Business context and reporting period
Artelo Biosciences, Inc. filed this Form 10-Q for the three months ended November 30, 2018, its fiscal first quarter (the filing metadata labels the period “2019 Q1”). The clinical-stage biopharmaceutical company intends to license, develop and commercialize therapies targeting the endocannabinoid system. It reported no revenue and said it was not yet developing treatments. Results are unaudited and in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended Nov. 30, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | None | None |
| Operating expenses and net loss | $556,903 | $277,057 |
| Research and development expense | $184,039 | $33,076 |
| Basic and diluted loss per share | $0.04 | $0.02 |
| Cash used in operations | $401,152 | $169,889 |
| Cash provided by financing | $173,902 | $11,446 |
At November 30, cash was $115,074, total assets were $165,363, and current liabilities were $640,527. Working capital was negative $475,645, versus negative $135,537 at August 31, 2018. Total liabilities equaled current liabilities; the filing reports no debt or interest payments. Stockholders’ deficit was $475,164. With no revenue, profit or operating margin was not meaningful.
Changes versus the prior comparable period
Operating expenses and net loss roughly doubled year over year, mainly reflecting higher R&D, professional fees and general and administrative expenses. R&D expense rose to $184,039 from $33,076. Operating cash use increased to $401,152 from $169,889. Cash fell by $222,350 during the quarter, despite $170,774 in proceeds from common-stock issuance and net related-party financing of $3,128.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It has no established revenue source sufficient to cover costs and needs additional capital; management offered no assurance that financing plans will succeed.
- Subsequent financing: After quarter-end, the company received $789,500 for 1,052,667 shares at $0.75 per unit under the private placement. The filing reports 15,282,687 common shares outstanding as of January 14, 2019.
- Equity dilution: The quarter’s placement issued 227,727 shares for $170,774, with one five-year Series D warrant per share exercisable at $1.75. At November 30, 4,190,020 warrants were outstanding and exercisable, with a $1.32 weighted-average exercise price.
- Commitments: R&D contracts include two stated payments of $77,760, due December 1, 2018 and March 1, 2019, and two semiannual payments totaling £115,000 over the following year. The filing says the December payment and the October 5 payment were unpaid as of November 30; additional milestone-based payments may apply.
- Business and IP risks: The company’s plans depend on licensing, research progress, regulatory approval and maintaining third-party intellectual-property rights. It reported discontinuing development of two provisional patents licensed from Analog and disclosed a December 10, 2018 patent application for a novel solid-form cannabinoid composition.
- Controls and legal matters: Management concluded disclosure controls and procedures were not effective at period-end; no material control changes were reported. The company reported no pending material legal proceedings.
- Reporting note: The cash-flow discussion’s table is labeled “Nine Months Ended May 31,” although the statements and surrounding discussion describe the three months ended November 30. The comparative-period operating cash use is also stated as $169,899 in one narrative passage versus $169,889 in the financial statements.
Most important facts for investors to verify
- Whether post-quarter financing and any further capital raise are sufficient to fund operations and address the going-concern uncertainty.
- Payment status and currency/amount details for the R&D commitments, particularly the filing’s wording for the £115,000 obligation.
- Progress, costs, milestones and continuing rights under the NEOMED and Stony Brook licenses, and the status of the patent application.
- Potential dilution from outstanding warrants, options and the post-quarter share issuance.
- How management plans to remediate ineffective disclosure controls and resolve the filing’s cash-flow-period and comparative-value inconsistencies.