Sunshine Biopharma Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; filed August 17, 2018. Financial statements are unaudited. The company develops the Adva-27a cancer drug, pursues generic pharmaceuticals, and provides laboratory testing through Atlas Pharma, acquired January 1, 2018.
Key financial results
| Metric | Q2 2018 | Six months 2018 | Comparable 2017 |
|---|---|---|---|
| Revenue | $107,250 | $198,418 | $0 |
| Cost of revenue | $91,631 | $190,913 | $0 |
| Gross profit (margin) | $15,619 (14.6%) | $7,505 (3.8%) | $0 |
| General and administrative expense | $586,570 | $745,153 | $472,218 / $581,208 |
| Operating loss | $(570,951) | $(737,648) | $(472,218) / $(581,208) |
| Net loss | $(644,308) | $(909,944) | $(485,444) / $(681,146) |
| Operating cash flow | — | $(292,898) | $(185,850) |
Q2 and six-month 2017 comparatives are shown in that order where two values appear. Basic loss per share was reported as $0.00, rounded, for all periods. Six-month interest expense was $103,842 and debt-conversion loss was $93,338; Q2 amounts were $28,375 and $54,998, respectively.
Financial position and liquidity
- At June 30, cash was $36,395, versus $107,532 at December 31, 2017. Six-month cash used in operations was $292,898; financing provided $249,975 and investing used $22,428.
- Current assets were $196,714 and current liabilities $1,136,768, a working-capital deficit of approximately $940,000. Total liabilities were $1,446,436; total assets were $1,170,306 and shareholders’ equity was a deficit of $276,130.
- Reported notes payable totaled approximately $1.27 million, including current notes and related-party notes and a $309,668 long-term related-party note. Current liabilities also included $34,334 of interest payable.
- Common shares outstanding were 1,104,105,806 at quarter-end and 1,179,237,384 on August 17, 2018. The company reported 572,727,700 shares reserved for issuance at June 30.
Changes and material developments
- Atlas generated all reported revenue, from laboratory testing services; the company had no revenue in the comparable 2017 periods. Atlas’s acquisition added $673,646 of goodwill and was financed with cash, 20 million shares, and a promissory note.
- Six-month net loss increased by $228,798 year over year. G&A rose $163,945, principally due to higher executive compensation and increased accounting, legal, and office costs. Increased revenue did not offset operating costs.
- During the six months, the company issued 185.4 million common shares, including shares for debt conversions, services, equipment, the Atlas acquisition, and cancellation of a royalty obligation. Debt conversions generated reported losses.
Outlook, risks and unusual items
- Management estimated that approximately $7 million would be needed to implement its business plan: $2 million for analytical chemistry and generic operations and $5 million for proprietary drug development. The planned Canadian private offering of up to C$10 million had raised no funds as of the report date; the offer was extended to August 31, 2018.
- Management said additional capital was necessary to continue operations and expansion. The filing states that recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Financing may dilute shareholders or impose restrictive terms or high interest costs.
- Adva-27a development had been delayed by lack of funding. Planned next steps included GMP manufacturing, IND-enabling studies, regulatory filing, and Phase I trials. Generic products awaited required Health Canada approvals; Atlas intended to expand into microbiology testing.
- Atlas’s audit was incomplete at the report date, and the company cautioned that related disclosures might require updates and could differ materially. Management also anticipated higher future expenses.
- Q2 included $429,300 of additional director compensation expense associated with 81 million shares. Convertible notes carried 8% interest and conversion prices at a 35% discount to market after 180 days.
- Management concluded disclosure controls and procedures were ineffective, citing staffing and expertise gaps and deficiencies in reporting, accounting, revenue recognition, inventory, and accrual controls.
- Legal matters included an unresolved dispute with Lonza concerning low manufacturing yield and Lonza’s demand for $687,818 before further work, plus a company lawsuit against a shareholder related to a proposed investment.
- After quarter-end, holders converted additional note principal and interest into shares, including $81,000 of principal on a January 2018 note. The filing details these conversions but does not provide a complete post-conversion capitalization total.
Investor verification priorities
- Verify available financing, cash runway, near-term debt maturities, and progress or outcome of the proposed equity offering.
- Review Atlas’s completed audit, acquisition accounting, revenue quality, and whether laboratory margins can improve.
- Track share issuance, discounted note conversions, reserved shares, and the resulting dilution.
- Confirm Health Canada approvals and the timing and funding of Adva-27a development milestones.
- Monitor remediation of ineffective controls and developments in the Lonza and shareholder litigation matters.