Sunshine Biopharma, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The financial statements are unaudited. Sunshine is a pre-revenue drug-development company focused on cancer treatments; it also formed a Canadian subsidiary in July 2014 to pursue generic pharmaceutical and biomedical products.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| General and administrative expenses | $277,427 | $177,683 | $1,448,814 | $1,250,667 |
| Interest expense | $3,422 | $375 | $151,679 | $6,080 |
| Net loss | $280,849 | $178,058 | $1,600,493 | $1,805,698 |
| Loss per share | Less than $0.01 | Less than $0.01 | $0.02 | $0.03 |
- Cash flow: Nine-month operating cash outflow was $350,883, versus $524,651 a year earlier. Financing provided $493,500; investing cash flow was zero. Cash increased by $142,617 to $173,857.
- Liquidity and debt: At September 30, current assets were $180,276, including $173,857 cash; current liabilities were $456,640, including $396,000 current notes payable, $51,320 accounts payable and $9,320 interest payable. The resulting working-capital deficit was $276,364. Total liabilities exceeded assets, leaving shareholders’ equity negative $276,364.
- Margins: No revenue was reported, so a revenue margin is not meaningful. The company reported an operating loss of $1,448,814 for the nine-month period.
- Share count: Common shares outstanding increased from 60,299,061 at December 31, 2013 to 68,911,041 at September 30, 2014. Many shares were issued for services, licensing, interest or other expenses, in addition to cash stock sales.
Material changes versus the prior period
- Nine-month net loss narrowed by $205,205, chiefly because 2013 included a $548,951 beneficial-conversion-feature charge that did not recur. This was partly offset by higher operating expenses and interest expense.
- Nine-month G&A rose $198,147. Management cited higher research and development, legal, public-relations and accounting costs, partly offset by lower consulting and licensing fees.
- Q3 net loss increased by $102,791 year over year, mainly reflecting $120,500 higher financial consulting costs. Q3 interest expense also increased.
Outlook, risks and unusual items
- Management estimated it would need approximately $5 million in debt and/or equity capital to fully implement its business plan and stated there was no assurance the funding could be raised. It also said current cash was insufficient for anticipated increased costs and future operations depend on additional financing.
- The company planned GMP manufacturing, IND-enabling studies and regulatory submissions for Adva-27a, with Phase I trials anticipated in mid-to-late 2015 and estimated to take 18 months. These are plans, not assured milestones; the filing stated no FDA or other regulatory filings had been made as of the report date.
- Under an agreement with Dutchess Opportunity Fund, the company could sell up to $2.5 million of shares over three years, generally at 90% of the lowest daily VWAP over the preceding five trading days. The company had used one $100,000 put in August 2014. The facility was discretionary and did not guarantee funding.
- Convertible notes carry conversion terms that may result in share issuance at discounted market prices. The September note also provides for extraordinary penalties if shares are not delivered timely after conversion. The filing reports $396,000 of current notes payable; the balance-sheet classification and outstanding amounts should be reconciled with the individual note terms, including a facility described as having a $500,000 principal amount.
- Key business risks include dependence on financing, clinical and regulatory uncertainty, competition, and the possibility of failing to secure funds to advance the technology. Management described anticipated generic-product contracts and a Health Canada Drug Establishment License, but gave no assurance they would be obtained or generate revenue.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material changes in internal control. The filing stated that the company was not party to material legal proceedings, while MD&A attributed some legal expense to defending against litigation.
Important facts for investors to verify
- Reconcile the $396,000 current note-payable balance with the terms, proceeds, maturities and classification of each borrowing and convertible facility.
- Confirm cash runway, the availability and actual use of the Dutchess facility, and the plan and ability to raise the estimated $5 million.
- Review dilution from shares issued for services and expenses, as well as the potential conversion terms of outstanding notes.
- Verify progress and funding for Adva-27a manufacturing, IND-enabling work and clinical trials, and the status of regulatory approvals or filings.
- Assess whether the Canadian subsidiary secured the licenses and commercial contracts described as prospective, and clarify the litigation-related legal costs.