Sunshine Biopharma, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Sunshine Biopharma operates through Atlas Pharma’s laboratory testing services, generic-drug development, dietary supplements, and proprietary drug development, including Adva-27a. Atlas generated nearly all reported revenue. The company completed a 20-for-1 reverse stock split effective February 1, 2019.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $119,728 | $91,168; up $28,560 (31%) |
| Cost of sales and gross profit | $84,866; gross profit $34,862 | $100,819; gross loss $9,651 |
| Gross margin | 29.1% | Negative 10.6% |
| General and administrative expense | $155,665 | $157,046 in the financial statements |
| Operating loss | $120,803 | $166,697 |
| Interest expense; debt-conversion loss | $49,815; $22,308 | $75,467; $38,340 |
| Net loss | $202,542 | $265,636; loss narrowed by $63,094 (24%) |
| Cash used in operating activities | $233,959 | $168,455; outflow increased by $65,504 |
| Cash provided by financing activities | $214,656 | $248,554 |
At March 31, 2019, the balance sheet reported cash of $95,129, current assets of $231,306, current liabilities of $1,119,748, total liabilities of $1,458,721, and a shareholders’ deficit of $211,772. Current notes payable were $745,397; current related-party notes payable were $108,796, and long-term related-party notes payable were $289,825. The company reported 89,348,981 common shares outstanding at quarter-end and 95,417,765 as of May 20, 2019.
Cash discrepancy: The balance sheet lists March 31 cash of $95,129, while the cash-flow statement lists ending cash of $92,129. The filing text does not explain the $3,000 difference. The cash-flow statement reports a net cash decrease of $19,302 before a $785 foreign-currency translation adjustment.
Changes, outlook, and material risks
- Essential 9, a dietary supplement, began selling online in March; the filing attributes $206 of Q1 revenue to its initial sales. Atlas laboratory testing remained the principal revenue source.
- Management said the company’s revenue was insufficient to fund its business plan. It estimated approximately $7 million would be required—$2 million for analytical chemistry and generics and $5 million for proprietary drug development—and gave no assurance it could raise those funds.
- Adva-27a clinical development has been delayed by lack of funding. Planned next steps include manufacturing, IND-enabling studies, regulatory filing, and Phase I trials; their timing depends on financing. The company also awaits Health Canada approvals needed to market four generic products and said timing could not be estimated.
- The company reported recurring operating losses and negative operating cash flows, raising substantial doubt about its ability to continue as a going concern. Management said continued operations depend on obtaining additional financing; potential equity or debt financing could be dilutive or carry restrictive terms or high interest costs.
- Q1 financing included new 8% notes, generally convertible after 180 days at a 35% discount to market. The company issued 3,696,581 shares to convert $25,000 of debt, recording a $22,308 conversion loss. Two further debt conversions after quarter-end were disclosed: 3,184,169 shares on May 6 and 2,884,615 shares on May 10.
- A proposed GHS equity facility of up to $10 million depended on an effective registration statement. The company withdrew its S-1 in October 2018 after SEC staff requested withdrawal because its shares were not trading on the OTCQB or a higher exchange; the filing says it was reviewing remedies.
- Management concluded disclosure controls and procedures were not effective as of March 31, citing staffing and accounting-process deficiencies, including revenue recognition, inventory, and accruals. It reported no material change in internal control over financial reporting during the quarter.
- Contingencies include a dispute with Lonza over low manufacturing yield and Lonza’s demand for $687,818 before further work; the filing says no further action had occurred. The company also described Quebec litigation seeking approximately C$200,000 in damages from a shareholder and said it had elected not to pay a related note that came due April 1, 2019, pending court proceedings.
Important facts for investors to verify
- Reconcile the $3,000 difference between cash on the balance sheet and cash-flow statement.
- Confirm current debt maturities, note terms, subsequent conversions, and the effect of additional share issuance and the reverse split on fully diluted share counts.
- Assess near-term liquidity and the feasibility and timing of the estimated $7 million funding requirement, including whether the GHS facility can be accessed.
- Check progress on Health Canada approvals for the four generic drugs and the funded timetable for Adva-27a development.
- Review remediation of the disclosed ineffective controls, and monitor the Lonza and shareholder litigation matters.