Sunshine Biopharma, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. The company is a small pharmaceutical business pursuing proprietary drug development, generic pharmaceuticals and dietary supplements. Its Atlas analytical chemistry business was disposed of in April 2019 and is reported as discontinued operations. Amounts below are in U.S. dollars unless otherwise indicated.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / December 31, 2019 |
|---|---|---|
| Revenue | $11,102 | $206 in Q1 2019 |
| Gross profit and margin | $7,219; approximately 65% | $94; approximately 46% in Q1 2019 |
| General and administrative expense | $44,918 | $122,303 in Q1 2019 |
| Operating loss | $37,699 | $122,209 in Q1 2019 |
| Net loss | $94,259; reported loss per share $0.00 | $202,542; loss per share $0.05 in Q1 2019 |
| Cash and cash equivalents | $10,808 | $40,501 at December 31, 2019 |
| Operating cash flow | $(31,034) | $(233,959) in Q1 2019 |
| Total current assets / current liabilities | $34,023 / $772,294 | $65,686 / $833,527 at December 31, 2019 |
| Notes payable, including related-party notes | $641,676 | $715,568 at December 31, 2019 |
| Total assets / shareholders’ deficit | $63,688 / $(708,606) | $98,142 / $(735,385) at December 31, 2019 |
Revenue was generated from dietary supplements. Gross margin improved, while the net loss narrowed year over year, reflecting lower overhead and interest expense, partly offset by a higher loss on debt conversion. No cash was paid for interest or income taxes in Q1 2020. Investing cash flow was zero, and the cash flow statement reports no financing cash flow for the quarter.
Material changes and capital structure
- Revenue increased by $10,896 from Q1 2019, when the supplement business had only recently launched. Management attributed lower general and administrative costs to a cost-cutting effort begun in early 2020.
- Interest expense fell to $16,356 from $46,297, while the reported loss on debt conversion increased to $51,393 from $22,308.
- The company issued 24,355,427 common shares during the quarter to convert debt and interest valued at $122,379, reducing notes payable by $66,500 and interest payable by $4,486. The company recorded a conversion loss of $51,393.
- At March 31, 2020, 59,675,417 common shares were reported outstanding. The filing reports 112,888,999 shares outstanding as of May 18, 2020. It also describes a 20-for-1 reverse split effective April 6, 2020; the financial statements reflect both reverse splits retroactively.
Outlook, risks and unusual items
- Going concern and funding: Management says existing cash is insufficient to fund current operations and substantial doubt about the company’s ability to continue as a going concern had been raised in prior-year audit reports. The company intends to seek debt or equity financing; there is no assurance it can obtain funding on acceptable terms. Management estimated approximately $7 million would be needed to implement its business plan—about $2 million for generic pharmaceuticals and supplements and $5 million for proprietary drug development. Additional financing could substantially dilute shareholders.
- Development and commercialization: Adva-27a clinical development has been delayed by lack of funding. The company’s stated next steps include manufacturing, IND-enabling studies, regulatory filing and Phase I trials, but timing depends on financing and there is no assurance of success. Four licensed generic products still require Health Canada approvals, including DINs and a Drug Establishment License; management could not estimate when approvals would be obtained.
- Product outlook: Management anticipated that Essential Calcium-Vitamin D would be available on Amazon.ca in Q3 2020. This is an expectation, not a guarantee.
- COVID-19: The filing says the pandemic and related measures had and were expected to continue to have a material adverse impact on the global economy and company activities. The duration and effect on the business and ability to raise funds were uncertain; no financial-statement adjustments were made.
- Debt and dilution: Several notes were past due and payable on demand, including notes convertible at a discount to market. Subsequent to quarter-end, conversions included $43,000 of principal plus interest for 38,855,726 shares and, on another note, $12,000 of principal plus interest for 14,357,856 shares, leaving $13,000 principal outstanding on that note.
- Legal matter: Litigation against a shareholder concerning an alleged failed investment and claimed damages was linked to proceedings relating to a note. The scheduled hearing was postponed because of COVID-19; the filing gives no new hearing date.
- Controls: Management concluded disclosure controls and procedures were not effective as of March 31, 2020, citing staffing and expertise gaps, reporting-process deficiencies, and weaknesses in revenue recognition, inventory and accrual controls. The board said it was reviewing remediation measures.
Key investor verification points
- Confirm the company’s ability to raise sufficient capital, its near-term cash needs and the terms and potential dilution of any financing.
- Reconcile the reported quarter-end and May 18 share counts with the April reverse split and post-quarter debt conversions.
- Verify the status, maturity and conversion terms of outstanding and past-due notes, including related-party debt.
- Track required Health Canada approvals and the actual timing of supplement sales and Adva-27a development milestones.
- Review remediation of the disclosed ineffective controls and the status of the postponed litigation.
- Check the cash flow discussion against the statements: MD&A reverses the comparative-period financing figures, whereas the cash flow statement reports zero financing cash flow for Q1 2020 and $214,656 provided in Q1 2019.