Filing summary
Entity and period: The supplied filing is for Knight Knox Development Corp., not Artelo Biosciences, Inc. It is an unaudited Form 10-Q for the three months ended November 30, 2016, filed January 10, 2017. The company identifies as a development-stage e-commerce business and checked the box indicating it is a shell company. Its stated plan is to develop an auction and classified website; it has not generated revenue.
Financial results and liquidity
- Revenue: $0, unchanged from the prior-year quarter.
- Expenses and loss: Operating expenses and net loss were $9,517, versus $15,219 in the three months ended November 30, 2015. Professional fees fell to $9,204 from $14,610; general and administrative expense was $313 versus $609. No income-tax provision was reported. Basic and diluted loss per share was reported as $(0.00).
- Cash flow: The cash-flow statement reports no operating or financing cash flow for the quarter, no investing cash flow, and ending cash of $3,590, unchanged from the beginning of the period. The prior-year quarter had $14,258 of operating cash outflow, $1,200 of financing inflow, and ending cash of $3,971.
- Balance sheet at November 30, 2016: Cash and total assets were $3,590; current and total liabilities were $10,050; stockholders’ deficit was $6,460. Working-capital deficit was $6,460, compared with $13,800 at August 31, 2016. The filing reports no interest-bearing debt balance.
- Margins: Not meaningful because the company reported no revenue.
Material changes and unusual items
- Liabilities decreased from $17,390 at August 31 to $10,050 at November 30, while cash remained $3,590. The accumulated deficit increased from $60,200 to $69,716.
- The company disclosed that it borrowed $12,406 from its previous majority shareholder during the quarter; the non-interest-bearing, on-demand loan was forgiven on November 18, 2016. The total forgiven loan was $16,856, recorded as a noncash financing item. The balance sheet shows no related-party amount due at quarter-end.
- The previous majority shareholder transferred its 6,000,000 shares to an unrelated party on November 18, 2016. Shares outstanding were 7,640,000 at January 6, 2017.
- Management attributed the year-over-year reduction in expenses primarily to lower professional fees, including prior-year S-1 registration and regulatory costs.
Outlook, risks, and controls
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern: it has no revenue, has incurred losses, and needs additional capital to fund operations. Management identifies equity sales, borrowing, and support from management or significant shareholders as possible funding sources, but provides no assurance of obtaining funds or achieving profitability.
- No specific financial guidance or quantified operating outlook is provided. Management says it expects additional capital will be needed; its MD&A also says it had no plans to raise funds other than through its current offering.
- Management concluded disclosure controls and internal control over financial reporting were ineffective and identified material weaknesses, including no functioning audit committee, insufficient independent board oversight, inadequate segregation of duties, and management dominance by one individual without adequate compensating controls.
- The company reported no pending material legal proceedings and no material off-balance-sheet arrangements. No separate risk-factor disclosure was required as a smaller reporting company.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q names Knight Knox Development Corp., whereas the request identifies Artelo Biosciences, Inc.
- Review the going-concern disclosure and the company’s ability and plans to obtain sufficient operating capital.
- Reconcile the related-party loan forgiveness, its accounting treatment, and the reported zero cash flow from operations with the detailed cash-flow statement and MD&A explanations.
- Assess the effect of the disclosed material weaknesses and whether any remediation occurred after the reporting date.