Artelo Biosciences, Inc. — Form 10-Q Summary
Reporting period: Three months ended November 30, 2017 (the company’s fiscal first quarter of 2018). Unaudited consolidated financial statements; amounts are in U.S. dollars.
Business context
Artelo is a development-stage biopharmaceutical company seeking to license, develop and commercialize cannabinoid-related therapeutics. It had not generated revenue, and no product candidate had completed clinical development or received regulatory approval. The company reported minimal operating history and consolidated its wholly owned subsidiaries.
Financial performance and position
| Metric | Three months ended Nov. 30, 2017 | Comparable 2016 period / prior balance-sheet date |
|---|---|---|
| Revenue | None | None since inception |
| Operating expenses and net loss | $277,057 | $9,517 |
| Loss per share, basic and diluted | $0.02 | $0.00 |
| Cash and cash equivalents | $412,440 | $572,775 at Aug. 31, 2017 |
| Total assets | $430,287 | $574,275 at Aug. 31, 2017 |
| Total current liabilities | $136,281 | $29,438 at Aug. 31, 2017 |
| Stockholders’ equity | $294,006 | $544,837 at Aug. 31, 2017 |
| Working capital | $293,211 | $544,837 at Aug. 31, 2017 |
Operating cash outflow was $169,889 in the financial statements (the MD&A cash-flow table gives $169,899); investing outflow was $867, and financing provided $11,446. Cash declined by $160,335. Financing included a $10,000 stock-subscription collection and net related-party advances and repayments. The filing reports no interest or income-tax payments. No material debt balance is reported; current liabilities consist primarily of accounts payable and accrued liabilities, plus amounts due to related parties.
Operating expenses rose sharply year over year, primarily reflecting increased activity under the company’s new business plan. Expense categories included general and administrative, professional fees, research and development, and depreciation. The financial statements report general and administrative expense of $136,564; the MD&A separately identifies $119,313 of general and administrative expense and $17,251 of stock-based compensation.
Material developments, outlook and risks
- Funding and going concern: The company had an accumulated deficit of $572,146, no revenue, and stated that it needs additional capital to fund operations. Management disclosed substantial doubt about the company’s ability to continue as a going concern and said there is no assurance financing will be available on acceptable terms or that the company will become profitable.
- NEOMED agreement: Subsequent to quarter-end, Artelo entered into an agreement providing for up to 12 months of research and evaluation of NEO1940 and an option to obtain an exclusive worldwide license. NEOMED agreed to provide specified materials and compound at its cost. Artelo issued NEOMED 120,000 common shares; the agreement’s effective date was January 2, 2018. The company must decide whether to exercise the option after evaluation.
- Other pipeline status: Artelo said it had discontinued development of the two provisional patent applications licensed from Analog Biosciences. It also disclosed filing a provisional patent application in December 2017; no patent outcome was reported.
- Equity and dilution: At November 30, 2017, 1,952,303 Series A warrants were outstanding, with a $1.00 exercise price and a weighted-average remaining life of 4.58 years. Common shares outstanding were 11,352,302 at quarter-end and 11,472,302 as of January 16, 2018.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing material weaknesses including no functioning audit committee, inadequate segregation of duties, and management dominated by one individual without adequate compensating controls.
- Other exposures: The company highlighted risks related to maintaining licensed intellectual property and meeting license obligations. It reported no pending material legal proceedings and no off-balance-sheet arrangements.
No quantified revenue, earnings, cash-flow or clinical-development guidance was provided. Management expected operating expenses to continue as it pursued its business plan and anticipated needing additional capital.
Investor verification points
- Reconcile the operating cash-flow figure: the statements report $169,889 used, while the MD&A table reports $169,899; also verify the MD&A’s stated accounts-payable cash-flow change against the financial statements.
- Review the full NEOMED agreement for option-exercise conditions, future costs, milestones, royalties and other obligations, and track whether Artelo exercises the option.
- Assess available financing, cash needs and dilution risk in light of the going-concern disclosure, subsequent share issuance and outstanding warrants.
- Monitor progress on the company’s research programs and intellectual-property applications; the filing reports no approved products or completed clinical development.
- Track remediation of the disclosed internal-control weaknesses and the establishment of effective independent oversight.