonic mucosal inflammatory infiltrates
and the signs and symptoms of mild to moderate ulcerative colitis. To test this
theory, an IND was allowed by the Food and Drug Administration in March 1997.
Dr. Steven Hanauer, a clinical researcher at the University of Chicago, has
agreed to conduct a Phase I/II clinical trial in patients with mild to moderate
ulcerative colitis.
OTHER DISEASE AREAS
PSORIASIS
DENSPM. The Company believes that DENSPM may have potential application
for the treatment of psoriasis. Patients with psoriasis have been found to have
increased local ODC activity, elevated systemic polyamine levels and increased
urinary polyamine excretion. Experimental studies ten years ago using various
models of mouse skin have shown that the ODC inhibitor Difluoromethylornithine
("DFMO"), administered systemically or topically, prevented polyamine
accumulation and subsequently inhibited tissue growth indicating the potential
use of DFMO in the treatment of hyperproliferating disorders of human skin.
Seven of ten patients treated topically with DFMO were moderately improved. In
these patients DFMO significantly reduced putrescine and spermidine
concentrations of the skin. Because of the marginal clinical efficacy of the
DFMO treatment, partly attributable to poor permeability into human skin, DFMO
has not gained a foothold in the treatment of psoriasis. DENSPM, however, has
been shown to penetrate mouse skin and to have cytostatic properties.
Company-sponsored preclinical studies of DENSPM as a possible treatment for
psoriasis are presently being conducted at the University of Florida, and the
Company plans to complete necessary skin safety studies prior to filing an IND
application in 1997 for testing DENSPM against psoriasis in human clinical
trials.
CYCLIC ANALOGUES. In preclinical testing, several cyclic analogues have
shown excellent anti-inflammatory and cardiovascular activity. The preclinical
testing necessary to determine which analogue and what indication to pursue
continues in 1997.
IRON OVERLOAD
DFO. In October 1995, SunPharm obtained a license from the Foundation to a
proprietary process for making the iron chelator drug, desferrioxamine ("DFO").
The process was invented at the University of Florida. DFO was discovered more
than 30 years ago and has since been the drug of choice to manage iron overload
in patients needing chronic blood transfusions, such as those with thalassemia
disorders, which affect more than 100,000 children worldwide. The combination
of chronic blood transfusions and DFO treatments for thalassemia patients
increases patients' chances for survival. Until recently, however, DFO has been
isolated only from microorganisms. Dr. Raymond Bergeron, the inventor of the
Company's polyamine analogue products, has invented a process for making DFO by
chemical synthesis that should overcome the difficulties caused by having a
naturally occurring source of the drug.
Under the terms of the license agreement, SunPharm has acquired exclusive
rights to patent applications covering a novel process of chemically
synthesizing DFO in exchange for a license payment and future royalties on the
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sales of the drug. SunPharm plans to use this unique process to develop an
alternative supply of DFO to the natural form of DFO marketed since 1976 by
Ciba-Geigy under the trade name Desferal-Registered Trademark-. The combined
North American and European market for DFO is approximately $50 million per
year.
The commercialization of DFO is an important first step in the development
of other iron chelators, such as Parabactin, to which the Company has license
rights for anticancer and antiviral uses. SunPharm plans to contract the
manufacturing and clinical development for an abbreviated new drug application
("ANDA") as soon as a reliable source has been identified.
The Company contracted with the Shanghai Institute of Organic Chemistry for
the commercial scale-up of DFO. The Shanghai Institute has previously
manufactured similar types of compounds using similar methods. However,
because of delays experienced to date in the delivery of initial samples, other
manufacturing subcontractors have been contacted as possible alternate sources
of supply.
ALZHEIMER'S DISEASE
The Company has entered into scientific collaborations with the University
of Toronto and the Mayo Clinic to study the possible role of SunPharm's
polyamine analogue drugs in the processes that are believed to cause or amplify
Alzheimer's disease. These collaborations are intended to result in data that
would justify the development of a new treatment approach for this progressive
dementia of old age that affects approximately one in six individuals over the
age of 65. Because of the great number of drugs in clinical testing by other
pharmaceutical companies and the tremendous resources needed to take a drug for
Alzheimer's disease through expensive, time-consuming and complicated human
testing, this project is awaiting the analysis of results from the University of
Toronto to determine the emphasis the Company should put on developing it
further.
PULMONARY HYPERTENSION
DEHOP. Pulmonary hypertension is a critical and acute disorder occurring
annually in approximately 5,000 patients. This indication is pursued based on
published work by Dr. Bergeron on the effect of DEHOP on hypertension in
animals. The Company's interest in using DEHOP in treating hypertension is
based on the compound's ability to induce the production of nitric oxide ("NO").
NO is a short lived messenger molecule that has been implicated in
cardiovascular disorders and relaxation of smooth muscle, among others. It is
believed that DEHOP induces NO production by its inhibition of ODC, the
accumulation of the polyamine precursor ornithine and the ensuing rerouting of
arginine metabolism to NO and citrulline. The release of NO relaxes smooth
muscle which is physiologically measured as lowering of blood pressure or
hypertension. However, this effect of DEHOP is only observed when given
acutely. No changes in blood pressure have been observed in cancer studies
where DEHOP is given over longer time periods. The Company is currently engaged
in preclinical development at the University of Kentucky for possible use of
DEHOP in primary and secondary pulmonary hypertension. Results are expected
from the University of Kentucky during the second quarter of 1997. A decision
will be made to proceed with clinical trials at that time.
STRATEGIC ALLIANCES
WARNER-LAMBERT AGREEMENT
In May 1993, the Company entered into a sublicense agreement with
Warner-Lambert, a multi-national pharmaceutical manufacturer and marketer, with
respect to DENSPM. The agreement grants Warner-Lambert exclusive worldwide
rights (excluding Japan) to manufacture and market DENSPM for all cancer
indications in exchange for certain license fees, advance royalty payments and
development milestone payments, of which Warner-Lambert has paid a total of $2.6
million to date. Warner-Lambert will also pay the Company a royalty on all
sales of products incorporating such compound. The Warner-Lambert agreement
provides for additional payments to the Company upon the completion of Phase II
clinical trials, filing of the NDA for DENSPM, and approval of the NDA for
commercial sale of DENSPM. The Company's rights to receive such payments are
dependent upon the achievement of these milestones by Warner-Lambert, and are
not within the control of the Company.
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Pursuant to the agreement, the Company was responsible for Phase I clinical
trials for DENSPM, and Warner-Lambert is responsible for completing all
remaining clinical trials at its expense. Warner-Lambert has a right of first
refusal to acquire the rights to DENSPM for other indications should the Company
elect to sublicense the development of DENSPM for such indications. However,
Warner-Lambert has waived its rights to be licensed DENSPM for the treatment of
Alzheimer's disease, which is being studied under a collaboration agreement with
the University of Toronto. Should Warner-Lambert elect to subcontract any
portion of the manufacturing of the compound to a third party, the Company has
the right to match such third party's offer under certain circumstances.
The Warner-Lambert agreement terminates on a country-by-country basis, upon
the later of the expiration of the last-to-expire patent in such country or ten
years after the commencement of marketing of a product in that country.
In June 1996, Warner-Lambert acquired a 12-month option to other linear
polyamines for use in cancer indications in exchange for an early payment of
$500,000, one half of the milestone payment due upon completion of the Phase I
clinical study of DENSPM. There can be no assurance that Warner-Lambert will
exercise this option upon the expiration of the option period. In December 1996
SunPharm had met its obligations under the sublicense agreement for completion
of the Phase I study and the IND was transferred to Warner-Lambert in exchange
for the remaining portion of the $1 million milestone payment.
NIPPON KAYAKU AGREEMENT
In February 1994, the Company entered into an agreement with Nippon Kayaku
with respect to the Japanese marketing and development rights to DENSPM for
cancer indications. Nippon Kayaku has committed to make staged payments to the
Company for research and development milestones, of which it has paid $225,000
to date, together with royalties on all sales of products incorporating DENSPM.
The Nippon Kayaku agreement provides for additional payments to the Company upon
commencement of Phase I and Phase II clinical trials in Japan, upon the
submission of and upon the approval of an NDA in Japan, and on the later to
occur of product pricing approval or patent approval in Japan. The Company
anticipates receiving a payment of $500,000 from Nippon Kayaku in 1998, upon the
commencement of Phase I clinical trials in Japan. The Company's rights to
receive such payments are dependent upon the achievement of these milestones by
Nippon Kayaku, and are not within the control of the Company. Nippon Kayaku is
responsible for completing all necessary Japanese clinical trials and associated
regulatory submissions at its expense. The Company has retained the right to
supply Nippon Kayaku with all of its bulk product requirements for marketing
DENSPM in Japan.
LICENSED TECHNOLOGY AND SPONSORED RESEARCH
The Company holds an exclusive worldwide license to the commercial rights
to uses of polyamine compounds, DFO and iron chelators under more than 25 issued
U.S. and foreign patents and numerous pending patent applications held by the
Foundation, the technology transfer subsidiary of the University of Florida.
The agreements pursuant to which the Company has the rights to these
patents require the Foundation to file and prosecute the patents relating to the
technology licensed to the Company, the costs of which are required to be
reimbursed by the Company, and to take all steps to defend such patent rights.
If the Foundation fails to take any such action, the Company has the right to
defend such rights at its own expense.
No assurance can be given that any existing patent application, or any
future patent applications, will be issued or that any patents, if issued, will
provide the Company with adequate patent protection with respect to the covered
products, their uses, technology or processes. In addition, under its license
with the University of Florida, the Company is required to meet specified
milestone and diligence requirements to retain its license of these patents.
LICENSE AGREEMENTS. The Company and the Foundation entered into a Patent
License Agreement with Research Component (the "1991 License Agreement") in
December 1991, pursuant to which the Foundation granted a worldwide exclusive
licensed to its rights under certain patents and patent applications relating
to polyamine and metal chelator technology invented by Dr. Bergeron to the
Company. The Company has rights under the 1991 License
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Agreement to all indications currently under development and, with respect to
all patent applications filed for inventions discovered during the term of
the Company's sponsored research agreement, the Company obtains rights for
all indications and uses for humans and animals. The Company's license is
subject to certain diligence milestones related to product development and
regulatory applications, product marketing and certain other matters. The
Foundation may terminate the 1991 License Agreement if the Company fails to
meet certain of these milestones; provided, however, such termination shall
be limited to a particular compound if the default is related to a particular
compound only. The Foundation may terminate the 1991 License Agreement in
its entirety if the Company defaults in its payment obligations under the
sponsored research agreement.
Under the 1991 License Agreement, the Company is obligated to pay
royalties on sales of products, subject to certain annual minimum royalties
and reimbursement of patent costs incurred by the Foundation. These
royalties include a royalty on net sales of the Company's products of between
five and six percent, and a royalty of 28% (increasing to 35% under certain
circumstances) on royalty and license payments made to SunPharm by the
Company's sublicensees. In no event, however, may payments to the Foundation
on sales of products by sublicensees be less than two percent of sublicensee
sales. The Company is required to pay a minimum annual royalty of $100,000
on each anniversary date of the 1991 License Agreement, which is credited
against royalties and research payments due under the sponsored research
agreement.
Under the 1991 License Agreement, as amended, the Company has issued the
Foundation a total of 342,760 shares of Common Stock. The 1991 License
Agreement terminates when the last patent licensed to the Company expires or
December 9, 2011, whichever is later.
In October 1995, the Company and the Foundation entered into a license
agreement (the "DFO License Agreement") giving the Company an exclusive
worldwide right to manufacture synthetic DFO pursuant to a proprietary
process invented by Dr. Bergeron. Under the DFO License Agreement, the
Company is obligated to pay royalties on sales of products at a rate of 2% on
net sales, subject to an annual minimum royalty of $10,000 in the first two
years, increasing by $10,000 per year to a maximum of $50,000. The DFO
License Agreement can be terminated in the event that SunPharm has not
commercialized DFO within three years (unless the minimum annual royalty
continues to be paid), and under certain other circumstances such as
bankruptcy or breach. The Company paid a $50,000 license fee upon execution
of the DFO License Agreement.
RESEARCH AGREEMENT. The Company and the Foundation also entered into a
Corporate Research Agreement (the "sponsored research agreement") in December
1991 (and subsequently amended) which provides that the Company will fund the
research and development work of Dr. Bergeron's laboratory through December
1998, at an annual cost (including direct and indirect costs) of $875,000,
commencing in January 1997. The Company has paid all required payments under
the sponsored research agreement to date. Under the sponsored research
agreement, any new invention is licensed to the Company on the same terms as
the 1991 License Agreement without any additional license fees to the
Foundation.
The Company has a close working relationship with Dr. Bergeron at the
University of Florida, who is engaged as a consultant to the Company, and
Company management and the scientists at the University meet regularly to
review the progress and direction of the University's efforts under the
sponsored research agreement. A total of 16 scientists and technicians at
the University of Florida are working on the Company's products under Dr.
Bergeron's supervision, five of whom have their Ph.D. degree. By utilizing
the significant resources of the University of Florida, including its
state-of-the-art equipment, its laboratory facilities for synthesis,
analyses, pharmacology, toxicology, IN VITRO and IN VIVO studies and its
clinical and animal facilities, the Company believes that it has accomplished
significantly more in the development of its licensed compounds than it would
have been able to do so on its own, without substantially greater need for
capital.
The Company has incurred costs of research and development totaling
approximately $1,676,000, $1,965,000 and $1,901,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. The Company has incurred
research and development costs of approximately $7,569,000 for the period
from the Company's inception of May 3, 1990 through December 31, 1996.
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PATENTS AND PROPRIETARY TECHNOLOGY
Subject to a nonexclusive statutory license to the United States
government, the Company is the exclusive licensee of over 25 issued U.S. and
foreign patents and numerous pending patent applications. The Company is
required to meet specified milestone and diligence requirements in order to
retain its license to the patents and other proprietary rights licensed from
the Foundation. No assurance can be given that the Company will satisfy any
of these requirements.
The Company's success will depend, in part, on the validity and scope of
the patents and patent applications licensed from the Foundation, and on its
ability to operate without infringing on the proprietary rights of others.
Other parties have filed patent applications and some patents may have been
or may be issued in the therapeutic areas in which the Company is developing
products. If any of the Company's proprietary technology in these areas were
to conflict with the rights of others, the Company's ability to commercialize
products using such technologies could be materially and adversely affected.
The patent position of pharmaceutical companies generally is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that the patents licensed from the Foundation will provide
substantial protection or commercial benefit to the Company, afford the
Company adequate protection from competing products, or not be challenged or
declared invalid or that additional related United States or foreign patents
will be issued, the occurrence of any of which could have a material adverse
effect on the Company's operations. While the United States government could
use its rights as licensee of the Foundation's patents to increase the supply
of products based on such patents or to reduce the cost of treatment with
such products, the Company is unaware of any instance in which federal
authorities have exercised such rights in that manner.
Certain proprietary trade secrets and unpatented know-how are important
to the Company. There can be no assurance that others may not independently
develop the same or similar technologies. It is the Company's policy to
require all employees and consultants to execute confidentiality agreements
protecting the Company's proprietary information. In addition, the Company's
sponsored research agreement with the University of Florida requires
confidential treatment by the University of Florida and its employees of the
proprietary information owned by or licensed to the Company. Notwithstanding
such agreements, however, third parties nonetheless may gain access to such
information.
There has been significant litigation in the biotechnology and
pharmaceutical industry regarding patents and other proprietary rights. If
the Company became involved in similar litigation regarding its intellectual
property rights, the cost of such litigation could be substantial.
GOVERNMENT REGULATION
In the United States, the Company's polyamine analogue and iron chelator
products are regulated under the Federal Food, Drug and Cosmetic Act by the
FDA's Center for Drug Evaluation and Research. The steps required before a
pharmaceutical product may be marketed in the United States include (i)
preclinical laboratory evaluation of product chemistry and animal studies to
assess the safety and efficacy of the product and its formulation, (ii) the
submission to the FDA of an IND, which includes the results of the
preclinical studies and, unless the FDA objects, becomes effective 30 days
following its filing with the FDA (and which must become effective before
human clinical trials may commence), (iii) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the drug (and which
provide data satisfying FDA data integrity standards), (iv) the submission of
an NDA to the FDA and (v) the FDA approval of the NDA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing facility is subject to inspections
every two years by the FDA and must comply with Good Laboratory Practices and
Good Manufacturing Practices.
In the United States, human clinical trial programs generally involve a
three phase process. Typically, Phase I trials are conducted in healthy
volunteers to determine the early side effect profile and the pattern of drug
distribution and metabolism. Phase II trials are conducted in groups of
patients afflicted with the target disease to provide sufficient
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data for the statistical proof of efficacy and safety required by federal
regulatory agencies. If Phase II evaluations indicate that a product has
shown indications of potential effectiveness and has an acceptable safety
profile, Phase III trials are undertaken to conclusively demonstrate clinical
efficacy and safety within an expanded population at multiple clinical study
sites. Sometimes, the FDA requires Phase IV studies to track patients after
a product is approved for commercial sale to identify side effects that may
occur in a small number of patients.
In the case of drugs for cancer, AIDS and other life-threatening
diseases, the initial human testing is generally done in patients rather than
in healthy volunteers. Because these patients are already afflicted with the
target disease, these studies may provide results traditionally obtained in
Phase II studies. Similarly, Phase II studies may be expanded to provide
results generally obtained in Phase III studies (such expanded studies are
generally referred to as Phase II/III studies). As a result, subject to
obtaining the necessary FDA approvals, the clinical trial process for cancer,
AIDS and other life-threatening diseases may be shortened relative to the
process for non-life-threatening diseases. No assurance can be given,
however, that the FDA will grant such approvals.
The Company will also be subject to widely varying foreign regulations
governing clinical trials and pharmaceutical sales. Whether or not FDA
approval has been obtained, approval of a product by the comparable
regulatory authorities of foreign countries must be obtained prior to
commencement of marketing the product in those countries. The approval
process varies from country to country, and the time may be shorter or longer
than that required for FDA approval. The Company intends, where applicable
and to the extent possible, to rely on licensees to obtain regulatory
approval for marketing the Company's products in foreign countries.
From the time an NDA is filed, regulatory approval of a new
pharmaceutical product often takes up to two years for life-threatening
diseases and longer for non-life-threatening diseases and involves the
expenditure of substantial resources. Approval depends on a number of
factors, including the severity of the disease in question, the availability
of alternative treatments and the risks and benefits demonstrated in clinical
trials.
During the pendency of Phase II/III trials for its products or
thereafter, the Company may file for Treatment IND status under provisions
of the IND regulations. These regulations apply to products for serious or
life-threatening diseases and are intended to facilitate the availability of
new products to desperately ill patients after clinical trials have shown
evidence of efficacy, but before general marketing approval has been granted
by the FDA. Under these regulations, the Company will be in a position to
recover some of the costs of research, development and manufacture of its
products before marketing begins, should the Company choose to do so.
However, no assurance can be made that the FDA will grant Treatment IND
status as to any of the Company's products, even after sufficient clinical
data have been obtained or that the Company can charge for the product.
COMPETITION
The Company has numerous competitors, including major pharmaceutical and
chemical companies, specialized biotechnology firms, universities and other
research institutions. These competitors may succeed in developing technologies
and products that are more effective than those being developed by the Company
or which would render the Company's technology and products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience than the Company in preclinical testing and human clinical
trials of new or improved pharmaceutical products and in obtaining FDA and other
regulatory approvals on products for use in health care.
The Company is aware of various products under development or manufactured
by competitors that are used for the prevention, diagnosis or treatment of
certain diseases the Company has targeted for product development, some of which
use therapeutic approaches that compete with certain of the Company's potential
products. For example, the Company believes that Ciba-Geigy is developing a
product which targets SAMDC, one of the two enzymes responsible for the
biosynthesis of polyamines in human cells. Ciba-Geigy is also marketing a
natural form of DFO for iron overload dysfunctions, and has significantly
greater resources than the Company.
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The Company has limited experience in conducting and managing the clinical
trials required to obtain government approvals and has not to date managed a set
of clinical trials to completion. Accordingly, the Company's competitors may
succeed in obtaining FDA approval for products more rapidly than the Company,
which could adversely affect the Company's ability to further develop and market
its products. If the Company commences significant commercial sales of its
products, it will also be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which the Company has limited or no experience.
EMPLOYEES
As of March 31, 1997, the Company had five full-time employees and one
part-time employee. The Company does not employ any full-time laboratory
personnel, and all of its preclinical and clinical tests are subcontracted and
performed at the University of Florida or other collaborative entities.
Although the Company has obtained a $1,000,000 key person life insurance policy
on the life of Stefan Borg, of which the Company is the sole beneficiary, the
loss of Mr. Borg's services could nevertheless have a material adverse effect on
the Company.
RISK FACTORS
DEVELOPMENT STAGE COMPANY
The Company is in the development stage and has realized only limited
revenues, all of which have been derived from payments from Warner-Lambert and
Nippon Kayaku in connection with license fees and achieving identified research
milestones with respect to DENSPM. The Company has incurred net losses since
commencement of its operations and it expects to continue to incur losses for
the foreseeable future. Moreover, there can be no assurance that the Company
will successfully complete the transition from a development company to
successful operations and/or profitability.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT OR COMMERCIALIZATION
Since its inception, the Company has devoted its efforts exclusively to the
research and development of potential pharmaceutical products based primarily
upon its licensed polyamine analogue and metal chelator technologies. While one
of these analogues, DEHOP, is presently in Phase II human clinical trials, and
another analogue, DENSPM, has completed Phase I human clinical trials, such
trials will not be sufficient to demonstrate their safety or efficacy, and
substantial further human clinical trials must be successfully completed before
such products may be approved for commercialization. There can be no assurance
that DEHOP or DENSPM, or any other potential product currently in development or
developed in the future, will prove to be safe or effective in clinical trials,
meet applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable cost or be successfully marketed.
NEED FOR ADDITIONAL FINANCING
The Company has expended and will continue to expend substantial funds to
continue the research and development of its products, conduct preclinical and
clinical trials, establish clinical and commercial scale manufacturing in its
own facilities or in the facilities of others and market its products. The
amount and timing of such expenditures are subject to a number of factors.
Based on its current operating plan, the Company anticipates that its existing
capital resources will be adequate to satisfy its capital needs through the
second quarter of 1997, but will not be sufficient to fund the Company's
operations to the point of introduction of a commercially successful product.
The Company's rights to receive payments from Warner-Lambert and Nippon Kayaku
are dependent upon the achievement of certain development and commercialization
milestones by Warner-Lambert and Nippon Kayaku, respectively, and are not within
the control of the Company. Further, the capability of Warner-Lambert or Nippon
Kayaku to achieve such milestones depends upon the availability and/or
prioritization of sufficient funding to support necessary testing of DENSPM, the
availability of trained and experienced staff for testing and the results of
such testing, among other factors. As a result, no assurance can be made that
such milestones will be achieved or that such payments will be received by the
Company. See "--Strategic Alliances."
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The Company will require significant levels of additional capital, which it
intends to raise through additional equity or debt financing, additional
arrangements with corporate partners or from other sources. No assurance can be
given that the necessary funds will be available for the Company to finance its
development on acceptable terms or at all. If adequate funds are not available
from operations or additional sources of financing, the Company's business will
be materially and adversely affected. See "Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Research, preclinical development, clinical trials and the manufacturing
and marketing of therapeutic products under development by the Company are
subject to extensive and rigorous regulation by government authorities in the
United States and other countries, including, but not limited to, the FDA. In
order to obtain approval to commercialize a product, the Company must
demonstrate to the satisfaction of the FDA and comparable authorities in other
countries that such product is safe and effective for its intended uses and that
the Company is capable of manufacturing the product to the applicable standards.
In the U.S., this requires that the product undergo extensive preclinical
testing, that the Company file an IND application with the FDA prior to
commencing human clinical trials and that the Company file a NDA requesting FDA
approval for commercial marketing of the product.
The approval process for the Company's product candidates is likely to take
several years and will involve significant expenditures for which additional
financing will be required. The cost to the Company of conducting human
clinical trials for any potential product can vary dramatically based on a
number of factors, including the order and timing of clinical indications
pursued and the extent of development and financial support, if any, from
corporate partners. Although Phase I and Phase II clinical trials of DENSPM and
DEHOP, respectively, are presently being conducted, further clinical trials,
including large, time-consuming and more costly Phase II and Phase III clinical
trials, will be required to demonstrate the safety and efficacy of DENSPM and
DEHOP. There can be no assurance that the Company will have sufficient
resources to complete the required regulatory review process or that the Company
could survive the inability to obtain, or delays in obtaining, such approvals.
Approvals that may be granted will be subject to continual review, and later
discovery of previously unknown problems may result in withdrawal of products
from marketing. See "--Government Regulation."
DEPENDENCE ON EXCLUSIVE LICENSE
All of the Company's development and commercialization rights for its
products are derived from its license agreement with the Foundation. The
Company's rights under the license agreement are subject to early termination
under certain circumstances, including failure to pay royalties or other
material breach by the Company, bankruptcy of the Company or failure by the
Company to carry on its business, failure to commence marketing of a licensed
product within six months of approval in any specific market, and failure to
comply with the terms of the Company's sponsored research agreement with the
University of Florida, among others. In the event that the license agreement
terminates for any reason, the Company's rights to manufacture and market DEHOP
and DENSPM and its other products would terminate. See "--Licensed Technology
and Sponsored Research."
LIMITED PERSONNEL; RELIANCE ON STRATEGIC ALLIANCES; RELIANCE ON
COLLABORATIVE ARRANGEMENTS FOR RESEARCH AND DEVELOPMENT
SunPharm has five full-time and two part-time employees and is
substantially dependent on third parties, with all of the risks attendant
thereto, to conduct research and development, to conduct clinical trials of the
Company's potential products and to manufacture DEHOP, DENSPM and other
compounds for such research and development. See "--Licensed Technology and
Sponsored Research" and "--Strategic Alliances."
The Company is dependent upon the University of Florida and Dr. Raymond
Bergeron, the inventor of the Company's technology, with respect to all research
and most early preclinical development of its potential products. The Company
does not have, and has no immediate plans to construct, a laboratory facility.
The Company has no control over the facilities where the research and
development work is being performed or over the personnel
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performing such work. If the University of Florida breaches its obligations
under its agreement with the Company, the Company's remedies may be limited
by applicable law affecting actions against state agencies.
The Company benefits significantly from and is dependent upon collaborative
arrangements with the University of Florida and Dr. Bergeron. Although the
Company believes that its relationships with its collaborators are good, there
can be no assurance that the Company's relationships with such institutions and
individuals will continue. The loss of these relationships would significantly
increase the Company's expenses and could have a substantial negative effect on
the Company's ability to attain its long-range objectives.
The Company is dependent upon strategic alliances with Warner-Lambert and
Nippon Kayaku with respect to the development and commercialization of DENSPM,
and expects to rely upon future strategic alliances with other pharmaceutical
companies with respect to other potential products. Although the Company
believes that Warner-Lambert, Nippon Kayaku and any future strategic alliance
partners have or will have an economic motivation to develop and commercialize
such products, the amount and timing of resources to be devoted to these
activities are not within the control of the Company and will be subject to the
priorities of such strategic alliance partners in allocating these resources,
which may not be consistent with the best interests of the Company. In
addition, the Company's strategic alliance partners or their affiliates may be
pursuing alternative products or technologies which may compete with the
Company's products and technologies. No assurances can be given that the
Company's agreements with Warner-Lambert and Nippon Kayaku, or with any other
strategic alliances the Company may enter in the future, will result in the
successful development or commercialization of DENSPM or other potential
products, or that any such agreements will result in any significant revenues,
profits or cost savings to the Company. Furthermore, no assurances can be given
that the Company will be able to enter into future strategic alliance agreements
on favorable terms or at all. In addition, the Company's strategic alliance
partners or their affiliates may be pursuing alternative products or
technologies which may compete with the Company's products and technologies.
See "--Strategic Alliances."
UNCERTAINTIES AS TO PATENTS AND PROPRIETARY TECHNOLOGIES
Subject to a nonexclusive statutory license to the U.S. government, the
Company is the exclusive licensee of more than 25 issued U.S. and foreign
patents and numerous pending patent applications. The Company is required to
meet specified milestone and diligence requirements in order to retain its
license to the patents and other proprietary rights licensed from the
Foundation. No assurance can be given that the Company will satisfy any of
these requirements.
The patent position of pharmaceutical companies generally is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that the patents licensed from the Foundation will provide substantial
protection or commercial benefit to the Company, afford the Company adequate
protection from competing products, or not be challenged or declared invalid or
that additional related United States or foreign patents will be issued, the
occurrence of any of which could have a material adverse effect on the Company's
operations. The United States government could use its rights as licensee of
the Foundation's patents to increase the supply of products based on such
patents or to reduce the cost of treatment with such products.
Certain proprietary trade secrets and unpatented know-how are important to
the Company. There can be no assurance that others may not independently
develop the same or similar technologies. Although the Company has taken steps
to protect its trade secrets and unpatented know-how, third parties nonetheless
may gain access to such information.
There has been significant litigation in the biotechnology and
pharmaceutical industry regarding patents and other proprietary rights. If the
Company became involved in similar litigation regarding its intellectual
property rights, the cost of such litigation could be substantial. See
"--Patents and Proprietary Technology."
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UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
in part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health coverage insurers and other organizations. While
the legislative and regulatory proposals of President Clinton to reform the
health care system have been tabled temporarily and while the Company cannot
predict whether any such future legislative or regulatory proposals will be
adopted, the pendency of such proposals could have a material adverse effect on
the Company's ability to raise capital. Any such reform measures, if adopted,
could adversely affect the pricing of therapeutic products in the United States
or the amount of reimbursement available from United States governmental
agencies or third party insurers and could materially adversely affect the
Company in general. Furthermore, the Company's ability to commercialize its
potential product portfolio may be adversely affected to the extent that such
proposals have a material adverse effect on the business, financial condition
and profitability of other companies that are prospective collaborators for
certain of the Company's proposed products.
In both domestic and foreign markets, sales of the Company's proposed
products will depend in part on the availability of reimbursement from third-
party payors such as government health administration authorities, private
health insurers and other organizations. Third-party payors are increasingly
challenging the price and cost effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that the Company's proposed
products will be considered cost effective or that adequate third-party
reimbursement will be available to enable the Company to maintain price levels
sufficient to realize an appropriate return on its investment in product
development. Legislation and regulations affecting the pricing of
pharmaceuticals may change before any of the Company's proposed products are
approved for marketing. Adoption of such legislation or regulations could
further limit reimbursement for medical products and services. See
"--Government Regulation."
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The testing, marketing and sale of pharmaceutical products entails a risk
of product liability claims by consumers and others and such claims may be
asserted against the Company. The Company does not maintain product liability
insurance coverage other than $1,000,000 of primary and $1,000,000 of excess
product liability coverage applicable only for DENSPM and DEHOP for the Phase I
human clinical trials of DENSPM Phase I and Phase II human clinical trials of
DEHOP and prior to marketing any product, there can be no assurance it will be
able to obtain such insurance at a reasonable cost or in an amount sufficient to
cover all possible liabilities. In the event of a successful product liability
suit against the Company, lack or insufficiency of insurance coverage could have
a material adverse effect on the Company. Further, SunPharm is required to
indemnify the University of Florida and its trustees, officers, employees and
affiliates against claims resulting from the manufacture or sale of products
derived from its polyamine compounds and to have product liability coverage
naming the University of Florida as an additional insured for such risks.
LACK OF MANUFACTURING EXPERIENCE OR FACILITIES
The Company currently contracts with third parties for the production of
compounds in limited quantities for its preclinical and clinical trials and
currently does not possess the staff or facilities necessary to manufacture
products in commercial quantities. The Company has entered into agreements,
however, for the production of clinical-scale quantities of its products by
third party contractors which it believes capable of supplying its short-term
requirements. There can be no assurance that the polyamine compounds or iron
chelators can be manufactured by the Company or its suppliers at a cost or in
quantities necessary to make such compounds commercially viable products.
-16-
<PAGE>
RELIANCE ON FOUNDER
The Company is highly dependent upon Stefan Borg, its founder, President
and Chief Executive Officer. See "--Employees."
COMPETITION
For a discussion of the competition faced by the Company, see
"--Competition."
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases its executive offices in Jacksonville, Florida at an
annual rent of approximately $37,000. The lease expires in November 1997 and
is not renewable. The Company believes that its present facilities should be
sufficient for the Company's needs through 1997. The Company does not own or
lease any laboratories or other research and development facilities. The
Company's sponsored research at the University of Florida is conducted at
laboratory facilities on the University of Florida campus.
ITEM 3. LEGAL PROCEEDINGS.
On December 20, 1995, Dean L. Rider, M.D. ("Rider"), a stockholder of
the Company, filed suit against the Company and Stefan Borg in Superior Court
for the City and County of San Francisco, California, seeking compensatory
damages of over $41 million and punitive damages based upon an alleged
agreement between SunPharm and Dr. Rider. In June 1996, the Company settled
this litigation with Rider by issuing Rider 50,000 shares of Common Stock.
The Company further agreed to file an S-3 registration statement to register
such shares for resale. The Company believes that the claims made by Rider
were without merit, and did not admit to any wrongdoing in connection with
the settlement. The Company agreed to the settlement because it believed the
cost of the settlement to be more economical than the cost of continuing to
incur significant legal expenses to defend this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
-17-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
SunPharm's Units, Common Stock and Warrants are traded on the Nasdaq
SmallCap Market under the symbols "SUNPU," "SUNP" and "SUNPW," respectively.
The Units, Common Stock and Warrants began trading on January 12, 1995. The
following table presents quarterly information on the price ranges of the
Units, Common Stock and Warrants. This information indicates the high and low
sales price reported by the Nasdaq SmallCap Market for the periods indicated.
1995 1996
------------------ -------------------
High Low High Low
-------- -------- -------- ---------
First Quarter
Units $9.00(1) $7.50(1)
Common Stock 7.75(1) 6.75(1)
Warrants 1.50(1) 1.00(1)
Second Quarter 1995
Units $9.88 $8.47
Common Stock 8.38 7.38
Warrants 1.75 1.06
Third Quarter 1995
Units $9.88 $8.38
Common Stock 7.88 7.13
Warrants 1.75 1.19
Fourth Quarter 1995
Units $9.00 $8.38
Common Stock 7.75 6.75
Warrants 1.75 1.25
(1) Period beginning January 12, 1995
At March 31, 1997, the Company's shares of Common Stock and Warrants
were held by ___ and ___ holders of record respectively and approximately
1,409 beneficial owners.
SunPharm is in the development stage, has not paid a cash dividend to
its stockholders and does not anticipate paying cash dividends in the
foreseeable future. Under the General Corporation Law of the State of
Delaware, a corporation's board of directors may declare and pay dividends
only out of surplus or current net profits.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Since its inception in May 1990, SunPharm has devoted substantially all of
its efforts and resources to research and development conducted on its own
behalf and through collaborations with clinical institutions. The Company's
drug development strategy emphasizes conducting most of its research and
clinical activities at the University of Florida. Consequently, the Company
believes that its research and development expenditures have been lower than
comparable development stage pharmaceutical companies. See "Description of
Business." The Company has incurred cumulative net losses of $11,596,629 from
its inception through December 31, 1996. In January and February 1995, the
Company raised equity through an initial public offering which resulted in net
proceeds of approximately $7,200,000. These proceeds were sufficient to finance
the Company's operations through mid-1996, at which time the Company raised
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<PAGE>
an additional $3,095,000 of net proceeds through sale of its common stock and
exercise of warrants. Such proceeds, along with the $1,000,000 milestone
payment from Warner-Lambert should be sufficient to fund the Company's
operations through the second quarter in 1997, after which time the Company
will require additional financing.
The Company intends to obtain additional funds for research and development
through collaborative arrangements with corporate partners, additional
financings and from other sources. The Company expects to incur additional
significant operating losses for at least the next several years principally as
a result of its continuing anticipated research and development and clinical
trials expenditures.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Revenues increased to $1,072,605 in 1996 from $162,657 in 1995. This
increase was due to the Company earning a $1 million payment under the Warner-
Lambert agreement for successful completion of DENSPM Phase I testing. Revenues
for 1995 decreased from $1,035,000 in 1994. Revenues for 1994 were primarily
due to a $750,000 payment from Warner-Lambert and the Company's initial payment
of $225,000 under the Nippon Kayaku agreement. All payments received relating
to sublicensing agreements have been used to fund ongoing research and
development. The Company expects to receive sublicensing revenues of $500,000
in 1997 from Nippon Kayaku when Phase I trials for DENSPM commence in Japan.
The Company's research and development expenses remained relatively
constant between 1995 and 1996, decreasing 3% from $1,964,556 to $1,900,799,
respectively. In 1996, these expenses consisted of expenditures for research
and development conducted by Dr. Bergeron at the University of Florida for
compound screening, toxicology and other tests and for expenses related to human
clinical trials. Research and development expenses for 1995 increased 17% from
$1,676,053 in 1994 to $1,964,556. The increase was due to expenses incurred in
conducting human clinical trials for DENSPM and DEHOP in 1995, whereas no such
trials were conducted in 1994. Research and development expenses in 1994
include a non-cash charge of $351,258 for compensation expenses related to
certain stock options issued to employees and consultants of the Company. The
Company expects its research and development expenses to increase during 1997
and 1998, reflecting anticipated increases in the funding of research
activities, preclinical studies and human clinical trials.
General and administrative expenses increased 69% from $1,517,958 in 1994
to $2,567,754 in 1995 and decreased 33% in 1996 to $1,728,415. The increase in
1995 and the decrease in 1996 were primarily due to the amortization of $775,000
of issuance costs, $600,000 of which were non-cash, in 1995 incurred in
connection with the 1994 issuance of the 10% Convertible Secured Notes.
Compensation expenses for certain stock options and warrants included in general
and administrative expenses were $467,050 and $50,000 for 1994 and 1995,
respectively. Also reflected in general and administrative expenses for 1995
and 1996 were legal fees incurred in connection with the Company's litigation
with Dean L. Rider, M.D. which settled in June 1996. See "--Liquidity and
Capital Resources." The remainder of the increase in general and
administrative expenses in 1995 and 1996 over 1994 is attributable to increases
in personnel, including the employment of a Vice President--Product Development
and a Vice President--Manufacturing and Operations in 1995, the employment of a
Vice President--Business Development in 1996 and the increased administrative
costs associated with being a public company.
In 1996, the Company incurred royalty expenses of $280,000 representing 28%
of the $1 million milestone payment from Warner-Lambert payable to the
Foundation.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through collaborative research and sublicense agreements with its strategic
alliance partners and the issuance of debt and equity securities. Through
December 31, 1996 the Company had received $1,885,000 of cumulative sponsored
research and sublicensing revenues, approximately $13,063,000 in consideration
of the sale of equity securities, and $1,697,500 in consideration of the
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<PAGE>
placement of debt securities. An additional $1,000,000 of cumulative
sponsored research and sublicensing revenues was earned in 1996 from
Warner-Lambert, of which $500,000 was receivable as of December 31, 1996 and
was collected in January 1997.
On January 12, 1995, the Company completed an initial public offering
(the "Offering") of 1,100,000 units ("Unit") at $7.00 per Unit. Each Unit
consists of one share of the Company's Common Stock and one Redeemable Common
Stock Purchase Warrant ("Warrant"), which entitles the holder to purchase one
share of Common Stock at $8.75 per share. Additionally, on February 16,
1995, the Representative exercised an option to purchase an additional
165,000 Units at $7.00 per Unit. Proceeds from the Offering were
approximately $7,200,000 of cash, net of underwriting costs and other
Offering costs of $1,655,000. Of such net proceeds, approximately $1,793,000
was used to repay the outstanding indebtedness (including accrued interest
and certain fees) of the Company.
During the year ended December 31, 1996, the Company completed the private
placement of 537,623 units pursuant to Section 4(2) of the Securities Act of
1933 for $5.50 per unit. Each unit consisted of one share of the Company's
Common Stock and one redeemable Common Stock Purchase Warrant. The warrants
included in the units expire four years from the date of issuance and have
exercise prices of $5.50 per share until the first anniversary date, $6.50 per
share until the second anniversary date, and $7.50 per share thereafter. The
warrants are subject to redemption by the Company at $0.01 per warrant, provided
the Company's Common Stock closes at a price of $8.50, $9.50 or $10.50 per share
for 20 consecutive days during the second, third or fourth years, respectively,
of the term of the warrant. Proceeds from the private placement were
approximately $2,636,000, net of placement agent and other costs of
approximately $321,000.
Also during 1996, the Company offered certain of its existing warrant
holders a 30% reduction in their applicable exercise price if they exercised
their warrants prior to December 31, 1996. Additionally, for each four warrants
exercised, participants were issued a warrant identical to the warrants issued
in the private placement. As a result of this warrant exchange offer, 236,721
outstanding warrants were exercised in exchange for 236,721 shares of Common
Stock and 59,178 new warrants. Proceeds from the warrant exchange were
approximately $459,000, net offering costs of approximately $34,000.
In April 1996, the Company received notice from The Nasdaq Stock Market,
Inc. ("Nasdaq") that the Company's total assets and capital as of December 31,
1995 did not meet the minimum requirements of $2 million and $1 million,
respectively, for listing on the Nasdaq Small Cap Market and that the Company's
Common Stock, Warrants and Units were subject to delisting. As a result of the
net proceeds from the private placement, the warrant exchange and the $1,000,000
milestone payment from Warner-Lambert referenced above, the Company was in
compliance with Nasdaq requirements as of December 31, 1996.
During the year ended December 31, 1996, the net cash used in operating
activities was $2,604,413. During the year ended December 31, 1995, the net cash
used in operating activities was $4,333,929. Of the total cash used in
operating activities in 1995, $2,900,000 related to 1995 activity and $1,400,000
related to accounts payable ($700,000), offering costs ($500,000) and royalties
($210,000) which were delayed until the completion of the Offering in January
and February 1995. The Company had net working capital of approximately
$1,440,000 at December 31, 1996. The Company will require substantial funds for
research and development performed by the University of Florida and to perform
preclinical testing and clinical trials of its potential products. The Company
believes, however, that its currently available cash will only satisfy its
capital needs through mid 1997.
The Company expects to incur substantial additional research and
development expenses, including expenses associated with preclinical studies,
clinical trials and manufacturing. The Company intends to use a portion of its
cash resources together with funds from its existing collaborative arrangements
with Warner-Lambert and Nippon Kayaku for these purposes; however, the Company's
rights to receive payments from Warner-Lambert and Nippon Kayaku are dependent
upon the achievement of certain milestones by Warner-Lambert and Nippon Kayaku,
respectively, and are not within the control of the Company. No assurance can
be made that such milestones will be achieved or that such payments will be
received by the Company. The Company intends to obtain additional funds for
research and development through new collaborative arrangements with corporate
partners, additional financings, and from other
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<PAGE>
sources; however, there can be no assurance that the Company will be able to
obtain necessary financing when required or what the terms of any financing,
if obtained, might be. Accordingly, there can be no assurance of the
Company's future success. In addition, the Company's future success is
affected by the progress of the Company's research and development, the
scope and results of preclinical studies and clinical trials, the cost and
timing of regulatory approvals, the rate of technological advances,
determinations as to the commercial potential of the Company's products under
development, the status of competitive products, the establishment of
manufacturing capacity or third-party manufacturing arrangements, its
reliance on research institutions and corporate partners, the uncertainty of
health care reform and the competitive environment in which the Company
operates. The Company's existing capital resources will not be sufficient to
fund the Company's operations to the point of introduction of a commercially
successful product, if and when that time should arrive. No assurance can be
given that additional funds will be available on acceptable terms, if at all.
The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1996, the Company had
net operating loss ("NOL") and tax credit carryforwards for income tax purposes
of approximately $9,553,000 and $338,000, respectively, which may be available
to reduce future taxable income and future tax liabilities. These carryforwards
begin to expire in 2008. The Tax Reform Act of 1986 provides for an annual
limitation on the use of NOL and credit carryforwards (following certain
ownership changes) that could significantly limit the Company's ability to
utilize these carryforwards. The Company has made no determination concerning
whether there has been such a cumulative change in ownership. It is possible
that such a change in ownership occurred following the completion of the
Offering, the exercise of the Representative's over-allotment option, the
private placement and the warrant exchange. Accordingly, the Company's ability
to utilize the aforementioned carryforwards to reduce future taxable income and
tax liabilities may be limited. Additionally, because United States tax laws
limit the time during which these carryforwards may be applied against future
taxes, the Company may not be able to take full advantage of these attributes
for federal income tax purposes.
On December 20, 1995, Dean L. Rider, M.D. ("Rider"), a stockholder of the
Company, filed suit against the Company and Stefan Borg in Superior Court for
the City and County of San Francisco, California, seeking compensatory damages
of over $41 million and punitive damages based upon an alleged agreement between
SunPharm and Dr. Rider. In June 1996, the Company settled this litigation with
Rider by issuing Rider 50,000 shares of SunPharm Common Stock. The Company
further agreed to file an S-3 registration statement to register such shares for
resale. The Company believes that the claims made by Rider were without merit,
and did not admit to any wrongdoing in connection with the settlement. The
Company agreed to the settlement because it believed the cost of the settlement
to be more economical than the cost of continuing to incur significant legal
expenses to defend this matter.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements and supplementary financial information required
to be filed under this Item are presented on pages F-1 through F-19 of this
Annual Report on Form 10-KSB, and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 23, 1996, the Company filed a report on Form 8-K disclosing a
change in independent accountants from Arthur Andersen LLP to Deloitte & Touche
LLP.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "Election of Directors," "Executive Compensation"
and "Compliance with Section 16(a)" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Securities
and Exchange Commission ("Commission") pursuant to the Securities and Exchange
Act of 1934 within 120 days of the end of the Company's fiscal year on
December 31, 1996.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item as to the management of the Company
is hereby incorporated by reference from the information appearing under the
captions "Executive Compensation" and "Election of Directors--Compensation of
Directors" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Securities and Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Commission
pursuant to the Securities and Exchange Act of 1934 within 120 days of the end
of the Company's fiscal year on December 31, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference from the information appearing under the
captions "Certain Relationships and Related Transactions" in the Company's
definitive proxy statement which involves the election of directors and is to be
filed with the Commission pursuant to the Securities and Exchange Act of 1934
within 120 days of the end of the Company's fiscal year on December 31, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 -- Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form SB-2)
(Registration No. 33-85416-A).
3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2) (Registration
No. 33-85416-A).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to Amendment No. 2 to the Company's Registration
Statement on Form SB-2) (Registration No. 33-85416-A).
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<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
4.2 -- Revised Form of Warrant Agreement relating to Redeemable
Common Stock Purchase Warrants (incorporated by reference to
Exhibit 4.2 to Amendment No.3 to the Company's Registration
Statement on Form SB-2) (Registration No. 33-85416-A).
4.4 -- Investment Agreement between the Registrant and SunPharm
Investors, L.P., dated January 11, 1993, relating to the
Registrant's 9.5% Extendable Notes and Warrants
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form SB-2) (Registration
No. 33-85416-A).
4.5 -- Revised form of Unit Purchase Option issued to Royce
Investment Group, Inc. (incorporated by reference to Exhibit
4.5 to Amendment No. 3 to the Company's Registration
Statement on Form SB-2) (Registration No. 33-85416-A).
10.1 -- Patent License Agreement between the Company and the
University of Florida Research Foundation, Inc. dated
December 9, 1991, as amended by the First Amendment thereto
dated December 30, 1992 and the Second Amendment dated
March 26, 1993 (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form SB-2)
(Registration No. 33-85416-A).
10.2 -- Corporate Research Agreement between the Registrant and the
University of Florida Research Foundation, Inc. dated April 30,
1993, as amended by the First Amendment dated May 16, 1994
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form SB-2) (Registration No.
33-85416-A).
10.3 -- Sublicense Agreement between the Registrant and Warner-Lambert
Company dated May 1, 1993 (incorporated by reference to Exhibit
10.3 to the Company's Registration Statement on Form SB-2)
(Registration No. 33-85416-A).
10.4 -- Exclusive Sublicense Agreement between the Registrant and Nippon
Kayaku Co., Ltd. dated February 28, 1994 (incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement
on Form SB-2) (Registration No. 33-85416-A).
10.5 -- 1994 Stock Option Plan (incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on Form SB-2)
(Registration No. 33-85416-A).
10.6 -- Employment Agreement between the Corporation and Stefan Borg
dated April 1, 1993 (incorporated by reference to Exhibit 10.6
to the Company's Registration Statement on Form SB-2)
(Registration No. 33-85416-A).
10.7 -- Stock Appreciation Rights Agreement between the Registrant
and Craig Siegler dated August 1, 1994 (incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form SB-2) (Registration No. 33-85416-A).
10.8 -- Stock Purchase Warrant between the Registrant and Craig
Siegler dated August 18, 1994 (incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement on
Form SB-2) (Registration No. 33-85416-A).
10.9 -- Consulting Agreement between the Corporation and Dr. Raymond J.
Bergeron dated December 9, 1991, as amended by letters dated
April 2, 1993 and April 29, 1994 (incorporated by reference to
Exhibit 10. 9 to the Company's Registration Statement on
Form SB-2) (Registration No. 33-85416-A).
10.10 -- Form of Bridge Warrant Certificate (incorporated by reference
to Exhibit 10.10 to the Company's Registration Statement on
Form SB-2) (Registration No. 33-85416-A).
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<PAGE>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.11 -- Form of Subscription Agreement for Bridge Financing (incorporated
by reference to Exhibit 10.13 to the Company's Registration
Statement on Form SB-2) (Registration No. 33-85416-A).
10.12 -- Second Amended and Restated Registration Rights Agreement
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form SB-2) (Registration No.
33-85416-A).
10.13 -- Agency Agreement between the Registrant and Royce Investment
Group, Inc. dated August 12, 1994 (incorporated by reference
to Exhibit 10.15 to the Company's Registration Statement on
Form SB-2) (Registration No. 33-85416-A).
10.14 -- First Amendment to Second Amended and Restated Registration
Rights Agreement (incorporated by reference to Exhibit 10.16
to Amendment No. 1 to the Company's Registration Statement
on Form SB-2) (Registration No. 33-85416-A).
10.15 -- Third Amendment to Patent License Agreement between the Company
and the University of Florida (incorporated by reference to
Exhibit 10.17 to Amendment No. 1 to the Company's Registration
Statement on Form SB-2) (Registration No. 33-85416-A).
10.16 -- License Agreement between the Registrant and the University of
Florida Research Foundation, Inc. dated October 23, 1995
(incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1995).
10.17 -- SunPharm Corporation 1995 Nonemployee Directors' Stock
Option Plan (incorporated by reference to Exhibit 10.17 to
the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995).
10.18 -- Form of Redeemable Common Stock Purchase Warrant (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 1996).
10.19 -- Form of Subscription Agreement relating to 1996 Private
Placement of Units consisting of Common Stock and Redeemable
Common Stock Purchase Warrants (incorporated by reference
to Exhibit 4.1 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1996).
11.1* -- Statement regarding computation of loss per share.
16.1 -- Letter from Arthur Andersen LLP regarding change in accountants
(incorporated by reference to the exhibit attached to the
Company's report of Form 8-K filed with the Securities and
Exchange Commission on January 23, 1996).
23.1* -- Consent of Deloitte & Touche LLP
- -------------------
* Filed herewith.
(b) Reports on Form 8-K.
On January 23, 1996, the Company filed a report on Form 8-K disclosing a
change in independent accountants from Arthur Andersen LLP to Deloitte & Touche
LLP.
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SUNPHARM CORPORATION
By: /s/ STEFAN BORG
-------------------------------------
President and Chief Executive Officer
Date: MARCH 27, 1997
-----------------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Date: March 27, 1997 /s/ STEFAN BORG
----------------------------------------
Stefan Borg, President and Chief
Executive Officer (Principal Executive,
Financial and Accounting Officer)
Date: March 27, 1997 /s/ PHILIP R. TRACY
----------------------------------------
Philip R. Tracy, Chairman of the Board
of Directors
Date: March 27, 1997 /s/ JERRY T. JACKSON
----------------------------------------
Jerry T. Jackson, Director
Date: March 27, 1997 /s/ ROBERT S. JANICKI
----------------------------------------
Robert S. Janicki, Director
Date: March 27, 1997 /s/ NORMAN LIPOFF
----------------------------------------
Norman Lipoff, Director
Date: March 27, 1997 /s/ JACQUES F. REJEANGE
----------------------------------------
Jacques F. Rejeange, Director
Date: March 27, 1997 /s/ ROBERT A. SCHOELLHORN
----------------------------------------
Robert A. Schoellhorn, Director
Date: March 27, 1997 /s/ GEORGE B. SCHWARTZ
----------------------------------------
George B. Schwartz, Director
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report...................................... F-2
Balance Sheets.................................................... F-3
Statements of Operations.......................................... F-4
Statements of Stockholders' Equity................................ F-5
Statements of Cash Flows.......................................... F-7
Notes to Financial Statements..................................... F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
SunPharm Corporation:
We have audited the accompanying balance sheet of SunPharm Corporation (a
development stage company) as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended, and for the period from May 3, 1990 (date of incorporation) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The Company's financial statements
for the period May 3, 1990 (date of incorporation) through December 31, 1994
were audited by other auditors whose report, dated April 3, 1995, expressed an
unqualified opinion on those statements. The financial statements for the
period May 3, 1990 (date of incorporation) through December 31, 1994 reflect
total revenues and net loss of $1,885,000 and $4,390,367, respectively, of the
related totals. The other auditors' report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such prior period, is
based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of SunPharm as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the two years then ended, and for the period
from May 3, 1990 (date of incorporation) to December 31, 1996, in conformity
with generally accepted accounting principles.
The accompanying financial statements for the years ended December 31, 1996 and
1995 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company is a
development stage enterprise with no significant revenues to date. As a result,
the Company has suffered recurring losses from operations since inception. In
addition, in order to complete the research and development and other activities
necessary to commercialize its products, additional financing will be required
in 1997. The Company's recurring losses together with the uncertainty
surrounding the Company's ability to obtain sufficient additional financing in
1997 raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
March 14, 1997
F-2
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -----------------------------------------------------------------------------
1996 1995
------------ -----------
ASSETS
CURRENT ASSETS:
Cash $ 341,145 $ 331,069
Investments 1,795,312 1,290,464
Sublicensing fee receivable 500,000
Prepaid expenses and other assets 112,066 159,857
------------ -----------
Total current assets 2,748,523 1,781,390
RECEIVABLE FROM STOCKHOLDER 10,000 13,114
OTHER ASSETS 12,437 14,237
------------ -----------
TOTAL ASSETS $ 2,770,960 $ 1,808,741
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 323,451 $ 360,722
Accrued liabilities 869,245 177,483
Accrued legal fees 300,000
Notes payable 112,201 87,834
------------ -----------
Total current liabilities 1,304,897 926,039
COMMITMENTS AND CONTINGENCIES
(Notes 3, 5, 6, 8 and 10)
STOCKHOLDERS' EQUITY:
Undesignated serial preferred stock,
$.001 par value, 2,500,000 shares
authorized, none issued and outstanding
Common stock, $.0001 par value, 25,000,000
shares authorized, 3,708,879 and
2,884,535 issued and outstanding 371 288
Additional paid-in capital 13,062,321 9,642,434
Deficit accumulated during development
stage (11,596,629) (8,760,020)
------------ -----------
Total stockholders' equity 1,466,063 882,702
------------ -----------
TOTAL $ 2,770,960 $ 1,808,741
------------ -----------
------------ -----------
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
PERIOD FROM
MAY 3, 1990
(DATE OF
YEARS ENDED INCORPORATION)
DECEMBER 31, TO
-------------------------- DECEMBER 31,
1996 1995 1996
SPONSORED RESEARCH/
SUBLICENSING REVENUES $ 1,000,000 $ 2,885,000
INTEREST INCOME 72,605 $ 162,657 235,262
----------- ----------- ------------
Total revenues 1,072,605 162,657 3,120,262
----------- ----------- ------------
EXPENSES:
Research and development 1,900,799 1,964,556 7,569,031
General and administrative 1,728,415 2,567,754 6,657,860
Royalty 280,000 490,000
----------- ----------- ------------
Total expenses 3,909,214 4,532,310 14,716,891
----------- ----------- ------------
NET LOSS $(2,836,609) $(4,369,653) $(11,596,629)
----------- ----------- ------------
----------- ----------- ------------
LOSS PER SHARE $ (0.92) $ (1.55)
----------- -----------
----------- -----------
SHARES USED IN COMPUTING
LOSS PER SHARE 3,085,093 2,811,028
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
-----------------------------------------------------
SERIES A SERIES B
----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
Issuance of common stock
for services, October 1991
($.0064 per share)
Issuance of common stock for
license agreement rights,
December 1991 ($.0064 per share)
Issuance of common stock for cash,
December 1991 ($.0064 per share)
-------- --------- ------- ---------
BALANCE, DECEMBER 31, 1991
Issuance of Series A for cash,
February through November 1991
($1.67 per share) 307,500 513,525
Issuance of Series B for cash,
October through December 1992
($5.00 per share) 32,500 162,500
Issuance of common stock for
services, October 1992 ($.32
per share)
Issuance of Series B for services,
December 1992 ($5.00 per share) 5,000 25,000
Net loss
-------- --------- ------- ---------
BALANCE, DECEMBER 31, 1992 307,500 513,525 37,500 187,500
Issuance of Series B for cash,
April through June 1993 ($5.00
per share) 57,500 287,500
Issuance of Series B for services,
June 1993 ($5.00 per share) 1,500 7,500
Issuance of common stock for
services, March 1993 ($.32 per
share)
Issuance of common stock for cash,
December 1993 ($.32 per share)
Net loss
-------- --------- ------- ---------
BALANCE, DECEMBER 31, 1993 307,500 513,525 96,500 482,500
Deferred compensation
Amortization of deferred compensation
Exercise of stock options, September
1994 ($.32 per share)
Issuance of warrants to purchase
common stock in connection with the
Bridge notes ($2.63 per share)
Net loss
-------- --------- ------- ---------
BALANCE, DECEMBER 31, 1994 307,500 513,525 96,500 482,500
Compensation expense
Conversion of preferred stock to
common stock (307,500) (513,525) (96,500) (482,500)
Initial public offering
Net loss
-------- --------- ------- ---------
BALANCE, DECEMBER 31, 1995 - - - -
Exercise of warrants
Issuance of common stock
Issuance of common stock for
settlement of litigation
Net loss
-------- --------- ------- ---------
BALANCE, DECEMBER 31, 1996 $ $
-------- --------- ------- ---------
-------- --------- ------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING
------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT CAPITAL COMPENSATION STAGE
<S> <C> <C> <C> <C> <C>
Issuance of common stock
for services, October 1991
($.0064 per share) 467,400 $ 47 $ 2,953
Issuance of common stock for
license agreement rights,
December 1991 ($.0064 per share) 311,600 31 1,969
Issuance of common stock for cash,
December 1991 ($.0064 per share) 148,010 15 935
--------- ---- ----------- --------- ------------
BALANCE, DECEMBER 31, 1991
Issuance of Series A for cash,
February through November 1991
($1.67 per share) 927,010 93 5,857
Issuance of Series B for cash,
October through December 1992
($5.00 per share)
Issuance of common stock for
services, October 1992 ($.32
per share)
Issuance of Series B for services,
December 1992 ($5.00 per share) 3,895 1,250
Net loss (998,004)
--------- ---- ----------- --------- ------------
BALANCE, DECEMBER 31, 1992 930,905 93 7,107 (998,004)
Issuance of Series B for cash,
April through June 1993 ($5.00
per share)
Issuance of Series B for services,
June 1993 ($5.00 per share)
Issuance of common stock for
services, March 1993 ($.32 per
share) 31,160 3 9,997
Issuance of common stock for cash,
December 1993 ($.32 per share) 15,580 2 4,998
Net loss (1,233,352)
--------- ---- ----------- --------- ------------
BALANCE, DECEMBER 31, 1993 977,645 98 22,102 (2,231,356)
Deferred compensation 818,308 (818,308)
Amortization of deferred compensation 818,308
Exercise of stock options, September
1994 ($.32 per share) 7,790 1 2,499
Issuance of warrants to purchase
common stock in connection with the
Bridge notes ($2.63 per share) 600,000
Net loss (2,159,011)
--------- ---- ----------- --------- ------------
BALANCE, DECEMBER 31, 1994 985,435 99 1,442,909 (4,390,367)
Compensation expense 28,188
Conversion of preferred stock to 634,100 63 995,962
common stock
Initial public offering 1,265,000 126 7,175,375
Net loss (4,369,653)
--------- ---- ----------- --------- ------------
BALANCE, DECEMBER 31, 1995 2,884,535 288 9,642,434 (8,760,020)
Exercise of warrants 236,721 24 458,697
Issuance of common stock 537,623 54 2,636,195
Issuance of common stock for
settlement of litigation 50,000 5 324,995
Net loss (2,836,609)
--------- ---- ----------- --------- ------------
BALANCE, DECEMBER 31, 1996 3,708,879 $371 $13,062,321 $ $(11,596,629)
--------- ---- ----------- --------- ------------
--------- ---- ----------- --------- ------------
</TABLE>
F-6
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
- ---------------------------------------------------------------------------------------------------------
Period From
May 3, 1990
(Date of
Incorporation)
Years Ended to
December 31, December 31,
----------------------------
1996 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,836,609) $(4,369,653) $(11,596,629)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,800 2,579 71,706
Expense related to issuance of stock for services 43,750
Compensation expense related to options, warrants
and stock appreciation rights 46,938 865,246
Amortization of deferred offering costs incurred in
connection with issuance of Bridge Notes 775,000 775,000
Write-off of patents 70,120
(Increase) decrease in receivable from stockholder 3,114 2,458 (10,000)
Increase in prepaid expenses and other assets (452,209) (80,990) (613,707)
Increase (decrease) in accounts payable (37,271) (669,641) 323,451
Increase (decrease) in accrued liabilities 716,762 (340,620) 875,495
Increase in accrued legal fees 300,000 300,000
----------- ----------- ------------
Total adjustments 232,196 35,724 2,701,061
----------- ----------- ------------
Net cash used in operating activities (2,604,413) (4,333,929) (8,895,568)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (1,795,312) (3,324,062) (5,119,374)
Sales and maturities of short-term investments 1,290,464 2,033,598 3,324,062
Purchases of office equipment (2,876) (17,198)
Payment of patent costs (67,424)
----------- ----------- ------------
Net cash used in investing activities (504,848) (1,293,340) (1,879,934)
----------- ----------- ------------
----------- ----------- ------------
(Continued)
</TABLE>
F-7
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
- ----------------------------------------------------------------------------------
Period From
May 3, 1990
(Date of
Incorporation)
Years Ended to
December 31, December 31,
-------------------------
1996 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of notes payable $ 24,367 $(1,501,511) $ 12,201
Increase in deferred offering costs (597,348)
Issuance of Series A redeemable convertible
preferred stock 513,525
Issuance of Series B redeemable convertible
preferred stock 450,000
Issuance of common stock 3,094,970 7,634,849 10,738,269
Proceeds from payable to stockholders 25,000 542,500
Repayment of payable to stockholders (200,000) (542,500)
---------- ----------- -----------
Net cash provided by financing activities 3,119,337 5,958,338 11,116,647
---------- ----------- -----------
NET CHANGE IN CASH 10,076 331,069 341,145
CASH AT BEGINNING OF PERIOD 331,069
---------- ----------- -----------
CASH AT END OF PERIOD $ 341,145 $ 331,069 $ 341,145
---------- ----------- -----------
---------- ----------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 3,030 $ 73,270 $ 164,940
---------- ----------- -----------
---------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-8
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION
SunPharm Corporation ("SunPharm" or the "Company"), formerly LexiGen,
Incorporated, was incorporated in the State of Delaware on May 3, 1990,
issued shares of its common stock in 1991 and commenced operations in
February 1992. The Company was formed to develop and commercialize unique
and proprietary polyamine analogs with antiproliferative and other
therapeutic uses.
The Company is a development stage company which has devoted substantially
all of its efforts to research and product development and has not yet
generated any revenues from the sale of products, nor is there any
assurance of future revenues. In addition, the Company expects to continue
to incur losses for the foreseeable future and there can be no assurance
that the Company will successfully complete the transition from a
development stage company to successful operations. The research and
development activities engaged in by the Company involve a high degree of
risk and uncertainty. The ability of the Company to successfully develop,
manufacture and market its proprietary products is dependent upon many
factors. These factors include, but are not limited to, the need for
additional financing, the reliance on collaborative arrangements for
research and contractual agreements with corporate partners, the Company's
dependence on its exclusive license agreement with the University of
Florida, the ability to attract and retain key personnel and consultants
including its founder, and the ability to develop manufacturing, sales and
marketing experience. Additional factors include uncertainties as to
patents and proprietary technologies, technological change and risk of
obsolescence, development of the product, competition, government
regulations and regulatory approval, the uncertainty of health care reform
and product liability exposure.
In order to continue its research and product development activities as
planned, the Company raised equity through an initial public offering
(Offering). Such Offering was completed in January and February of 1995
and resulted in net proceeds of approximately $7,200,000 which were
sufficient to fund the Company's operations through July of 1996. The
Company intends to obtain additional funds for research and development
through collaborative arrangements with corporate partners, additional
financings, and from other sources; however, there can be no assurance that
the Company will be able to obtain necessary financing when required or
what the terms of any financing, if obtained, might be. Accordingly, there
can be no assurance of the Company's future success.
In April 1996, the Company received notice from the Nasdaq Stock Market
("Nasdaq") that the Company's total assets and capital as of December 31,
1995, did not meet the minimum requirements of $2 million and $1 million,
respectively, for continued listing on the Nasdaq Small Cap Market and that
the Company's Common Stock, Warrants and Units were subject to delisting.
Through private placement of common stock resulting in net proceeds of
approximately $2,636,000, a warrant exchange offer resulting in net
proceeds of approximately $459,000 and a $1 million milestone payment
earned by the Company in
F-9
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1996, the Company was in compliance with the Nasdaq requirements as of
December 31, 1996. There can be no assurance that the Company will
maintain its continued listing on the Nasdaq Small Cap market. In the
event that the Company's securities are delisted, the market value of such
securities may be adversely affected.
Presently, the Company is exploring a number of financing alternatives
which would generate cash resources through a private sale of equity in the
Company. There can be no assurance that a transaction will be completed
or, if completed, there can be no assurance as to the terms or amount of
such transaction.
In August 1994, the board of directors authorized a 1.558-For-1 stock split
of all outstanding stock, increased the number of shares of authorized
common stock to 25,000,000 and changed the par value of the common stock to
$.0001 per share, all of which was approved by the stockholders in October
1994. All share and per share amounts have been retroactively restated to
reflect the stock split for all years presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS PRESENTATION - The financial statements are presented in accordance
with generally accepted accounting principles, which require management to
make estimates that affect the reported amounts and contingency disclosures
in the financial statements. Actual results could differ from these
estimates.
PATENT COSTS - The Company reimburses the University of Florida Research
Foundation, Inc. (UFRFI), for direct expenses related to the Company's
licensed patents. Patent costs consist of legal fees and other direct
costs incurred in filing, prosecuting and maintaining the licensed patents.
These costs are charged directly to research and development expense.
RESEARCH AND DEVELOPMENT - Sponsored research is recognized as revenue when
the research has been performed. Research and development expenses are
charged to operations as incurred. Research and development expenses
include, among other things, consulting fees and cost reimbursements to
UFRFI.
NEW ACCOUNTING STANDARD - Effective January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123
establishes a fair value based method of accounting for stock-based
employee compensation plans; however, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under
the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
F-10
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
price of the stock at the grant date or other measurement date over the
amount an employee must pay to acquire
F-11
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
the stock. The company has elected to continue to account for its employee
stock compensation plans under APB Opinion 25 with pro forma disclosures of
net earnings and earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied.
3. INITIAL PUBLIC OFFERING AND SUBSEQUENT SECURITIES OFFERING
On January 12, 1995, the Company completed an initial public offering of
1,100,000 units ("Unit") at $7.00 per Unit. Each Unit consists of one
share of the Company's common stock and one Redeemable Common Stock
Purchase Warrant ("Warrant"), which entitles the holder to purchase one
share of common stock at $8.75 per share. The Warrants are subject to
redemption by the Company commencing January 1996 at $.05 per Warrant,
providing the closing bid price of the Company's common stock exceeds
$12.25 per share for 20 consecutive trading days ending within five days of
the notice of redemption. Additionally, on February 16, 1995, the
underwriter of the Offering (the "Representative") exercised an option to
purchase an additional 165,000 Units at $7.00 per Unit (Representative's
over-allotment option).
Proceeds from these sales were approximately $7,200,000 of cash, net of
underwriting costs and other Offering costs of $1,655,000. Of such net
proceeds, approximately $1,793,000 was used to repay the outstanding
indebtedness (including accrued interest and certain fees) of the Company.
In addition, other expenses which were paid include approximately $310,000
for human clinical trials of DEHOP and DENSPM, $150,000 for research and
development of other potential products, $240,000 for general corporate
expenses and approximately $210,000 to pay royalties to the UFRFI.
In connection with the Offering, the Company has sold to the
Representative, for nominal consideration, a unit purchase option to
purchase up to 110,000 Units substantially identical to the Units sold in
the Offering in all respects, except that each Warrant included in the unit
purchase option entitles the holder to purchase one share of common stock
at $11.375 per share. The unit purchase option will be exercisable during
the four year period commencing January 12, 1996, at an exercise price of
$11.20 per Unit.
Also, during the five year period from the date of the Offering, in the
event the Representative originates a financing or a merger, acquisition,
joint venture, strategic alliance introduction or other similar transaction
to which the Company is a party, the Representative will be entitled to a
finders' fee in consideration of the origination of the transaction. The
fee is based upon a percentage of the consideration paid in the transaction
or, in the case of an introduction to a customer, a five year royalty on
sales. In both instances, the consideration will consist of 5% of the
first $1,000,000, 4% of the next $1,000,000, and 3% of any amount in excess
of $2,000,000.
The Company entered into a one year consulting agreement with the
Representative, providing for the Representative to act as the Company's
investment banker for an annual fee of $77,000, which was paid from the
proceeds of the Offering. Such agreement expired in January 1996 and was
not renewed.
F-12
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
During the year ended December 31, 1996, the Company completed the private
placement of 537,623 Units pursuant to Regulation D of the Securities Act
of 1933 for $5.50 Per Unit. Each Unit consists of one share of the
Company's common stock and one redeemable Common Stock Purchase Warrant
("Warrant"). The Warrants included in these units expire four years from
the date of issuance and have exercise prices of $5.50 Per share until the
anniversary date, $6.50 Per share until the second anniversary date, and
$7.50 Per share thereafter. The Warrants are subject to redemption by the
Company at $.01 Per Warrant, provided the Company's common stock closes at
a price of $8.50, $9.50 Or $10.50 Per share for twenty consecutive days
during the second, third or fourth years, respectively, of the term of the
Warrant.
Proceeds from the private placement as well as proceeds from the warrant
exchange discussed in Note 8 were approximately $3,095,000 of cash, net of
placement agent and other offering costs of approximately $355,000.
4. INVESTMENTS
At December 31, 1996 and 1995, the Company's investments consisted of
United States treasury bills earning interest at an annual rate of 4.6 and
5.5 percent, respectively. These investments are available for sale and
cost plus accrued interest approximates fair market value. At December 31,
1996 and 1995, these securities had a maturity of less than one year.
5. NOTES PAYABLE
In January and March 1993, the Company issued notes payable in the
aggregate principal amount of $522,500 primarily to SunPharm Investors
L.P., a limited partnership in which 7 percent of the funds loaned to the
Company were contributed by existing stockholders of the Company. Costs
associated with this issuance totaled $57,500. There were also stock
purchase warrants issued as discussed in Note 8. The notes bore interest
at 9.5 percent through January, 1995, when they were repaid.
In August and September 1994, two directors of the Company loaned $5,000
and $50,000, respectively, to the Company. The loans were repaid from the
proceeds of the Bridge Financing discussed below. In addition, the
directors were granted warrants to acquire 500 and 5,000 shares,
respectively, of common stock at an exercise price of $5.50.
F-13
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996 (CONTINUED)
- ------------------------------------------------------------------------------
On September 27, 1994, the Company issued the Bridge Notes totaling
$1,000,000 as a bridge financing for the initial public offering. The
holders of the Bridge Notes also received warrants to purchase 228,573
shares of common stock at an exercise price of $4.375 per share. The
estimated value of $600,000 for the warrants was recorded as additional
paid-in capital and deferred offering costs during 1994. The net proceeds
of the Bridge Notes were $825,000 considering the $100,000 placement fee
paid to the placement agent and $75,000 of offering costs. The total
deferred offering costs of $775,000 were charged to expense upon repayment
of the Bridge Notes in 1995. The Bridge Notes bore interest at an annual
rate of 10% and were repaid in January and February 1995 from the proceeds
of the Offering.
In November and December 1994, two directors of the Company loaned $100,000
and $75,000, respectively, to the Company. The notes bore interest at 12%
per annum and were repaid from the proceeds of the Offering in January
1995. In addition, the directors were granted 10,000 and 7,500 warrants,
respectively, to acquire shares of common stock at an exercise price of
$7.00. The warrants are not exercisable until the second anniversary of
the completion of the Offering.
In January 1995, two directors of the Company loaned a total of $25,000 to
the Company. The notes bore interest at 12% per annum and were repaid from
the proceeds of the Offering. In addition, the directors were granted
warrants to acquire 2,500 shares of common stock at an exercise price of
$7.00. The warrants are not exercisable until the second anniversary of
the completion of the Offering.
6. COMMITMENTS AND CONTINGENCIES
In 1992 and 1993, the Company entered into consulting agreements with
various financial advisors and directors. The Company is obligated to pay
the advisors certain fees if the Company enters into a financing
transaction with certain identified parties. The fees include a percentage
ranging from .5 percent to 2 percent of the financing transactions in
addition to options or warrants to purchase shares of common stock, with
the number of shares to be computed based upon the level of financing as
defined in the respective agreements.
The Company entered into a one year agreement with a consultant under which
the Company was obligated to pay $2,500 per month for one year beginning
June 30, 1993. Such agreement has been extended on a month-to-month basis
since July 1994. The Company has also entered into an agreement with Dr.
Bergeron, the inventor of the technology, under which the Company is
obligated to pay $8,000 per month for consulting through December, 1998.
F-14
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996 (CONTINUED)
- ------------------------------------------------------------------------------
In March 1993, the company entered into an employment agreement with the
founder. The agreement provides for an annual base salary of $120,000 for
a three-year period beginning April 1, 1993. The board of directors
approved a $30,000 bonus upon the closing of the bridge financing discussed
in Note 5 and, effective June 1, 1994, the annual base salary was increased
to $132,000. In March 1995, the board of directors approved a $35,000
bonus for services performed during the preceding twelve months, extended
the agreement to March 31, 1997 and agreed to increase the annual base
salary to $150,000, effective April 1, 1995.
On December 20, 1995, Dean L. Rider, M.D. ("Rider"), a stockholder of the
Company, filed suit against the Company and Stefan Borg in Superior Court
for the City and County of San Francisco, California, seeking compensatory
damages of over $41 million and punitive damages based upon an alleged
agreement between SunPharm and Rider. In June 1996, the Company settled
this litigation with Rider by issuing Rider 50,000 shares of SunPharm
common stock. Such shares have subsequently been registered for resale.
The issuance of the shares was recorded by a reduction in legal fees
accrued at December 31, 1995, which approximated the fair value of the
shares issued. The Company believes that the claims made by Rider were
without merit, and did not admit to any wrongdoing in connection with the
settlement. The Company agreed to the settlement because it believed the
cost of the settlement to be more economical than the cost of continuing to
incur significant legal expenses to defend this matter.
The Company leases office space and office equipment under operating
leases. At December 31, 1996, the Company is committed to pay future
minimum annual rentals of approximately $39,000. Lease expense for the
years ended December 31, 1996 and 1995 was approximately $62,700 and
$50,700, respectively.
7. PREFERRED STOCK
Upon the closing of the Offering in January 1995, the Series A and Series B
Redeemable Convertible Preferred Stock outstanding automatically converted
into 479,700 and 154,400 shares of common stock, respectively. The Company
presently has 2,500,000 shares of undesignated serial preferred stock
authorized and none issued and outstanding.
8. STOCK OPTIONS, WARRANTS AND OTHER INCENTIVE COMPENSATION
In 1992, the Company issued Warrants to a director to purchase 77,900
shares of the Company's common stock. The Warrants are exercisable at
$1.93 per share. In connection with the notes issued to SunPharm Investors
in 1993 as discussed in Note 5, the Company issued Warrants to purchase
155,021 shares and 133,234 shares of the Company's common stock at exercise
prices of $1.93 per share and $3.21 per share, respectively. These
Warrants have been recorded at zero in the accompanying financial
statements as the value at the time of issuance was de minimus.
F-15
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996 (CONTINUED)
- ------------------------------------------------------------------------------
During 1996, the Company offered the Bridge Note warrant holders discussed
in Note 5 and SunPharm Investors L.P. discussed above a thirty percent
reduction in their applicable exercise price if they exercised their
warrants prior to December 31, 1996. Additionally, for each four warrants
exercised, a warrant identical to those included in the units described in
Note 2 would be issued. As a result of this warrant exchange offer, 62,858
of the Bridge Note Warrants and 173,863 of SunPharm L.P. warrants were
exercised in exchange for 236,721 shares of stock and 59,178 new warrants.
Proceeds from the warrants exchange were approximately $459,000 of cash,
net of offering costs of approximately $34,000.
The Company's board of directors granted stock options to employees and
other parties to purchase common stock. Employee options generally vest
over a sixty month period or over the term of an employment agreement.
Options granted to consultants generally vest over a particular service
period or in connection with certain milestones. Also, certain options
previously granted had immediate vesting provisions. Most options expire
seven years from the date of grant if not exercised.
In April 1994, the board of directors of the Company approved the 1994
Stock Option Plan (1994 Plan) and reserved 350,550 shares of common stock
for issuance of stock options to employees and consultants. The 1994 plan
is composed of incentive stock options and nonqualified stock options. The
options generally vest over a two- to five-year period, and the incentive
stock options expire 10 years from the date of grant. For the years ended
december 31, 1996 and 1995, there were 80,000 shares and 55,000 shares
granted from this plan, respectively.
On July 10, 1995, the stockholders of the Company approved the SunPharm
Corporation 1995 Nonemployee Directors' Stock Option Plan (the 1995
Directors Plan). The maximum number of shares of common stock with respect
to which options may be granted under this plan is 200,000, subject to
appropriate adjustment upon a reorganization, stock split, recapitalization
or other change in the Company's capital structure. Directors who are not
employees or consultants to the Company are eligible to receive
nonqualified stock options, which in accordance with the plan must be
issued at one hundred percent (100%) of the fair market value of the common
stock of the Company on the date of grant. Directors who are eligible to
receive options under the plan, will be entitled to receive an option to
purchase 25,000 shares of common stock on the date on which they become a
director. Additionally, eligible directors will be entitled to receive
options annually on the date of their reelection to the Board of Directors
to purchase 5,000 shares (with an additional 10,000 shares for the Chairman
of the Board of Directors, if he is eligible) of common stock. For the
years ended December 31, 1996 and 1995 options to purchase 60,000 and
55,000 shares of common stock were granted under the plan.
F-16
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996 (CONTINUED)
- ------------------------------------------------------------------------------
SFAS NO. 123 REQUIRED DISCLOSURE
If compensation cost for stock option, SARs and warrant grants (Grants) had
been determined based on the fair value at the grant dates for 1995 and 1996
consistent with the method prescribed by SFAS No. 123, the Company's net
loss and loss per share would have been adjusted to the pro forma amounts
indicated below:
1996 1995
Net loss As reported $ (2,836,609) $ (4,369,653)
Pro forma (3,242,139) (4,529,672)
Loss per share As reported (0.92) (1.55)
Pro forma (1.05) (1.61)
Under SFAS No. 123, the fair value of each Grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995,
respectively: dividend yield of 0 and 0 percent, expected volatility of
52.6% and 44.4% percent, risk-free interest rates of 6.54% and 5.63%
percent, and expected lives of 10 years.
A summary of the status of Grants under the Company's stock-based
compensation plans as of December 31, 1996 and 1995, and changes during the
years ending on those dates is presented below:
1996 1995
--------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISED EXERCISED
GRANTS PRICE GRANTS PRICE
Outstanding at
beginning of year 1,244,696 $2.97 1,122,196 $2.49
Granted 140,000 5.75 122,500 7.34
Exercised
--------- ---------
Outstanding at end of year 1,384,696 $3.25 1,244,696 $2.97
--------- ---------
--------- ---------
Grants exercisable at year-end 1,003,926 585,959
Weighted-average fair value
of Grants granted during
the year 610,530 554,123
F-17
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1986 (CONTINUED)
- -------------------------------------------------------------------------------
The following table summarizes information about the outstanding Grants at
December 31, 1996:
<TABLE>
GRANTS OUTSTANDING GRANTS EXERCISABLE
------------------------------------- ------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
<S> <C> <C> <C> <C> <C>
$.0064 to $.32 460,752 3.73 $ 0.27 386,747 $ 0.26
$1.60 to $1.93 257,070 5.93 1.71 184,363 1.75
$5.00 to $5.50 501,874 4.59 5.49 327,540 5.45
$6.56 and $8.75 165,000 7.86 6.11 105,276 7.29
--------- ---------
1,384,696 5.06 3.25 1,003,926 3.06
--------- ---------
--------- ---------
</TABLE>
Remaining non-exercisable Grants as of December 31, 1996 become available
as follows:
1997 196,328
1998 56,050
1999 100,392
2000 16,000
2001 12,000
-------
380,770
-------
-------
In August 1994, the Company elected a director of the Company, and engaged
him as a consultant to provide management, marketing, economic and
strategic planning services during a two-year period. The director was
compensated under such consulting agreement at a rate of $7,500 per month,
and by the issuance of a stock appreciation right ("SAR") for 150,000
common stock equivalents, exercisable (commencing in 1996 with respect to
50% and 1997 with respect to the remainder) in an amount equal to the
excess of the fair market value of the Company's common stock on the date
of exercise over the initial public offering price of the Units. Such
stock appreciation right terminates on January 1, 2000. As consideration
for his serving on the Board of Directors, the director was granted a five-
year stock purchase warrant ("Warrant") for 225,000 shares of common stock
of the Company, such Warrant being exercisable at a price of $5.50 per
share. In 1995 the Company recorded compensation expense of $18,750 and
$28,188 in connection with the SAR and the Warrant, respectively, and due
to the terms, may incur additional non-cash charges in the future. No
compensation expense was recorded in 1996 related to any options, warrants
or SARs based on the quoted market value of the Company's common stock.
F-18
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1986 (CONTINUED)
- -------------------------------------------------------------------------------
9. FEDERAL INCOME TAXES
The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1996, the Company
has net operating loss (NOL) and tax credit carryforwards for income tax
purposes of approximately $9,553,000 and $338,000, respectively, which may
be available to reduce future taxable income and future tax liabilities.
These carryforwards begin to expire in 2008.
The Tax Reform Act of 1986 provides for an annual limitation on the use of
NOL and credit carryforwards (following certain ownership changes) that
could significantly limit the Company's ability to utilize these
carryforwards. The Company has made no determination concerning whether
there has been such a cumulative change in ownership, and it is possible
that such a change in ownership occurred following the completion of the
initial public offering, the private placement and the subsequent exercise
of the Warrants. Accordingly, the Company's ability to utilize the
aforementioned carryforwards to reduce future taxable income and tax
liabilities may be limited. Additionally, because United States tax laws
limit the time during which these carryforwards may be applied against
future taxes, the Company may not be able to take full advantage of these
attributes for federal income tax purposes.
As the Company has had cumulative losses and there is no assurance of
future taxable income, a valuation allowance has been established to fully
offset the deferred tax asset related to the net operating losses and other
items. The components of the Company's deferred tax assets at December 31,
1996 and 1995 are as follows:
1996 1995
---------- ----------
Net operating loss carryforwards $3,582,000 $2,421,000
Research and development tax credits 338,000 260,000
Deferred compensation 326,000 326,000
Litigation 113,000
---------- ----------
Total deferred tax assets 4,246,000 3,120,000
Less valuation allowance 4,246,000 3,120,000
---------- ----------
Net deferred tax assets $ - $ -
---------- ----------
---------- ----------
F-19
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996 (C0NTINUED)
- -------------------------------------------------------------------------------
10. RESEARCH AND DEVELOPMENT
In 1991, the Company issued UFRFI 311,600 shares of common stock, recorded
at $2,000, for exclusive, worldwide license agreement rights. The Company
also paid a maintenance fee to UFRFI in the amount of $50,000 which was
charged to research and development expense. This fee is credited toward
sponsored research payments and/or royalties. In March 1993, the license
agreement was amended to provide for additional patent rights for the
Company in exchange for the Company's payment of patent costs incurred by
UFRFI prior to the amendment, a license fee of $40,000 payable to UFRFI
upon execution of the amendment, the issuance of 31,160 shares of common
stock valued at $10,000 and an increase in annual maintenance fee payable
to UFRFI from $50,000 to $100,000. In September 1996, this agreement was
further amended providing for more patent rights for the Company in
exchange for the Company's payment of a one time license fee of $50,000 and
an increase in the annual maintenance to $200,000 beginning in 1997.
The Company has also entered into a research agreement with UFRFI. For the
years ended December 31, 1996 and 1995, the Company paid $535,000 and
$869,000, respectively, to UFRFI under the terms of the research agreement.
The amount paid in 1995 includes the maintenance fee of $100,000 for 1996.
In September 1996, this agreement was amended concurrently with the license
agreement described above for increased sponsored research payments related
to the Company's products from $625,000 in 1995 to $641,000 in 1996,
$854,250 in 1997 and $875,000 in 1998. These expenses are charged to
operations as incurred. Failure to pay such costs could result in
termination of the license agreement rights. If UFRFI were to terminate
the license, the Company's rights to manufacture and market the technology
and related products would terminate and such an event would have a
material adverse effect on the Company. In 1995, the Company paid $50,000
to UFRI for an additional license, described below. The Company also paid
UFRFI $151,000 and $111,000 in 1996 and 1995, respectively, for
reimbursement of patent costs.
The Company agreed to pay a royalty on net sales of licensed products up to
6 percent of net sales for each product. A royalty of 28 percent of
sublicensee payments, but no less than 2 percent of net sales by such
sublicensee, will also be payable to UFRFI. The Company paid UFRI $210,000
in royalties in 1995, which were payable as a result of licensing fees
received in 1993. At December 31, 1996 the Company had accrued an
additional $280,000 liability to UFRFI for sublicense payments related to
the $1 million Warner Lambert milestone payment earned in 1996.
On May 1, 1993, the Company entered into a sublicensing agreement with
Warner-Lambert. The agreement grants Warner-Lambert the right of first
refusal in the event the Company decides to develop certain other licensed
products under certain circumstances. Under the terms of the agreement,
Warner-Lambert paid the Company $100,000 in May 1993 upon the execution of
the agreement and $750,000 in October 1993 related to the filing of the
investigational new drug application. The payments were recognized as
revenue when the payments were received. Additional payments may be
received for the completion of certain scientific milestones. The
agreement provides for Warner-Lambert to pay the
F-20
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1996 (C0NTINUED)
- -------------------------------------------------------------------------------
Company a royalty on net sales, as defined. On March 1, 1994, Warner-
Lambert paid the Company $750,000 in consideration for the Company's
research and development activities performed. In 1996, the Company earned
an additional $1 million from Warner Lambert, of which $500,000 was
receivable as of December 31,1996 and was collected in January, 1997. The
agreement will terminate on the later of the last expiration date of a
licensed patent or 10 years from Warner-Lambert's marketing of a licensed
product.
In February 1994, the Company entered into an exclusive sublicense
agreement with Nippon Kayaku. Upon execution of the agreement, Nippon
Kayaku paid the Company $225,000 for research and development performed.
The sponsored research payment was recognized as revenue when the payment
was received. Additional payments may be payable to the Company for the
completion of certain scientific milestones. The agreement provides for
Nippon Kayaku to pay the Company a royalty on net sales, as defined.
In addition, Nippon Kayaku will reimburse the Company for direct costs
incurred for preclinical studies performed prior to the agreement. Nippon
Kayaku will also pay a running royalty of 2 percent of net sales as defined
for 10 years in the event that Nippon Kayaku elects to manufacture the
product. The agreement will terminate on the later of the last expiration
of a licensed patent or 10 years from Nippon Kayaku's marketing of a
licensed product in Japan.
A director was issued options with an exercise price of $.32 per share to
purchase 77,900 shares of common stock in connection with the exclusive
sublicense agreement with Nippon Kayaku. The original option agreement
stipulated that the options vested upon the completion of specified
milestones and, accordingly, compensation expense was recorded for the
portion of the options that had not vested through September 1994, at which
time the Company amended the agreement to reflect vesting based upon time
or the completion of specified milestones (see Note 8).
In October 1995, the Company entered into a licensing agreement with the
UFRI to acquire the rights to a proprietary process for making the iron
chelator drug, Desferrioxamine ("DFO"). The process was invented at the
University of Florida Department of Medicinal Chemistry by Raymond J.
Bergeron, Jr., Ph.D. Under the terms of the agreement, SunPharm has
acquired exclusive rights to patent applications covering a novel process
of chemically synthesizing DFO. SunPharm plans to use this unique process
to develop an alternative source of supply of DFO. SunPharm paid a
licensing fee of $50,000 upon the execution of the agreement.
Additionally, the Company will pay an earned royalty of 2% of net sales, as
defined in the agreement. A minimum royalty of $10,000 is payable on the
first and second anniversary dates of the agreement; on the third through
six anniversary dates, the minimum royalty will increase by $10,000 each
year until it reaches $50,000 on the sixth anniversary date. For all years
subsequent to the sixth year the minimum royalty will be $50,000.
F-21
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1986 (CONCLUDED)
- -------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
Several of the Company's stockholders and directors provided consulting and
administrative services to the Company. The fees related to these services
were $32,500 and $111,000 during 1996 and 1995, respectively, and are
included in research and development and general and administrative
expenses in the accompanying statements of operations. In addition, the
Company's legal counsel was paid $114,000 and $317,000 in 1996 and 1995,
respectively, for services rendered.
* * * * *
F-22
<PAGE>
EXHIBIT 11.1
SUNPHARM CORPORATION
CALCULATION OF LOSS PER SHARE
FOR THE YEAR ENDED
DECEMBER 31,1996
WEIGHTED AVERAGE SHARES OUTSTANDING:
------------------------------------
TOTAL # DAYS
SHARES OUTSTANDING
--------- -----------
Jan 1 - Jun 22 2,884,535 x 173 = 499,024,555
Jun 23 - Jul 22 3,223,617 x 30 = 96,708,510
Jul 23 - Dec 31 3,273,617 x 162 = 530,325,954
Dec 31 - Dec 31 3,708,879 x 0 = 0
365 1,126,059,019 / 365 = 3,085,093
LOSS PER SHARE:
------------------------------------
Net Loss (2,836,609)
-----------
Weighted Ave Share 3,085,093 = $ (0.92)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 341,145
<SECURITIES> 1,795,312
<RECEIVABLES> 510,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,748,523
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,770,960
<CURRENT-LIABILITIES> 1,304,897
<BONDS> 0
0
0
<COMMON> 371
<OTHER-SE> 1,465,692
<TOTAL-LIABILITY-AND-EQUITY> 2,770,960
<SALES> 0
<TOTAL-REVENUES> 1,072,605
<CGS> 0
<TOTAL-COSTS> 3,909,214
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,836,609)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,836,609)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> (.92)
</TABLE>
