Sunshine Biopharma, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed April 12, 2019. This is an annual filing, not a standalone fourth-quarter report. Sunshine Biopharma develops drug candidates and operates analytical testing, generic-drug, and dietary-supplement businesses. 2018 was the first year it consolidated Atlas Pharma, acquired January 1.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $447,200 | $0 |
| Cost of revenue | $391,081 | $0 |
| Gross profit / margin | $56,119 / approximately 12.5% | — |
| General and administrative expenses | $1,222,656 | $857,190 |
| Operating loss | $1,166,537 | $857,190 |
| Interest expense | $159,420 | $104,829 |
| Loss on debt conversion | $871,726 | $76,929 |
| Net loss | $2,156,155 | $1,040,236 |
| Basic loss per share | $0.04 | $0.02 |
| Cash used in operating activities | $512,806 | $543,520 |
| Cash and cash equivalents at year-end | $115,216 | $107,532 |
Revenue came from Atlas Pharma’s laboratory testing services; the filing reports no company revenue in 2017. Current assets were $211,512 against current liabilities of $912,477, implying a working-capital deficit of approximately $701,000 and a current ratio of about 0.23. Total assets were $1,146,571, total liabilities $1,202,324, and shareholders’ deficit $55,753. Current notes payable were $419,663, with related-party notes payable of $532,941 in total, including $289,847 classified as long-term. The filing does not provide a single consolidated figure for all debt beyond its balance-sheet and note disclosures.
Financing activities provided $527,640 in cash; investing activities used $13,908. Year-end cash increased only modestly, while operations continued to consume cash. The 2018 net loss more than doubled from 2017, primarily alongside higher operating expenses and a substantial increase in losses on debt conversions. Weighted-average shares rose to 60,936,164 from 43,634,280. At December 31, 2018, 85,652,400 common shares were reported outstanding, restated for the 20-for-1 reverse split completed February 1, 2019.
Material changes and business developments
- Atlas Pharma added $447,200 in consolidated revenue and laboratory operations; Atlas reported nine employees and Health Canada certification and FDA registration.
- Sunshine launched Essential 9, a dietary supplement authorized by Health Canada in December 2018. The company also acquired testing equipment to expand Atlas’s services.
- Adva-27a remains preclinical. The company reported laboratory and animal-study findings but had not filed with the FDA or another regulator, and clinical development had been delayed by lack of funding.
- The four licensed generic drugs—anastrozole, letrozole, bicalutamide, and finasteride—were not yet ready for the company’s own-label sales; required Canadian product and establishment authorizations remained in process.
- Common shares issued during 2018 included shares for services and officer/director compensation, equipment, the Atlas acquisition, and conversion of debt. Debt conversions generated a reported loss of $871,726 and materially increased share count.
Outlook, risks, contingencies, and unusual items
- Going concern: The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern because of limited operations and a working-capital deficit. The financial statements include no adjustments for a possible inability to continue.
- Funding needs: Management estimated approximately $10 million would be required to implement its plan, including $7 million for proprietary drug development and $1 million each for generics, analytical services, and supplements. A private offering targeting up to C$10 million expired August 31, 2018 without raising funds. Management was pursuing other financing, with no assurance of success.
- Development and regulatory risk: Adva-27a requires manufacturing, IND-enabling work, regulatory filings, and clinical trials. The anticipated fast-track process was not assured. The company stated that clinical development would resume only after adequate financing.
- Debt and dilution: The company relied on debt, including convertible notes with conversion prices at a 35% discount to market in several cases, and also borrowed from related parties. Subsequent to year-end, it continued issuing notes and shares were converted from debt.
- Legal matters: A dispute with Lonza concerned low yield from a pilot manufacturing run; Lonza had requested $687,818 before further work, and neither party had taken further action as of the report. The company also sued a shareholder over a proposed investment, seeking approximately C$200,000 (about US$154,000); a court date was pending.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were ineffective. Cited deficiencies included staffing and SEC-experience gaps, period-end reporting, accounting policies, revenue recognition, inventory, and accruals. No directors were considered independent; the board had no committees or adopted code of ethics.
- Other unusual items: Management reported $755,215 in officer and director remuneration expense, including stock compensation. The filing’s MD&A describes Atlas’s direct revenue costs as $359,300, while the audited statement of operations reports cost of revenue of $391,081; this difference should be reconciled.
Important facts for investors to verify
- Reconcile the MD&A’s $359,300 direct-cost figure with the audited statement’s $391,081 cost of revenue, and confirm Atlas revenue, margins, and cash collection.
- Review the full debt schedule, maturities, related-party terms, subsequent borrowings, and potential share dilution from convertible notes.
- Confirm available financing and cash runway, given $115,216 in year-end cash, operating cash use, and the auditor’s going-concern warning.
- Track required DIN and DEL approvals for the four generic drugs and sales traction for Essential 9.
- Verify Adva-27a manufacturing yield resolution, financing, regulatory filings, and any actual progress toward clinical trials; preclinical findings are not evidence of clinical efficacy.
- Monitor the Lonza dispute, the shareholder lawsuit, remediation of material control weaknesses, and the effect of the reverse split and subsequent share issuances on ownership.