Sunshine Biopharma, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited; dollar amounts below are U.S. dollars unless noted.
Business context and reporting period
Sunshine is a pharmaceutical and laboratory-services company. It acquired Atlas Pharma, a Canadian analytical testing business, effective January 1, 2018; Atlas generated all reported revenue. The company also pursues generic-drug sales and development of its Adva-27a cancer drug. The filing states that the Atlas audit was not complete and that disclosures could require material updates.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $136,939 | $0 | $335,357 | $0 |
| Gross profit | $34,137 | $0 | $41,642 | $0 |
| Gross margin | 24.9% | Not applicable | 12.4% | Not applicable |
| Operating loss | $(279,754) | $(113,805) | $(1,017,402) | $(695,013) |
| Net loss | $(907,556) | $(147,611) | $(1,817,500) | $(828,757) |
| Operating cash flow | Not provided separately | Not provided separately | $(396,759) | $(334,038) |
Q3 2018 included a $591,763 loss on debt conversions; the nine-month amount was $685,101. Nine-month interest expense was $128,181, versus $46,169 a year earlier. Basic loss per share was reported as $0.00, reflecting rounding.
Liquidity, debt, and capital
- At September 30, cash was $46,430; current assets were $150,488 and current liabilities were $747,129, implying a working-capital deficit of $596,641.
- Total liabilities were $1,059,695, compared with total assets of $1,104,358. The balance sheet reports $361,050 of current notes payable, $225,195 of current related-party notes, and $312,566 of long-term related-party notes.
- Cash used in operations was $396,759 for the first nine months; financing provided $354,853 and investing used $22,428. Ending cash was down from $107,532 at year-end 2017.
- Common shares outstanding rose from 918,736,498 at December 31, 2017 to 1,585,628,494 at September 30, 2018; the filing reports 1,632,980,943 shares outstanding at November 16, 2018. Many shares were issued for debt conversions and compensation.
Changes, outlook, and risks
- Revenue began with the Atlas acquisition, but nine-month gross profit was modest relative to operating expenses. General and administrative expense increased to $1,059,044 from $695,013, primarily due to higher executive compensation and increased accounting, legal, and office costs.
- Management says approximately $7 million is needed to implement its plans: $2 million for analytical chemistry and generics operations and $5 million for proprietary drug development. It warns there is no assurance the funds can be raised.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing recurring losses and negative operating cash flows and dependence on additional financing. Management expects expenses to rise as operations expand.
- A proposed Jitney Trade offering expired without raising funds. A September 2018 agreement with GHS Investments contemplated up to $10 million through discounted share purchases, subject to an effective registration statement. The company withdrew its October S-1 filing after the SEC requested withdrawal because its shares were not trading on OTCQB or a higher exchange; it was reviewing alternatives.
- Adva-27a development has been delayed by lack of funding. Planned next steps include GMP manufacturing, IND-enabling studies, regulatory filing, and Phase I trials; these are plans, not assured milestones. Four generic products remained subject to licensing and regulatory steps.
- Atlas acquisition included a $358,407 U.S.-dollar equivalent promissory note and $246,000 in stock, among other consideration; goodwill recorded was $673,646. The Atlas audit and certain acquisition matters remained incomplete.
- Management reported disclosure controls were ineffective, citing staffing and SEC-reporting experience deficiencies, period-end reporting and accounting-policy issues, and weaknesses in revenue recognition, inventory, and accrual controls.
- Legal matters include a dispute with Lonza concerning low manufacturing yield and Lonza’s demand for $687,818 before further work, and a company lawsuit against a shareholder concerning a proposed investment. A long-term Atlas facility lease runs through May 2021.
Most important facts for investors to verify
- Whether Atlas’s audit or subsequent review changes the acquisition accounting, goodwill, or reported results.
- The company’s actual available financing, the status and terms of any replacement for the withdrawn GHS registration, and its near-term cash needs.
- The share-count and dilution effects of convertible debt, including the reported 35% market-price discounts and subsequent conversions.
- Reconciliation of reported debt-conversion and share-issuance figures: the filing gives differing values in some sections, including Q3 conversion-share values and nine-month conversion losses.
- Progress on remediation of ineffective controls, generic-drug approvals, Atlas business expansion, and Adva-27a development funding and milestones.
- Developments in the Lonza dispute and shareholder litigation, including any resulting payments or other obligations.