Sunshine Biopharma, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts below are in U.S. dollars unless otherwise stated. The filing is unaudited.
Business context
Sunshine Biopharma develops proprietary drugs and sells nutritional supplements; it also plans to launch licensed generic pharmaceuticals in Canada. Q2 revenue came from nutritional supplements. Its pipeline includes Adva-27a, an anticancer drug still in preclinical development, and a proposed coronavirus treatment for which the company filed a U.S. patent application in May 2020. The former Atlas Pharma analytical-services subsidiary was disposed of in 2019.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $15,145 | $3,033 | $26,247 | $3,239 |
| Gross profit | $9,984 | $1,573 | $17,203 | $1,667 |
| Gross margin | 65.9% | 51.9% | 65.5% | 51.5% |
| General and administrative expense | $138,553 | $67,770 | $183,471 | $190,073 |
| Operating loss | $(128,569) | $(66,197) | $(166,268) | $(188,406) |
| Net loss | $(638,313) | $(710,890) | $(732,572) | $(913,432) |
Q2 basic loss per share was $0.01, compared with $0.14 in Q2 2019; six-month basic loss per share was $0.01 versus $0.20. The much larger reported share counts in 2020 affect per-share comparisons.
- Cash flow: Six-month operating cash use was $113,050, compared with $281,423 in 2019. Investing cash flow was zero; financing provided $159,007, versus $219,428 in 2019. Cash was $85,593 at June 30, up from $40,501 at year-end.
- Balance sheet and liquidity: Current assets were $112,165 and current liabilities $686,196, a working-capital deficit of $574,031. Total liabilities were $749,430, compared with total assets of $138,517; shareholders’ deficit was $610,913.
- Debt: Notes payable totaled $502,730, including $63,234 classified as long-term; related-party notes payable were $128,269. Interest payable was $28,548. The company reported no cash interest paid in the first half.
Material changes and unusual items
- Revenue increased from a low base as supplement sales expanded. For the six-month period, G&A declined $6,602 year over year, but Q2 G&A rose $70,783, including higher officer/director compensation, accounting and legal costs.
- Debt-conversion losses rose sharply to $550,390 for the first half, including $498,997 in Q2, from $65,094 for the first half of 2019. Management attributed the increase to convertible-note terms and stock-price volatility. The conversions issued 156,390,606 common shares, valued at $807,909, to reduce debt by $230,074 and interest payable by $27,445.
- Common shares outstanding increased from 35,319,990 at December 31, 2019 to 191,710,596 at June 30, 2020; the cover reports 200,308,644 shares as of August 18. A second 20-for-1 reverse split became effective April 6, 2020, and the statements present reverse splits retroactively.
- The CEO received 500,000 Series B preferred shares for coronavirus-treatment technology, bringing his holdings to 1,000,000 shares. Each share carries 1,000 votes and a $0.10 liquidation preference; the shares are nonconvertible and nonredeemable.
- The 2019 comparison includes a $582,237 loss related to discontinued Atlas operations; no comparable discontinued-operation loss was reported in 2020.
Outlook, risks and contingencies
- Going concern: Management says existing cash is insufficient to fund current operations and plans to raise debt and/or equity. It estimates approximately $20 million is needed to fully implement its business plan, including $18 million for proprietary drug development and $2 million for generic and supplement operations. There is no assurance financing will be available; failure to obtain it could threaten continued operations, and financing could substantially dilute shareholders.
- Development and commercialization: Adva-27a clinical development has been delayed for lack of funding. The coronavirus program was at patent-application and planned synthesis/testing stages, not demonstrated clinical efficacy. Canadian approvals and licensing steps for four generic drugs remained pending; the company could not estimate when required DINs and a Drug Establishment License would be obtained. Essential Calcium-Vitamin D was anticipated to be available on Amazon.ca in Q3 2020.
- COVID-19: The company said the pandemic had materially adversely affected, and could continue to affect, business and fundraising; the duration and magnitude were uncertain. It made no financial-statement adjustments for the pandemic.
- Government loans: The company received a $50,655 U.S. PPP loan and believed it would qualify for full forgiveness after using proceeds for eligible expenses; forgiveness was not reported as confirmed. It also received a C$40,000 Canadian CEBA loan, with conditional repayment/forgiveness terms.
- Debt and legal matters: Certain notes were past due or payable on demand at quarter-end. Litigation with a shareholder over an alleged failed investment and a note due was pending in Quebec; hearings were postponed because of the pandemic. After quarter-end, the company disclosed three additional notes totaling $217,000, each bearing 8% interest and convertible at a discount to market.
- Controls: Management concluded disclosure controls were ineffective, citing deficiencies in staffing, period-end reporting, accounting policies, revenue recognition, inventory controls, transaction review and accrual accounting. It described remediation as a priority.
Important facts for investors to verify
- Current cash runway, near-term obligations, and whether additional financing is available on acceptable terms.
- Conversion terms and potential dilution from outstanding and subsequent convertible notes, and the status of any past-due debt.
- Whether PPP loan forgiveness was approved and whether the company can meet CEBA repayment conditions.
- Progress and costs for the coronavirus patent program, Adva-27a development, generic-drug approvals, and supplement commercialization.
- Remediation of ineffective disclosure and financial-reporting controls, and reconciliation of reported equity figures across the statements.
- Outcome and potential financial impact of the pending Quebec litigation.