Artelo Biosciences, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended February 28, 2019. The filing was signed April 15, 2019. Amounts are in U.S. dollars unless noted.
Business context
Artelo is a development-stage biopharmaceutical company seeking to license, develop and commercialize therapies targeting the endocannabinoid system. Its programs include ART12.11, a cannabidiol (CBD) cocrystal; ART27.13, being evaluated for cancer-related anorexia; and ART26.12, a preclinical FABP5 inhibitor program. The filing describes ART27.13’s Phase 1b/2a study as planned for late 2019 and ART26.12 clinical studies as anticipated in 2020. The company had no product revenue and no approved products.
Financial results and liquidity
| Metric | Three months ended Feb. 28 | Six months ended Feb. 28 |
|---|---|---|
| Revenue | None | None |
| Operating expenses | 2019: $757,919; 2018: $798,464 | 2019: $1,314,822; 2018: $1,075,521 |
| Net loss | 2019: $424,789; 2018: $798,464 | 2019: $981,692; 2018: $1,075,521 |
| Basic loss per share | 2019: $0.03; 2018: $0.07 | 2019: $0.07; 2018: $0.10 |
Quarterly operating expenses fell year over year, while six-month expenses rose, led by higher general and administrative and professional fees; R&D expense was slightly lower for the six-month period. The lower reported net losses include a $333,130 favorable change in the fair value of derivative liabilities; this noncash item reduced the reported loss. No profit margins are meaningful because the company had no revenue.
At February 28, cash and cash equivalents were $457,328, total assets $484,282, current liabilities $1,176,456, and stockholders’ deficit $692,174. Working capital deficiency was $692,588, versus $135,537 at August 31, 2018. The current derivative liability was $584,920; accounts payable and accrued liabilities were $586,002. The filing reports no undisclosed borrowings or debt and no interest paid.
For the six months, operating cash use was $1,142,126, compared with $637,379 in the prior-year period. Financing provided $1,260,759, principally from common-stock issuance; cash increased by $119,904 to $457,328. There was no investing cash use in the period.
Changes, outlook and risks
- Six-month operating expenses increased $239,301 year over year; six-month net loss decreased $93,829, reflecting the derivative fair-value benefit.
- The company raised $1,257,905 in the six months by issuing 1,677,196 Series D units at $0.75 each. Each unit included one common share and a five-year warrant to buy one share at $1.75. Shares outstanding were 15,679,489 at quarter-end and 15,879,489 as of April 12, 2019.
- Subsequent to quarter-end, the company reported receiving $143,932 for 151,507 Series E units at $0.95 each; the offering remained open. The filing also says no common shares, units or warrants had been issued in connection with that offering.
- Management states that existing cash would not fund operating expenses through fiscal year-end August 31, 2019 and that substantial doubt exists about the company’s ability to continue as a going concern. Management expects to seek equity, debt or other financing, but provides no assurance it can obtain adequate capital on acceptable terms.
- Research commitments included a $77,760 payment due March 1, 2019, monthly or quarterly contract charges, and potential milestone-based payments. A stated £57,500 payment due October 5, 2018 remained unpaid; another £57,500 payment was due April 5, 2019.
- On March 15, 2019, the board approved 200,000 common shares for services to a company owned by a former director. The filing identifies substantial risks from financing needs, clinical and regulatory uncertainty, cannabinoid-related regulation, licensing and intellectual-property protection, and reliance on limited personnel and third parties.
- Management concluded disclosure controls and procedures were not effective at period-end. It reported no material changes in internal control over financial reporting during the period. No material pending legal proceedings were reported.
Important facts for investors to verify
- Confirm the company’s near-term cash needs, subsequent financing proceeds, and ability to fund operations and research commitments; reconcile the Series E cash receipt with the statement that no units or securities had been issued.
- Check the status and settlement of the overdue and upcoming research payments, including the GBP amounts and the $77,760 payment due March 1.
- Review the Series D price-protection derivative: its $584,920 quarter-end liability, valuation assumptions, and $333,130 fair-value change materially affect reported results.
- Track actual development progress against the stated ART27.13 and ART26.12 timelines, along with required regulatory permissions, clinical funding and licensing obligations.
- Review the 200,000-share service award and resulting dilution, and the company’s remediation of ineffective disclosure controls.
- Reconcile filing inconsistencies: the MD&A cash-flow comparison labels periods 2018 and 2017 although the financial statements show 2019 and 2018; its stock-compensation adjustment ($89,235) also differs from the cash-flow statement ($83,355).