Sunshine Biopharma, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a standalone fourth-quarter report. The audited 2017 financial statements exclude Atlas Pharma and NOX Pharmaceuticals. The auditor issued an unmodified opinion but highlighted substantial doubt about the company’s ability to continue as a going concern.
Business context
Sunshine is a development-stage pharmaceutical company pursuing three areas: Adva-27a cancer-drug development, Canadian generic-drug sales, and analytical chemistry services through Atlas Pharma, acquired in January 2018. The company reported no revenue in either 2017 or 2016.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| General and administrative expenses | $857,190 | $993,108 |
| Operating loss | $857,190 | $993,108 |
| Net loss | $1,040,236 | $3,496,687 |
| Operating cash flow | $(543,520) | $(314,182) |
| Investing cash flow | $(84,008) | $(3,439) |
| Financing cash flow | $670,705 | $324,622 |
| Cash at year-end | $107,532 | $57,453 |
Gross margin is not meaningful because the company had no revenue. At December 31, 2017, total assets were $257,485, current assets $117,199, current liabilities $751,138, total liabilities $830,848, and shareholders’ deficit $573,363. The balance sheet reports $516,867 of current notes payable and $205,742 of current related-party notes payable, plus $79,710 of long-term notes payable. The filing’s debt classifications and note disclosures should be reconciled. The company reported $104,829 of interest expense in its income statement, while a note gives $79,833; this is an apparent inconsistency requiring verification.
Changes versus 2016
- Net loss narrowed by about $2.46 million, principally because 2016 included a $1.95 million loss on debt conversion and a $556,120 patent impairment. 2017 still included $76,929 of debt-conversion loss and $104,829 of interest expense as reported in the income statement.
- Operating expenses fell $135,918, including lower consulting, amortization and depreciation, research and development, and licensing costs. Research and development expense was reported as zero in 2017.
- Operating cash use worsened by $229,338 despite the lower net loss; financing remained the principal source of cash.
- Common shares outstanding rose from 769.4 million to 918.7 million during 2017. The filing reports 948.0 million outstanding as of March 28, 2018.
Outlook, risks and unusual items
- Funding and going concern: Management says the company needs approximately $8 million to execute its plans and expects to seek equity and/or debt financing. A Canadian private offering targeting approximately US$8 million expired February 28, 2018 without raising funds; extension discussions were ongoing. The auditor and management cite substantial doubt about the company’s ability to continue as a going concern.
- Adva-27a: Development has been delayed by inadequate funding. The company anticipated Phase I trials beginning in mid-2019, subject to financing, and estimated 18 months to complete; these were plans, not assured milestones. No FDA or other regulatory filing had been made. A pilot manufacturing run produced substantially lower-than-expected yield, and Lonza required $687,818 before further work; the parties had not resolved their positions.
- Generic drugs: Four products were licensed for Canadian registration, but required Drug Identification Numbers and a Drug Establishment License remained pending, with no clear timing. No sales had begun. Anastrozole carries a 5% net-sales royalty for three years after first sale.
- Atlas acquisition: The January 2018 acquisition price was C$848,000 (approximately US$678,400), funded with a C$100,500 cash payment, 20 million common shares, and a C$450,000 promissory note at 3% interest with quarterly payments through 2023. Atlas reported approximately C$500,000 of 2017 revenue, but was not included in the 2017 financial statements.
- Dilution and related parties: 2017 share issuances included 42 million shares valued at $336,000 for directors and officers and 42.5 million shares for debt conversion. Several notes had conversion discounts to market price. The CEO controls 500,000 Series B preferred shares carrying 1,000 votes each, and the filing discloses substantial related-party dealings, including payments to a CEO-controlled company.
- Controls and governance: Management found disclosure controls and internal control over financial reporting ineffective, citing inadequate staffing, reporting-process and accounting-policy deficiencies, and weak transaction and revenue controls. No directors were deemed independent; the board had no audit committee or code of ethics.
- Trading and contingencies: The common stock traded OTC as a penny stock, with significant price fluctuations and potential resale constraints. The company reported no other material claims beyond the unresolved Lonza matter and a previously settled lawsuit.
Important facts for investors to verify
- Current cash runway, financing status, and the company’s ability to meet near-term debt maturities and fund planned operations.
- The apparent differences between reported interest expense and the notes, and between balance-sheet debt classifications and detailed note balances.
- Progress and costs to resolve Adva-27a manufacturing yield issues, obtain financing, and reach required regulatory and clinical milestones.
- Whether Canadian permits and product registrations are obtained and when generic sales may begin; confirm Atlas’s post-acquisition results separately.
- Potential dilution from discounted convertible notes, equity compensation, and other share commitments; confirm current shares outstanding and voting control.
- Remediation of material control deficiencies and the status of the Lonza dispute.