Sunshine Biopharma, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing is an annual report, not a standalone fourth-quarter report. Financial statements are audited under U.S. GAAP. The auditor issued an unqualified opinion but highlighted substantial doubt about the company’s ability to continue as a going concern.
Business context
Sunshine is a small pharmaceutical and supplements company with three principal activities: preclinical development of its patented anticancer compound Adva-27a; Canadian generic-drug commercialization; and dietary supplements. It reported three employees, all members of management. The company sold its analytical chemistry subsidiary, Atlas Pharma, effective April 1, 2019.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Continuing-operations revenue | $21,121 | $0 |
| Cost of revenue / gross profit | $11,050 / $10,071 | $0 / $0 |
| Gross margin | About 47.7% | Not applicable |
| General and administrative expenses | $651,707 | $1,164,290 |
| Loss from continuing operations | $1,078,054 | $2,137,951 |
| Loss from discontinued operations | $582,237 | $18,204, per the statement of operations |
| Net loss / basic loss per share | $1,660,291 / $0.15 | $2,156,155 / $0.71 |
| Operating cash flow | $(495,798), per cash-flow statement | $(512,806), per cash-flow statement |
| Cash at year-end | $40,501 | $110,534, per balance sheet |
Revenue came from dietary supplements, principally Essential 9. The company recorded a $580,125 loss on Atlas’s disposition within discontinued operations. Total assets were $98,142 and total liabilities were $833,527 at year-end, including $586,307 of notes payable and $129,261 of related-party notes payable. Shareholders’ deficit was $735,385; current assets of $65,686 were substantially below current liabilities of $833,527.
Financing activities provided $442,255 in cash during 2019. The company relied on debt and stock issuance to finance operations. It issued 20,432,370 shares in debt conversions, valued at $717,726, and recorded a $314,752 conversion loss. The filing reports numerous convertible notes bearing 8% interest, generally convertible at a 35% discount to market price, as well as 12% nonconvertible notes, including notes owed to the CEO and other related parties.
Changes versus FY 2018
- Dietary-supplement sales began in 2019, generating $21,121 in revenue versus none in 2018; revenue remained small relative to operating costs.
- G&A expenses fell by $512,583, principally reflecting lower officer and director remuneration and lower accounting costs; debt-conversion losses also declined from $871,726 to $314,752.
- Net loss narrowed by about $496,000, but remained substantial. The Atlas disposal generated a large 2019 discontinued-operations loss.
- Cash declined from $110,534 to $40,501 on the balance sheet, while liabilities remained far greater than current assets.
Outlook, risks and unusual items
- Funding and going concern: Management says additional financing is required to sustain operations and execute its plans. It estimates approximately $6 million is needed—$5 million for drug development and $1 million for generic-drug and supplement operations—and gives no assurance it can raise the funds. The auditor and management identify substantial doubt about continuing as a going concern.
- Adva-27a: Development remains preclinical; funding constraints delayed clinical development. The company had made no FDA or other regulatory filings as of the report date. Planned next steps include GMP manufacturing, IND-enabling studies, regulatory filing and Phase I trials, subject to financing and regulatory approval. No clinical success or commercial transaction is assured.
- Generics and supplements: Health Canada authorized Essential 9 and, in November 2019, Essential Calcium-Vitamin D. The latter was anticipated to launch on Amazon.ca in Q3 2020. The four licensed generic drugs still required Health Canada DINs and a Drug Establishment License; the company could not estimate approval timing.
- Equity dilution and governance: Shares were issued for compensation, services and debt conversions. A 20-for-1 reverse split took effect in February 2019 and another in April 2020; the filing states share figures are adjusted for both, though the presentation of share counts warrants checking. The CEO held all 500,000 Series B preferred shares, carrying 1,000 votes each; the filing attributes 87.73% of voting power to that class. No directors were considered independent.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2019, citing staffing and accounting-process deficiencies, including revenue recognition and inventory controls. The auditor did not attest to internal-control effectiveness.
- Litigation: A Quebec shareholder dispute seeks approximately C$200,000 in damages. The company also elected not to pay a C$100,000 note when due and sought to link that matter to the litigation. Hearings were postponed because of COVID-19.
- Market and operating risks: The stock traded on OTC Pink and was classified as a penny stock; the filing warns of price volatility and limited ability to sell shares. The company faces competition and extensive regulatory requirements.
Important facts for investors to verify
- Reconcile reported cash-flow figures: MD&A gives 2019 operating cash use of $498,255, while the cash-flow statement reports $495,798; the MD&A and statement also differ for 2018. The 2018 year-end cash figure differs between the balance sheet and cash-flow statement.
- Reconcile the 2018 discontinued-operations loss: the statement of operations reports $18,204, whereas the Atlas discontinued-operations note reports $8,847.
- Confirm year-end debt maturities, accrued interest, subsequent conversions and the potential dilution from discount-to-market convertible notes.
- Confirm the share counts and per-share figures after the two reverse splits; the filing’s split-adjusted presentation and reported share figures should be reconciled.
- Track financing availability, cash runway, progress toward the stated $6 million capital requirement, and any regulatory approvals or clinical-trial filings.
- Monitor remediation of the disclosed control weaknesses, the Atlas-related litigation, and the company’s ability to commercialize supplements and obtain approvals for its generic products.