Business context and reporting period
This Form 10-Q is for Reactive Medical Inc. (formerly Knight Knox Development Corp.), for the three and six months ended February 28, 2017. The filing identifies the company as a Nevada corporation based in Dublin and reports in U.S. dollars under U.S. GAAP. Although the request metadata names Artelo Biosciences, the filing itself names Reactive Medical Inc.; investors should verify the issuer and filing identity.
The company changed its name effective February 10, 2017 and shifted from a planned e-commerce business to a development-stage biopharmaceutical business focused on licensing, developing and commercializing cannabinoid therapies. It had no licenses, identified treatments or revenue as of the filing’s discussion.
Financial performance and position
| Metric | Three months ended Feb. 28, 2017 | Six months ended Feb. 28, 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Operating expenses | $11,995 | $21,512 | $5,090 and $20,309, respectively |
| Net loss | $13,011 | $22,528 | $5,090 and $20,309, respectively |
| Operating cash used | Not stated for quarter | $22,193 | $14,639 |
At February 28, 2017, cash was $10,897, total assets $13,457, current liabilities $32,929, and working capital deficit and stockholders’ deficit each $19,472. At August 31, 2016, cash was $3,590 and the corresponding deficits were $13,800. Six-month financing cash flow was $29,500, including $29,400 in note proceeds and $100 in shareholder advances; cash increased by $7,307. No investing cash flows or cash interest or tax payments were reported.
The company’s $30,000 promissory note bears 10% annual interest and is due November 18, 2017. Its balance-sheet carrying value was $29,569, net of a $431 unamortized discount; the company recorded $847 interest expense and $169 discount amortization for the six months. No gross margin or other operating margin is reported because there was no revenue.
Changes versus prior comparable periods
Six-month operating expenses rose to $21,512 from $20,309, and net loss increased to $22,528 from $20,309. Management attributed the expense increase mainly to travel and business-license fees. For the quarter, net loss increased to $13,011 from $5,090; management cited higher accounting and audit fees. Operating cash use increased to $22,193 from $14,639, while financing inflows supported the increase in ending cash.
During the period, the company recorded the forgiveness of a $16,856 loan from a former majority shareholder as a noncash financing item. It also borrowed $12,406 from that shareholder; the filing describes this separate loan as non-interest-bearing and due on demand.
Outlook, risks and unusual items
The filing states that substantial doubt exists about the company’s ability to continue as a going concern: it has no revenue, an accumulated deficit of $82,728 and needs additional capital to fund operations. Management discussed equity, debt and shareholder financing as possible sources but gave no assurance of obtaining funds. The filing also states that the company had no agreements or understandings for additional financing and, in its going-concern discussion, no current plans or intentions to raise funds through additional securities. No financial guidance or quantified outlook is provided.
After quarter-end, the company engaged a law firm for services relating to potential intellectual property and entered into a consultant agreement concerning cannabinoid technology and intellectual property. It also sold 400,000 shares for $400 to a law-firm member and 1,760,000 shares for $1,760 to its newly appointed CEO; the agreements include clawback or employment-related conditions. The filing reports 9,800,000 shares outstanding as of April 14, 2017, compared with 7,640,000 at February 28.
Management reported ineffective disclosure controls and material weaknesses, including no functioning audit committee, no majority of independent directors, inadequate segregation of duties and management dominated by one individual. Management said the weaknesses had not affected reported results but could contribute to future misstatements. The filing reports no pending material legal proceedings and no material off-balance-sheet arrangements.
Key facts investors should verify
- Confirm the issuer identity: the supplied metadata says Artelo Biosciences, while the filing names Reactive Medical Inc.
- Reconcile the quarter’s operating-loss amount: the financial statements report $11,995, while one MD&A passage says $11,955.
- Assess near-term liquidity, the November 2017 note maturity, and the company’s ability to obtain funding given its going-concern warning.
- Verify the post-quarter share issuances, their conditions and the reported 9,800,000 shares outstanding as of April 14, 2017.
- Monitor whether the company secures cannabinoid licenses or identifies viable treatments; the filing says it had done neither.
- Track remediation of the disclosed internal-control weaknesses and confirm governance oversight.