Sunshine Biopharma, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Figures are in U.S. dollars unless stated otherwise. The unaudited consolidated statements include Sunshine Biopharma and its subsidiaries.
Business context
The company is developing the Adva-27a cancer drug, pursuing Canadian generic-drug operations, and selling the Essential 9 dietary supplement. Essential 9 sales began in March 2019. On April 1, 2019, the company returned its Atlas Pharma subsidiary to the former owner in exchange for cancellation of Atlas-related debt; Atlas results are reported as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $3,033 | $3,239 | $0 |
| Gross profit | $1,573 | $1,667 | $0 |
| Gross margin | 51.9% | 51.5% | Not applicable |
| General and administrative expenses | $67,770 | $190,073 | $580,511 / $731,754 |
| Operating loss | $66,197 | $188,406 | $580,511 / $731,754 |
| Net loss | $710,890 | $913,432 | $644,308 / $909,944 |
| Cash used in operating activities | Not provided quarterly | $281,423 | $225,883 |
Revenue and gross profit came from Essential 9. Q2 net loss included a $580,125 loss on the Atlas disposal; the six-month discontinued-operations loss was $582,237. Continuing-operations losses were $130,765 for Q2 and $331,195 for the six months. Interest expense for the six months was $64,639, and losses on debt conversions were $65,094.
At June 30, cash was $37,277, versus $110,534 at December 31, 2018. Current assets were $70,866 and current liabilities were $925,691, a working-capital deficit of $854,825. Total liabilities were $925,691; shareholders’ deficit was $816,302. Current notes payable were $688,977, related-party notes payable $89,808, related-party advances $27,869, and interest payable $34,660. Six-month financing cash inflows of $219,428 did not offset operating and investing cash outflows; ending cash was $37,277.
Material changes and developments
- Six-month G&A decreased by $541,678 year over year, primarily because officer and director remuneration, accounting, legal, and consulting expenses fell. Management attributed the reductions to cost-cutting.
- Common shares outstanding rose from 85,652,400 at December 31, 2018 to 104,287,421 at June 30, 2019. The company issued 18,635,021 shares during the first half to convert debt and interest, reducing debt by $83,000 and interest payable by $3,841. The filing reports 133,285,058 shares outstanding on August 14, 2019.
- A 20-for-1 reverse stock split took effect February 1, 2019. A new U.S. patent for Adva-27a was issued April 30, extending stated proprietary coverage to 2033.
- Atlas disposal removed its reported assets and liabilities from the balance sheet and resulted in the disposal loss. The company reported no off-balance-sheet arrangements.
Outlook, risks, and contingencies
- Management states that current cash is insufficient to fund operations and that substantial doubt exists about the company’s ability to continue as a going concern. It plans to seek debt and/or equity financing; there is no assurance financing will be available on acceptable terms. Equity financing could substantially dilute shareholders.
- The company estimates it needs approximately $7 million to implement its plans: about $2 million for supplements and generics and $5 million for proprietary drug development. It also says future operating costs are expected to increase.
- Adva-27a clinical development has been delayed for lack of funding. Planned next steps include manufacturing, IND-enabling studies, regulatory filing, and Phase I trials; success, timing, and potential licensing or sale are uncertain.
- Health Canada approvals (Drug Establishment License and product identification numbers) for four generic products remained pending; the company could not estimate timing. Management also reported limited supplement revenue and significant competition in generics.
- Disclosure controls and procedures were assessed as ineffective at June 30. Cited weaknesses include staffing and SEC-reporting expertise, period-end reporting, accounting policies, revenue recognition, inventory controls, and accruals.
- Legal matters include a dispute with Lonza concerning low manufacturing yield and its demand for $687,818 before further work, and litigation against a shareholder seeking approximately C$200,000 (about $154,000) in damages. The company says it withheld payment on a related C$100,000 note and asked the court to link it to the litigation; a hearing date was pending.
- Subsequent events included additional convertible-note financing and conversions into common shares, plus a July 31 issuance of 4.6 million shares for consulting services rendered through June.
Most important facts for investors to verify
- Near-term cash needs, access to financing, and the company’s ability to continue as a going concern.
- Outstanding debt, interest accruals, conversion terms, maturity dates, and dilution from conversions and later share issuances.
- Whether Essential 9 sales can grow materially and whether the required Canadian approvals for generic products are obtained.
- Funding, regulatory milestones, and clinical-development progress for Adva-27a, including the assumptions behind management’s development plans.
- Remediation of disclosed internal-control weaknesses and the status and potential financial exposure of the Lonza and shareholder disputes.