Sunshine Biopharma, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated financial statements; amounts below are U.S. dollars unless stated otherwise.
Business context
Sunshine develops the experimental cancer drug Adva-27a, holds licenses for four generic prescription drugs, and sells the Essential 9 dietary supplement. Essential 9 sales began in March 2019. The company sold its Atlas Pharma analytical-chemistry subsidiary effective April 1, 2019, in exchange for cancellation of Atlas-related debt; Atlas is reported as discontinued operations.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $7,326 | $0 | $10,565 | $0 |
| Gross profit (margin) | $2,033 (27.8%) | $0 | $3,700 (35.0%) | $0 |
| General and administrative expense | $204,673 | $288,825 | $394,746 | $1,020,579 |
| Operating loss | $(202,640) | $(288,825) | $(391,046) | $(1,020,579) |
| Net loss | $(350,241) | $(907,556) | $(1,263,673) | $(1,817,500) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(367,959) | $(396,759) |
- For the nine-month period, reported other expense included $185,814 in losses on debt conversions, $92,486 in interest expense, and a $582,237 loss from discontinued operations, primarily reflecting the Atlas disposal. Net loss improved from the prior year, while revenue remained minimal.
- Cash was $81,973 at September 30, 2019, down from $110,534 at December 31, 2018. Nine-month investing cash use was $14,416; financing provided $352,100. Cash at period-end was supported by ongoing financing activity.
- Current assets were $110,496 versus current liabilities of $889,191, a working-capital deficit of $778,695. Total liabilities were $889,191 and shareholders’ deficit was $742,856. Current debt included $662,917 of notes payable, $88,751 of related-party notes, and $45,153 of interest payable.
- The company issued 225.8 million shares during the first nine months for note conversions, reducing principal and interest payable by a combined $252,562, and also issued shares for consulting and officer/director compensation. Common shares outstanding were 311.4 million at September 30; the cover reports 520.1 million at November 13.
Changes, outlook, risks and unusual items
- Management attributed lower year-over-year operating expenses mainly to reduced executive compensation and cost-cutting. G&A fell by $625,833 for the nine months, although consulting expense and research and development spending increased.
- Management estimated that approximately $7 million would be required to implement its business plan: about $2 million for supplements and generics and $5 million for proprietary drug development. It intended to seek debt and/or equity financing, but gave no assurance it could raise sufficient capital. Additional equity could substantially dilute shareholders.
- The filing states that existing cash is insufficient to fund current operations and that there is substantial doubt about the company’s ability to continue as a going concern. Management warned that failure to obtain financing could materially impair operations or prevent the company from continuing.
- Adva-27a clinical development had been delayed for lack of funding. Planned next steps included manufacturing, IND-enabling studies, regulatory filing, and Phase I trials; timing and success are uncertain. The four generic products were still awaiting required Canadian approvals. No quantified revenue or earnings guidance was provided.
- Convertible notes generally carried 8% interest and conversion prices set 35% below market after a waiting period, creating dilution risk. Numerous conversions occurred after quarter-end. The company also disclosed a pending Quebec lawsuit against a shareholder concerning an alleged failed investment and related note; the company had not paid the matured note and was seeking to link it to the litigation.
- Management concluded disclosure controls and procedures were ineffective at September 30, citing staffing and expertise gaps, reporting-process deficiencies, and weaknesses involving revenue recognition, inventory, accounting policies, transaction review, and accruals. It reported no material change in internal control during the period.
Important facts for investors to verify
- Reconcile the reported 520.1 million shares outstanding on November 13 with 311.4 million at September 30 and the post-quarter conversions described in the filing; assess resulting dilution and remaining convertible debt.
- Confirm the company’s near-term financing needs, available cash runway, and the status and terms of any subsequent debt or equity financing.
- Verify regulatory approval milestones for the four generic drugs and the funding, timing, and feasibility of Adva-27a’s proposed development steps.
- Review the Atlas disposal accounting and reported debt-conversion losses, including differences between amounts disclosed in the financial statements and equity note.
- Track the pending Quebec litigation and any consequences of the matured, unpaid note.