Artelo Biosciences, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended August 31, 2018; comparisons are with the year ended August 31, 2017. This is an annual report, not a calendar fourth-quarter report. Amounts are in U.S. dollars.
Business context
Artelo is a pre-revenue biopharmaceutical company developing and seeking to license therapies that modulate the endocannabinoid system. Its programs include ART12.11, a cannabidiol composition; ART26.12, a FABP5 inhibitor research program; and ART27.13, formerly NEO1940, which the company plans to evaluate for cancer supportive care and potential anti-tumor activity. The company has two full-time employees and relies on consultants and external research organizations.
Artelo held an option to obtain an exclusive worldwide license to NEOMED’s compound after research and diligence; the filing does not clearly state that the option had been exercised. Its Stony Brook license covers specified intellectual property, with research, royalty, and milestone payment obligations.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $2,343,491 | $232,789 |
| Net loss | $(2,343,491) | $(234,889) |
| Total comprehensive loss | $(2,356,428) | $(234,232) |
| Basic and diluted loss per share | $(0.23) | $(0.03) |
| Cash and cash equivalents at year-end | $337,424 | $572,775 |
| Net cash used in operating activities | $(1,610,020) | $(216,821) |
| Net cash provided by financing activities | $1,388,451 | $785,349 |
| Working capital | $(135,537) | $544,837 |
FY2018 R&D expense was $1,249,854, general and administrative expense was $508,278, and professional fees were $585,069. With no revenue, profit or operating margin was not applicable. Total assets were $396,998; current liabilities were $531,972, primarily accounts payable and accrued liabilities of $529,272. The balance sheet reported no long-term debt. Stockholders’ deficit was $134,974, and accumulated deficit was $2,638,580.
Financing included $1,386,613 from common-share issuance. The company reported 3,962,293 warrants outstanding at August 31, 2018, with a weighted-average exercise price of $1.30, as well as 400,000 options granted during the year. These instruments may dilute shareholders.
Material changes versus FY2017
- Net loss increased to $2.34 million from $234,889 as the company began funding its biopharmaceutical development strategy; R&D expense rose from zero to $1.25 million.
- Operating cash use increased to $1.61 million, while year-end cash fell by about $235,000 and working capital shifted from a $544,837 surplus to a $135,537 deficit.
- Accounts payable and accrued liabilities increased substantially, from $28,576 to $529,272.
- Artelo entered into the NEOMED and Stony Brook agreements and raised equity through private placements, issuing shares with five-year warrants.
Outlook, risks, and unusual items
- Management stated that available funds were insufficient to finance the business for the next 12 months. The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. Additional financing is necessary, and the filing gives no assurance it will be available on acceptable terms.
- Management expected R&D spending to exceed $500,000 over the next 12 months, with actual spending dependent in part on licensing and research progress.
- At August 31, 2018, disclosed R&D commitments included a $100,000 payment, three payments of $77,760 each, two semi-annual payments totaling GBP154,000, and further monthly or quarterly invoices and potential milestone payments.
- Development, clinical testing, regulatory approval, financing, competition, intellectual-property rights, and foreign-currency exposure pose significant risks. The company reported no current material litigation.
- NEO1940 had previously been administered to 205 subjects in five Phase I studies. The filing describes its observed safety and tolerability as generally acceptable, but reports no convincing analgesic efficacy in the acute-pain studies.
- Management reported ineffective disclosure controls and internal control over financial reporting, citing inadequate segregation of duties and management concentration in one individual. The auditor did not attest to internal controls.
- After year-end, a private placement based on subscriptions accepted by August 31 closed on September 12, 2018, for reported proceeds of $525,828; the units included shares and warrants.
Important facts for investors to verify
- Confirm the company’s financing runway, status and terms of subsequent fundraising, and its ability to meet R&D commitments and other near-term obligations.
- Check whether the NEOMED option was exercised, the status of the ART27.13 and ART26.12 research programs, and the timing and cost of planned studies.
- Reconcile the filing’s weighted-average share counts: the audited statement reports 10,220,218 for FY2018, while the MD&A summary reports 12,482,174.
- Reconcile cash figures: the balance sheet reports $572,775 at August 31, 2017, while the cash-flow statement reports $572,118 as FY2017 ending cash.
- Review the dilution implications of outstanding warrants, options, and the 2018 plan authorizing up to 3,000,000 option shares.
- Assess whether control weaknesses have been remediated and monitor the company’s continued compliance with SEC reporting requirements.