Sunshine Biopharma, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited condensed consolidated financial statements; filed November 10, 2020. The company is a small pharmaceutical and supplement business, with drug development and commercial product activities.
Financial performance and position
| Metric | Q3 2020 / Sept. 30, 2020 | Comparable period / Dec. 31, 2019 |
|---|---|---|
| Revenue | $17,150 for Q3; $43,397 for nine months | $7,326 for Q3 2019; $10,565 for nine months 2019 |
| Gross profit | $10,810 for Q3; $28,013 for nine months | $2,033 for Q3 2019; $3,700 for nine months 2019 |
| Net loss | $698,595 for Q3; $1,700,298 for nine months | $350,241 for Q3 2019; $1,263,673 for nine months 2019 |
| Operating cash flow | $(233,627) for nine months | $(367,959) for nine months 2019 |
| Cash and equivalents | $488,708 | $40,501 at Dec. 31, 2019 |
| Current assets / current liabilities | $527,604 / $747,846 | $65,686 / $833,527 at Dec. 31, 2019 |
| Total liabilities | $1,105,398 | $833,527 at Dec. 31, 2019 |
| Shareholders’ equity (deficit) | $(554,876) | $(735,385) at Dec. 31, 2019 |
- All reported sales were from nutritional supplements. Q3 gross margin was approximately 63%; nine-month gross margin was approximately 65%.
- Nine-month general and administrative expense fell to $261,569 from $394,746, which management attributed mainly to reduced executive compensation and consulting costs.
- Debt-conversion losses were $608,899 in Q3 and $1,416,313 for nine months, compared with $120,720 and $185,814, respectively, in 2019. The nine-month loss materially contributed to the higher net loss.
- At September 30, notes payable included $530,209 current and $357,552 long-term, plus $128,269 of related-party notes payable. Interest payable was $31,677. The company reported a working-capital deficit of $220,242, calculated from the balance sheet.
- Financing activities provided $683,643 net cash during the nine months; financing inflows, rather than operations, drove the increase in cash.
Changes and significant developments
- Nine-month revenue increased by $32,832 year over year; the 2019 comparison included only six months of supplement sales after the March 2019 launch.
- The company issued 269,099,306 common shares during the first nine months of 2020 to convert debt and interest, compared with 7,883,683 shares in the comparable 2019 period. Common shares outstanding rose from 35,319,990 at December 31, 2019 to 304,419,296 at September 30, 2020; the filing reports 332,419,296 shares outstanding at November 10, 2020.
- In June 2020, the company issued 500,000 Series B preferred shares to CEO Dr. Steve N. Slilaty for COVID-19 treatment technology. Each share carries 1,000 votes and a $0.10 liquidation preference; the shares are non-convertible and non-redeemable.
- The company reported that it synthesized four potential coronavirus-protease inhibitors and identified SBFM-PL4 as a lead candidate in September. In October, after quarter-end, it entered a University of Georgia research agreement for further development and planned preclinical work. These are development-stage activities, not evidence of clinical efficacy or approval.
- The Atlas Pharma analytical chemistry business was disposed of in April 2019; the prior-year nine-month result included a $580,125 disposal loss and discontinued-operations loss totaling $582,237.
Outlook, risks and contingencies
- Liquidity and going concern: Management said available cash was insufficient to fund current operations and that the company intended to raise debt and/or equity. It estimated approximately $20 million would be required to fully implement its plan, including $18 million for proprietary drug development. The filing cautions that financing may not be available on acceptable terms and failure to obtain it could impair continued operations.
- Financing commitment: A September 8 agreement with RB Capital Partners provided for a minimum $2 million of convertible debt over three to six months; $300,000 had been received by September 30. The notes bear 5% interest, mature in two years, and convert at the market value or $0.30 per share, whichever is greater. Subsequent to quarter-end, the company reported receiving a further $250,000 note on October 20.
- Potential dilution: Significant share issuance has already occurred through discounted convertible-note conversions, with substantial reported conversion losses. The company also warned that future debt or equity financing could dilute existing shareholders.
- Business execution: The company said Adva-27a clinical development had been delayed by lack of funding. It also had not obtained required Health Canada establishment and product authorizations for its four generic drugs; timing was uncertain. Essential Calcium-Vitamin D was expected to be available on Amazon.ca in early 2021.
- COVID-19: Management said the pandemic had adversely affected, and could continue to affect, business activity and its ability to raise funds; duration and magnitude were uncertain.
- PPP loan: The company stated that all $50,655 of proceeds had been used for eligible expenses and management believed the loan would qualify for full forgiveness; forgiveness was not reported as finalized.
- Controls and legal matter: Management concluded disclosure controls were ineffective as of September 30, citing staffing, accounting, revenue-recognition, inventory and reporting-process deficiencies. A Quebec legal dispute involving alleged misrepresentations and approximately C$200,000 in claimed damages was pending; the filing said linked proceedings were scheduled to begin November 16, 2020.
- No formal financial guidance was provided. Management described intended financing and development plans, subject to funding and other uncertainties.
Important facts for investors to verify
- Whether the RB Capital commitment was funded as planned, and the full terms and conversion effects of subsequent notes.
- Current cash, cash burn, near-term obligations and ability to continue operations given the disclosed working-capital deficit and going-concern uncertainty.
- Updated common-share count and the impact of debt conversions and preferred shares on voting power and dilution.
- Progress, funding and independent results for SBFM-PL4 and Adva-27a, including whether planned studies have commenced.
- Health Canada licensing status for the generic products, and actual sales trends and margins for supplements.
- Whether PPP loan forgiveness was obtained, the outcome of the Quebec litigation, and remediation of the disclosed control deficiencies.