Sunshine Biopharma Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. The company is a development-stage pharmaceutical business with generic-drug and analytical-chemistry operations; Q1 revenue came from Atlas Pharma, acquired January 1, 2018.
Key financial results
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $91,168 | $0 |
| General and administrative expenses | $257,865 | $108,990 |
| Operating loss | $(166,697) | $(108,990) |
| Interest expense | $(75,467) | $(9,144) |
| Loss on debt conversions | $(38,340) | $(76,929) |
| Net loss | $(265,636) | $(195,702) |
| Operating cash flow | $(168,455) | $(108,037) |
| Cash at quarter-end | $104,763 | $107,532 at December 31, 2017 |
The filing reports basic loss per share as $0.00 for both periods, apparently rounded; it does not provide a more precise per-share value. Gross profit and operating margins are not separately reported. Revenue was newly consolidated from Atlas, so the year-over-year comparison is not like-for-like.
At March 31, 2018, total assets were $1.00 million, total liabilities $1.50 million, and shareholders’ deficit $500,685. Current assets of $202,489 compared with current liabilities of $1.18 million, a working-capital deficit of approximately $979,000. Reported notes payable, including related-party balances, totaled approximately $1.36 million. Goodwill from the Atlas acquisition was $673,646.
Material changes and business developments
- Atlas acquisition added analytical chemistry services and generated all reported Q1 revenue. Consideration was C$848,000 (reported as US$684,697): US$80,289 cash, 20 million shares valued at $246,000, and a related-party note reported at US$358,407. The Atlas audit was incomplete when the filing was prepared; the company cautioned that disclosures could require material updates.
- G&A rose $148,875 year over year, principally reflecting Atlas employees, rent, supplies, office costs, and acquisition-related accounting and legal fees. Officer and director compensation was $77,787, versus $42,965.
- The company issued 29.3 million shares during the quarter: 20 million for the Atlas acquisition and 9.3 million upon debt conversion. These conversions reduced debt by $55,000 and interest payable by $1,712, while producing a $38,340 loss.
- Q1 cash financing included new borrowings; the company also reported substantial increases in debt and interest expense. Three new 8% convertible notes had face values totaling $337,000, with conversion prices at a discount to market after 180 days.
- Adva-27a development was assigned to newly formed wholly owned subsidiary NOX Pharmaceuticals. The company said development had been delayed by lack of funding.
Outlook, risks, and unusual items
- Funding and going concern: The filing states that recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Management estimated approximately $7 million would be needed to fully implement its business plan and said additional capital was required for operations and expansion, with no assurance it could be raised.
- Proposed financing: A Canadian private offering of up to C$10 million (approximately US$8 million), potentially involving up to 400 million shares at C$0.025 per share, was extended to August 31, 2018. The earlier offering had expired without raising funds; the company cautioned there was no assurance the extended offering would sell shares.
- Development and commercial plans: Adva-27a’s planned next steps include GMP manufacture, IND-enabling studies, regulatory filing, and Phase I trials, contingent on financing. The four generic products were awaiting required Health Canada approvals, including a DEL inspection and product DINs; the filing gives no firm approval or launch dates.
- Controls: Management concluded disclosure controls were ineffective as of March 31, 2018, citing staffing and expertise gaps, period-end reporting and accounting deficiencies, and weaknesses in revenue recognition, inventory, transaction review, and accrual accounting. The board said it was reviewing remediation.
- Lonza matter: A manufacturing dispute remains unresolved. Lonza requested $687,818 before further activity, while the company sought a defined solution to low manufacturing yield; the filing says neither party had taken further action. Management reported no other material claims known to it.
- Lease commitments: Atlas lease minimum payments were reported as $228,113 through May 2021, including $62,213 annually for 2018–2020 and $41,474 for 2021.
- Subsequent events: April note conversions issued 20.5 million additional shares in total. These post-quarter issuances help explain why May 21 outstanding shares were 968,512,658, versus 949,019,532 on the March 31 balance sheet.
Most important facts to verify
- Reconcile cash-flow figures: the financial statements report operating cash use of $168,455, investing cash use of $80,130, and financing cash provided of $248,554; MD&A instead reports investing cash use of $106,101 and financing cash provided of $248,462. The filing text does not explain these differences.
- Confirm Atlas acquisition accounting, purchase-price allocation, and final financial disclosures; the Atlas audit was incomplete and the filing warns that updates could be material.
- Assess cash runway, near-term debt maturities, related-party obligations, and whether the proposed financing actually closes; the filing identifies substantial funding needs and going-concern uncertainty.
- Track Health Canada approvals and the timing and cost of Adva-27a’s planned manufacturing, preclinical, and clinical-development steps.
- Review the status and potential financial exposure of the Lonza dispute and the company’s remediation of ineffective disclosure controls.