Artelo Biosciences, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2017, ended May 31, 2017. The filing was signed July 21, 2017. Amounts are in U.S. dollars.
Business context
Artelo is a development-stage company that intends to license, develop, and commercialize cannabinoid-based therapies. It reported no revenue and had conducted only minimal operations. In May 2017, it licensed a provisional patent application for a cannabidiol combination-product strategy; it had not identified or licensed other drug programs. The company said formulation research could position it to enter clinical development in 2018, subject to funding and regulatory and ethics approvals. It also formed wholly owned subsidiaries in Ireland and, after quarter-end, England and Wales.
Financial results and position
| Metric | Three months ended May 31, 2017 | Nine months ended May 31, 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Operating expenses | $95,725 | $117,237 | $5,050 and $25,359, respectively |
| Net loss | $96,632 | $119,160 | $5,050 and $25,359, respectively |
| Basic and diluted loss per share | $(0.01) | $(0.01) | $(0.00) in both comparable periods |
For the nine months, professional fees were $93,822 (versus $24,750 in 2016), primarily related to capital raising and diligence for licensing and program acquisition. General and administrative expense was $21,749 (versus $609); stock compensation was $1,666.
At May 31, cash and total assets were $227,838, compared with $3,590 at August 31, 2016. Current liabilities were $341,782, including accounts payable and accrued liabilities of $71,315, accrued interest of $1,603, related-party amounts of $7,478, a note payable net of discount of $29,720, and stock payable of $231,666. Working capital was negative $113,944, versus negative $13,800 at August 31, 2016. Stockholders’ deficit was $113,944; accumulated deficit was $179,360.
For the nine months, the financial statements report $58,862 of net cash used in operations, no investing cash flow, and $283,110 provided by financing activities; cash increased by $224,248 to $227,838. Financing included proceeds recorded as stock payable, a $29,400 note issuance, related-party funding, and $2,160 from common-share issuance. The company had a $30,000 promissory note bearing 10% interest, due November 18, 2017. No cash interest or taxes were paid.
Material changes, outlook, and risks
- The company changed its business focus from e-commerce to cannabinoid therapeutics, changed its name to Artelo, and increased authorized capital to 150 million common and 50 million preferred shares. Common shares outstanding were 9.8 million at May 31 and July 7, 2017, up from 7.64 million at August 31, 2016.
- It reported substantial doubt about its ability to continue as a going concern, citing no revenue, recurring losses, and the need for additional capital. Management planned to seek equity, debt, or support from management and significant stockholders, but gave no assurance funding would be available or that the company would become profitable.
- The May 4 note repayment agreement with Malibu Investments Limited called for repayment of $31,500, representing principal and accrued interest. The filing does not clearly establish whether repayment occurred by May 31; a note payable remains on the balance sheet.
- Management concluded disclosure controls and procedures were not effective as of May 31, 2017. It reported no material change in internal control over financial reporting during the quarter.
- Two directors received commitments for 120,000 and 100,000 shares, vesting over four years subject to continued service. The filing also describes a $230,000 stock investment to be settled with shares and warrants; the balance sheet and cash-flow statement show stock payable of $231,666.
Important facts for investors to verify
- Reconcile the reported quarterly net loss, operating loss, and interest expense: the statements show a $96,632 net loss, while listed operating loss and interest expense do not arithmetically reconcile to that figure.
- Confirm operating cash use: the cash-flow statement reports $58,862 for the nine months, while the MD&A cash-flow summary labels $119,160 as cash used in operations.
- Clarify the Malibu note repayment status and the balance-sheet treatment of the note and accrued interest after the May 4 agreement.
- Reconcile the $230,000 stock investment described in the notes with the $231,666 stock-payable balance and financing cash-flow presentation.
- Assess near-term funding needs, the adequacy of cash relative to operating plans, the status of the provisional patent and any further licensing, and progress toward regulatory and clinical-development milestones.