Business context and reporting period
Artelo Biosciences, Inc. filed this unaudited Form 10-Q for the quarter and six months ended February 28, 2018, its fiscal second quarter. The development-stage biopharmaceutical company is pursuing therapies that modulate the endocannabinoid system and has generated no revenue. Its programs include research-stage endocannabinoid modulators licensed from Stony Brook University, an option to license NEOMED’s NEO1940, and a proprietary crystalline form of cannabidiol for which it filed a patent application. The company said it had discontinued development of the two provisional patents previously licensed from Analog Biosciences.
Financial performance and liquidity
| Metric | Three months ended Feb. 28, 2018 | Six months ended Feb. 28, 2018 | Comparison |
|---|---|---|---|
| Revenue | $0 | $0 | No revenue in comparable 2017 periods |
| Operating expenses | $628,354 | $905,411 | $11,995 and $21,512, respectively, in 2017 |
| Net loss | $628,354 | $905,411 | $13,011 and $22,528, respectively, in 2017 |
| Operating cash flow | Not presented by quarter | $(637,379) | $(22,193) in 2017 |
| Cash and cash equivalents | $525,107 at Feb. 28, 2018 | $572,775 at Aug. 31, 2017 | |
| Working capital | $384,544 at Feb. 28, 2018 | $544,837 at Aug. 31, 2017 | |
| Total liabilities | $155,813 at Feb. 28, 2018 | $29,438 at Aug. 31, 2017 |
Six-month operating expenses included $510,433 of research and development, $227,344 of professional fees, and $167,488 of general and administrative expense. The company reported no interest expense in the 2018 periods and no income-tax provision. No revenue-based margins are meaningful. The filing reports no undisclosed borrowings or debt; current liabilities were principally accounts payable and accrued liabilities of $154,211, plus $1,602 due to a related party.
Cash used in investing activities was $887. Financing provided $592,877, including $592,137 from stock issuance, $16,583 in related-party advances, and $15,843 repaid to a related party. Cash declined by $47,668 over the six months. The filing attributes higher operating costs chiefly to research and development, and reports $156,001 of stock-based compensation during the period.
Material changes and outlook
- Compared with the prior-year periods, operating expenses and net losses rose substantially, principally reflecting research and development activity and increased professional and general and administrative costs.
- Management stated that additional capital is required to fund operations and anticipated seeking capital through equity or debt financing. The filing gives no quantified operating or revenue guidance and provides no assurance that financing will be available on acceptable terms.
- The company disclosed substantial doubt about its ability to continue as a going concern: it has no revenue, reported a six-month net loss of $905,411, and had an accumulated deficit of $1,200,500. It warned that inability to obtain adequate capital could force it to cease operations.
- Subsequent to quarter-end, the company reported agreements to sell 390,306 units for aggregate proceeds of $253,700; each unit comprises one common share and a five-year warrant exercisable at $1.50. It also reported receipt of $14,950 on March 16 for 23,000 shares related to an earlier subscription.
- As of February 28, 2,847,889 Series A warrants were outstanding, with a weighted-average exercise price of $1.16 and 4.52 years of weighted-average remaining life. The filing reports intrinsic value of $741,875. Common shares outstanding were 12,781,195 as of April 12, 2018.
- Management concluded disclosure controls and procedures were not effective as of period-end. It reported no material change in internal control over financial reporting during the quarter.
- Key risks include dependence on future financing, early-stage drug development and regulatory uncertainty, and the possibility of losing licensed intellectual-property rights if contractual obligations are not met. No material pending legal proceeding was reported.
Important facts for investors to verify
- Financing needs, cash use and runway, particularly in light of the going-concern warning and the absence of revenue.
- Status and terms of the subsequent private placement, share issuance, and related warrants; reconcile the filing’s share-subscription and cash proceeds disclosures.
- Milestones, costs, and decision timelines for the Stony Brook, NEOMED, SUNY, and cannabidiol programs, including whether the NEOMED option is exercised.
- Remediation of ineffective disclosure controls and the nature of any reporting-control weaknesses.
- Potential dilution from outstanding warrants and any further equity financing.