Artelo Biosciences, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017. This is an annual report, not a report for calendar-year Q4. Financial statements are audited and prepared under U.S. GAAP.
Business context
Artelo is a development-stage biopharmaceutical company that shifted from an e-commerce plan to cannabinoid therapeutics in 2017. It reported no product revenue, and no candidate had completed clinical development or received regulatory approval. The company licensed cannabinoid-related patent rights from Analog Biosciences, including a provisional-patent combination-product strategy involving cannabidiol and rights relating to cannabinoid manufacturing methods.
Key financial metrics
| Metric | FY2017 / Aug. 31, 2017 | FY2016 / Aug. 31, 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $232,789 | $29,690 |
| Net loss | $234,889 | $29,690 |
| Basic and diluted loss per share | $0.03 | $0.00 |
| Research and development expense | $16,123 | $0 |
| Cash and cash equivalents | $572,775 | $3,590 |
| Current assets | $574,275 | $3,590 |
| Current liabilities | $29,438 | $17,390 |
| Working capital | $544,837 | $(13,800) |
| Stockholders’ equity (deficit) | $544,837 | $(13,800) |
| Long-term debt | $0 | $0 |
Operating expenses included $121,924 of professional fees, $107,533 of general and administrative costs, and $3,332 of stock-based compensation. Interest expense was $2,100. Profit margins are not meaningful because the company had no revenue.
Cash used in operating activities was $216,821, versus $18,489 in FY2016; cash from financing activities was $785,349, versus $5,050. Investing cash flow was $0. FY2017 financing included $772,681 collected from stock issuance/subscriptions, shareholder advances, and note proceeds, partly offset by repayments. The $30,000 promissory note was repaid during FY2017.
Material changes versus FY2016
- Net loss increased to $234,889 from $29,690 as the company began costs associated with its changed business plan.
- Operating cash use rose to $216,821 from $18,489, while cash increased substantially following equity financing.
- Working capital improved from a deficit of $13,800 to positive $544,837.
- The company changed its name and business focus, expanded its authorized share capital, formed wholly owned subsidiaries, and entered into two license arrangements with Analog.
Outlook, risks and unusual items
- Management said available funds were insufficient to fund business development for the next 12 months and expected R&D spending to exceed $500,000 over that period, contingent on licensing and research progress. The company expects to need additional capital; no assurance is given that financing will be available on acceptable terms.
- The auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. The company had recurring losses, negative operating cash flow, no revenue, and an accumulated deficit of $295,089.
- The July 2017 manufacturing license provides for Analog to receive 25% of consideration from sublicensing (excluding sublicensee sales-based royalties), a 1% royalty on defined net sales, and milestone payments of $100,000 at first Phase III patient enrollment and $200,000 upon marketing authorization per licensed product. No accrual was recorded at year-end.
- Clinical, regulatory, controlled-substance, competition, intellectual-property, financing, and foreign-currency risks are material. Product approval and commercial revenue are uncertain. The company had no established public trading market, despite OTC quotation.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing no functioning audit committee, inadequate segregation of duties, and management dominated by one individual without adequate compensating controls.
- The filing reports no pending material litigation. The auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Reconcile the stated cash balance and positive working capital with management’s statements that funds were insufficient for the next 12 months; assess the timing and amount of financing needed for the projected R&D program.
- Confirm the status, scope, diligence milestones, termination provisions, and potential economics of the Analog licenses, and whether the provisional patent produces enforceable patent protection.
- Review the equity subscription and dilution details: 1,927,302 shares were treated as issued under a subscription agreement by year-end, with approximately 1.93 million warrants exercisable at $1.00; verify final issuance, registration, and any anti-dilution effects.
- Monitor remediation of the reported material weaknesses and whether the company establishes effective independent audit oversight and financial-reporting controls.
- Confirm subsequent financing and share issuances, clinical and licensing progress, and the company’s ability to meet its obligations and continue as a going concern.