Artelo Biosciences, Inc. — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended May 31, 2019. The filing was signed July 15, 2019. Artelo is a clinical-stage biopharmaceutical company developing therapies that modulate the endocannabinoid system; it had generated no revenue.
Financial results and liquidity
| Metric | Three months ended May 31, 2019 | Nine months ended May 31, 2019 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $941,288 | $2,256,110 |
| Operating loss | $941,288 | $2,256,110 |
| Net loss | $344,883 | $1,326,575 |
| Net loss per share, basic | $0.17 | $0.70 |
| Net cash used in operations | Not provided for the quarter | $1,731,580 |
- Quarterly operating expenses rose $363,431 from the prior-year quarter, largely reflecting higher general and administrative expense and professional fees; R&D expense declined. Nine-month operating expenses increased $602,732 year over year.
- Net losses were lower than the prior-year periods despite higher operating expenses, principally because of a $563,966 quarterly and $897,096 nine-month noncash gain from changes in the fair value of derivative liabilities. The nine-month comparison was $1,326,575 net loss versus $1,653,378.
- At May 31, cash was $286,439, current assets $1,152,395, current liabilities $1,018,873, and working capital $133,522. Total assets were $1,153,252 and total liabilities $1,018,873. Liabilities were primarily accounts payable and accrued liabilities ($912,413); the filing reports no borrowings or undisclosed debt.
- Nine-month financing provided $1,679,772, mainly from common-share issuance. Cash declined $50,985 over the period, while operating cash use increased $635,432 versus the comparable period.
Material developments, outlook and risks
- Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It had no established revenue source sufficient to cover costs and expected its capital resources would not fund operations for at least the next 12 months. Management planned to seek equity, debt or support from management and significant stockholders, with no assurance of success.
- After quarter-end, on June 25, 2019, Artelo completed an offering of 1,300,813 units at $6.15 per unit, reporting gross proceeds of approximately $8,001,911 before underwriting discounts and expenses. In July it paid NEOMED $1.5 million to exercise the license. These subsequent events are not reflected in May 31 cash.
- The company issued 61,297 shares valued at $539,417 as a deposit toward exercising its NEOMED license. The filing also reports unpaid research commitments, including a $77,760 payment and two GBP-denominated payments; the text’s description of the GBP amounts is unclear. Additional milestone payments may arise.
- Pipeline priorities included ART27.13, for which management planned to initiate a Phase 1b/2a cancer-related anorexia study in late 2019, and ART26.12, for which it anticipated clinical studies in cancer could begin in 2020 after further development. These are forward-looking plans, not assured milestones.
- Key risks include financing needs, clinical and regulatory uncertainty, controlled-substance licensing requirements, dependence on third-party research and licensed intellectual property, and the possibility of license termination if obligations are not met. Management reported disclosure controls and procedures were not effective as of period-end; it reported no material change in internal control during the quarter.
- A one-for-eight reverse stock split took effect June 20, 2019; share and per-share amounts in the financial statements reflect the split retroactively. The filing reported 3,401,987 common shares outstanding as of July 12, 2019.
Important facts for investors to verify
- Whether post-quarter offering proceeds, net of costs, and the NEOMED payment provide adequate runway, given management’s going-concern warning.
- Clinical and regulatory progress against the stated ART27.13 and ART26.12 timelines, including required funding and controlled-substance permissions.
- Amounts, timing and status of unpaid R&D commitments and any additional NEOMED or other license milestones.
- The derivative-liability accounting and its effect on reported earnings: the filing presents $32,439 as “other income” in the financial statements but describes it as “interest expense” in MD&A.
- Remediation of ineffective disclosure controls and the potential dilution from outstanding warrants, options and subsequent financing.