Source: https://ir.artelobio.com/sec-filings/quarterly-reports/content/0001640334-19-001361/artl_10q.htm?TB_iframe=true&height=auto&width=auto&preload=false
Timestamp: 2019-12-06 08:17:54
Document Index: 633451766

Matched Legal Cases: ['ART27', 'ART27', 'ART27', 'ART27', 'ART27', 'ART26']

Commission File Number 001-38951
760-943-1689
3,401,987 shares of common stock issued and outstanding as of July 12, 2019
$ 286,439
Equipment, net of accumulated depreciation of $646 and $282, respectively
1,153,252
$ 912,413
Preferred Stock, par value $0.001, 6,250,000 shares authorized, 0 and 0 shares issued and outstanding as of May 31, 2019 and August 31, 2018, respectively
Common Stock, par value $0.001, 18,750,000 shares authorized, 2,101,140 and 1,750,268 shares issued and outstanding as of May 31, 2019 and August 31, 2018, respectively
(3,965,155 )
(10,227 )
$ 1,153,252
$ 402,803
$ 666,226
2,256,110
(941,288 )
(2,256,110 )
897,096
$ (344,883 )
(1,326,575 )
$ (344,112 )
$ (1,324,522 )
2,058,929
2,267,655
1,959,903
2,937,136
Common shares issued for services - related party
Common shares issued for deposit of exercise of the license
(79,224 )
(344,883 )
2,101,140
$ 4,107,660
$ (10,227 )
$ (3,965,155 )
$ (134,379 )
$ 837,853
$ 1,867,208
$ (1,948,467 )
$ (1,326,575 )
(897,096 )
(1,731,580 )
1,675,637
(8,087 )
1,679,772
(50,985 )
Deferred offering costs incurred
During the nine months ended May 31, 2019, there were no issuances of preferred stock.
During the nine months ended May 31, 2019, the Company received cash of $1,257,905 for 209,635 units at a price of $6.00 per unit (a “Series D Unit”) pursuant to the Company’s Series D offering. Each Series D Unit consists of: (i) one (1) share of common stock; and (ii) one (1) Series D Stock Purchase Warrant to purchase one (1) share of common stock at a price of $14.00 per share, for a period of 5 years from the issue date.
During the nine months ended May 31, 2019, the Company received cash of $417,732 for 54,940 units at a price of $7.60 per unit (a “Series E Unit”) pursuant to the Company’s Series E Offering. Each Series E Unit consists of: (i) one (1) share of common stock; and (ii) one (1) Series E Stock Purchase Warrant to purchase one-half (1/2) share of common stock at a price of $16.00 per share for a period of 3 years from the issue date.
On March 15, 2019, the Board approved the issuance of 25,000 shares of our common stock valued at $240,000 to Blackrock Ventures, Ltd., a Company owned by a former director, in exchange for its prior services to the Company.
During the nine months ended May 31, 2019, the Company issued 61,297 shares of common stock to NEOMED for the exercise of the license valued at $539,417. The Company recorded this as a deposit.
In connection with the common stock sold pursuant to subscription agreements in fiscal year 2019, 2018 and 2017, each individual investor received warrants to purchase additional shares of common stock.
For each unit purchased in the Company’s Series A offering, Series B offering, Series C offering and Series D offering, each investor will receive one Series A, Series B, Series C and Series D Common Stock Purchase Warrant, respectively, to purchase one share of the Company’s common stock for a period of five years from the date of the subscription agreement at a price per share from $8.00 to $14.00, depending on the subscription round. For each unit purchased in the Company’s Series E offering, each investor will receive one Series E Common Stock Purchase Warrant to purchase one-half (1/2) share of the Company’s common stock for a period of three years from the date of the subscription agreement at a price per share of $16.00.
Under the terms of the subscription agreements for the Company’s private placement offerings, following the closing date of such private offering until the earlier of (i) the date that the registration statement of the shares issued in such offering is declared effective by the SEC, or (ii) the date the shares otherwise become freely tradable, if the Company issues any common stock or common stock equivalent entitling the new investor to acquire common stock at a price below the purchase price for that particular prior subscription agreement, the Company will be required to issue the prior investor additional units, each consisting of one share of common stock and a warrant to purchase one share of common stock, equal to the difference between the units actually issued at such closing to the new investor, and the number of units we would have issued to the prior investor had the offering been completed at this new, lower price per share. Management reviewed the terms of the agreements and determined that in accordance with ASC 815, these cash subscription agreements entered into by the Company contain derivative features. As of May 31, 2019, a derivative liability of $100,178 has been recorded.
A summary of activity during the nine months ended May 31, 2019 follows:
Outstanding, May 31, 2019
The intrinsic value of the warrants as of May 31, 2019 is $195,226.
On August 17, 2018, the Company granted options to consultants to purchase an aggregate of 50,000 shares of the Company’s common stock at a price of $10.80 per share with various vesting schedules. The options expire on August 17, 2028, unless such consultant ceases his or her service as a consultant prior the exercise or expiration of the option. One consultant also serves as a director of the Company.
During the nine months ended May 31, 2019, $97,095 was expensed, and as of May 31, 2019, $332,431 remains unamortized. The intrinsic value of the 50,000 options as of May 31, 2019 is $0, and the weighted average value of the remaining life of the options is 9.22 years.
During the nine months ended May 31, 2019, the Company recorded $39,000 of stock compensation expense for five members of the Company’s Board of Directors.
The following is a summary of stock option activity during the nine months ended May 31, 2019:
The Company has certain financial commitments in relation to Research and Development contracts. As of May 31, 2019:
The Company is obligated to make one payment of $77,760 on March 1, 2019 for research and development. The March 1, 2019 payment has not yet been made by the Company.
The Company is obligated to make two semi-annual payments totaling 115,000 GBP over the next year. A payment of $57,500 GBP is due on October 5, 2018, and April 5, 2019, respectively. The October 5, 2018 and April 5, 2019 payments have not yet been paid by the Company.
NOTE 7 – DEPOSIT
During the nine months ended May 31, 2019, the Company issued 61,297 shares of common stock to NEOMED for the exercise of the license. The value of the common shares was $539,417 based on the stock price at agreement date.
The Company recognized a derivative liability related to the purchase price protection clause associated with the Series D and Series E private offerings (Note 5). Additional units would be issued to the unit holder if the Company should issue common stock or the equivalent at a share price less than $6.00 per share (Series D) or a share price less than $7.60 (Series E). In accordance with ASC 815-10- Derivatives and Hedging we measured the derivative liability using a Monte Carlo pricing model. Accordingly, at the end of each quarterly reporting date, the derivative fair market value is re-measured and adjusted to current market value.
(997,274 )
Fair value – May 31, 2019
(100,178 )
2.35%-2.43 %
On June 25, 2019, the Company sold an aggregate of 1,300,813 units with each unit consisting of one (1) share of the Company’s common stock, par value $0.001 per share and a warrant to purchase one (1) share of common stock at an exercise price equal to $6.4575 per share. The offering price to the public was $6.15 per unit. In addition, the Company granted the Underwriters a 45-day option to purchase up to 195,121 additional shares of common stock, or warrants, or any combination thereof, to cover over-allotments, if any. Simultaneously with the closing of the offering the Company sold 191,102 warrants at $0.01 per warrant for cash proceeds of $1,911 upon the partial exercise of the underwriters’ over-allotment option. The Company received gross proceeds of approximately $8,001,911, before deducting underwriting discounts and commissions of eight percent (8%) of the gross proceeds and estimated offering expenses.
In relation to the offering described above, the Company also agreed to issue to the underwriters warrants to purchase up to a total of 104,065 shares of Common Stock (8% of the shares of Common Stock sold in the offering). The underwriter’s warrants are exercisable at $6.765 per share of common stock and have a term of three years. The warrants were issued for services provided by the underwriters.
In July 2019, the Company completed a $1,500,000 payment to NEOMED for the exercise of the license.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this filing, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
U.S. and international patent applications including broad claims to our novel cocrystal composition of CBD were filed in late 2018. Composition claims are generally known in the pharmaceutical industry as the most desired type of intellectual property and, if issued, should provide for long lasting market exclusivity for our CBD cocrystal drug product candidate. In addition, due to the reasons outlined above, we believe that our CBD cocrystal will have superior pharmaceutical properties compared to non-cocrystal CBD products under development at other competing companies.
In addition to our own internal discovery research, we are currently developing two patent protected product candidates that we obtained through our in-licensing activities. Our first program is a synthetic cannabinoid product candidate, ART27.13, being developed for cancer-related anorexia. ART27.13 is a peripherally-restricted high-potency dual CB1 and CB2 receptor agonist which was originally developed at AstraZeneca plc (“AstraZeneca”). We have exercised our option to exclusively license this product candidate through the NEOMED Institute, a Canadian not-for-profit corporation (“NEOMED”). In Phase 1 single dose studies in healthy volunteers and a multiple ascending dose study in otherwise healthy patients with back pain conducted by AstraZeneca, ART27.13 exhibited an attractive pharmacokinetic and absorption, distribution, metabolism, and excretion (“ADME”) profile and was well tolerated within the target exposure range. It also exhibited dose-dependent and potentially clinically meaningful increases in body weight. Importantly, the changes in body weight were not associated with fluid retention or other adverse effects and occurred at exposures without CNS side effects. Preliminary discussions with U.S. and Canadian regulators suggest there is a potential pathway for development of ART27.13 for the treatment of cancer-related anorexia, which affects approximately 60% of advanced stage cancer patients. We are planning to initiate a Phase 1b/2a clinical study of cancer-related anorexia with ART27.13 in late calendar year 2019.
Our second in-licensed program is a platform of small-molecule inhibitors for fatty acid binding protein 5 (“ FABP5”), based upon scientific developments achieved at Stony Brook University (“SBU”) which we have designated ART26.12. To date, SBU has received nearly $4 million in funding from the National Institutes of Health (the “NIH”) to begin developing these candidates. Fatty acid binding proteins (“FABPs”) are attractive therapeutic targets, however, their high degree of similarity among the various types has proven challenging to the creation of drugs targeting specific FABPs. FABP5 is believed to specifically target and regulate one of the body’s endogenous cannabinoids, anandamide (“AEA”). While searching for a FABP5 inhibitor to regulate AEA, we believe researchers at SBU discovered the chemistry for creating a highly specific and potent small molecule inhibitor for FABP5. In addition to its potential as an endocannabinoid modulator, FABP5 is also an attractive target for cancer drug development. Large amounts of human clinical epidemiological and animal model data support FABP5 as a well validated oncology therapeutic target, especially for triple negative breast cancer and castration-resistant prostate cancer. We licensed exclusive world-wide rights to these inhibitors from SBU. The program is in the final stages of lead optimization, and we plan to initiate Investigational New Drug (“IND”) enabling studies thereafter. We anticipate clinical studies in cancer can begin in 2020.
The following summary of our results of operations, for the nine months ended May 31, 2019 and 2018, should be read in conjunction with our interim financial statements, as included in this Form 10-Q and our audited financial statements for the year ended August 31, 2018, as included in Form 10-K filed with the SEC on November 29, 2018.
The following table provides selected financial data about the Company as of May 31, 2019 and August 31, 2018.
$ (50,985 )
$ 756,254
$ 1,018,873
$ 486,901
$ 269,353
We have not generated any revenues since inception through May 31, 2019. The decrease in cash was primarily due to an increase in general and administrative expenses, professional fees, and research and development costs offset by the issuance of common shares.
For the Three Months Ended May 31, 2019 Compared to the Three Months May 31, 2018
$ 298,239
(52,641 )
(363,431 )
$ 232,974
Our operating expenses, for the three months ended May 31, 2019 were $941,288 compared to $577,857 for the same period in 2018. The Company’s operating expenses were primarily related to professional fees for ongoing regulatory requirements, research and development and general and administrative expenses.
For the Nine months ended May 31, 2019 Compared to the Nine months ended May 31, 2018
(59,164 )
(602,732 )
$ 326,803
Our operating expenses, for the nine months ended May 31, 2019 were $2,256,110 compared to $1,653,378 for the same period in 2018. The higher operating expenses during the nine months ended May 31, 2019 were primarily related to professional fees for ongoing regulatory requirements, research and development and general and administrative expenses.
$ 1,152,395
$ 755,960
$ 133,522
$ 269,059
$ (1,731,580 )
$ (635,432 )
$ 195,767
Our total current assets as of May 31, 2019 were $1,152,395 as compared to total current assets of $396,435 as of August 31, 2018. The increase in current assets is primarily due to an increase in deposit for the option to exercise a license and deferred offering costs.
Our total current liabilities as of May 31, 2019 were $1,018,873 as compared to total current liabilities of $531,972 as of August 31, 2018. The increase in current liabilities was primarily due to an increase in derivative liability and accounts payable and accrued liabilities.
During the nine months ended May 31, 2019, cash used in operating activities was $1,731,580 compared to cash used in operating activities of $1,096,140 during the period ended May 31, 2018. The cash used from operating activities was primarily attributed to net loss of $1,326,575 and change in fair value of derivative of $897,096, offset by stock-based compensation of $376,095, and an increase in accounts payable and accrued liabilities of $91,471 for the nine months ended May 31, 2019. The cash used from operating activities was primarily attributed to net loss of $1,653,378, offset by stock-based compensation of $168,751, and an increase in accounts payable and accrued liabilities of $461,052 for the nine months ended May 31, 2018.
The Company used $688 and $887 for purchase of equipment for the nine months ended May 31, 2019 and 2018, respectively.
During the nine months ended May 31, 2019 and 2018, the Company received $1,675,637 and $860,786 from issuance of common stock and $12,220 and $18,472 from advance from related parties and repaid $8,087 and $16,602 to related parties, respectively.
We are a party to license agreements with NEOMED Institute, a Canadian not-for-profit corporation (“NEOMED”) and the Research Foundation at Stony Brook University, pursuant to which we in-license key patents and patent applications for our product candidates. These existing licenses impose various diligence, milestone payment, royalty and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate the licenses, in which event we would not be able to develop or market the products covered by such licensed intellectual property. In particular, on April 24, 2019, we exercised our option (the “Option Exercise”) pursuant to the Material and Data Transfer, Option and License Agreement with NEOMED dated as of December 20, 2017, as amended on January 4, 2019 (the “NEOMED Agreement”). If we are found in the future not to be in compliance with the NEOMED Agreement, our license agreement with the Research Foundation at Stony Brook University (the “Stony Brook Agreement”), or any other license agreements it could materially adversely affect our business, results of operations, financial condition and prospects. If we fail to comply with these any of our license obligations, our licensors may have the right to terminate these agreements, in which event we might not be able to develop and market any product candidate that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms. We may enter into additional licenses in the future and if we fail to comply with obligations under those agreements, we could suffer similar consequences.
Upon the completion of our financial statements for the period ended May 31, 2019, and management’s assessment of our ability to continue as a going concern, we concluded there was substantial doubt about our ability to continue as a going concern for the twelve months after the date of this report. Our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year-ended August 31, 2018, noting the existence of substantial doubt about our ability to continue as a going concern. As of the date of this report, there have been no changes to management’s conclusion that there remains substantial doubt about our ability to continue as a going concern.
We have incurred losses since inception. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future. To date, we have financed our operations primarily through the sale of equity securities. Although we have closed five (5) equity offerings between July 2017 and May 2019 we continue to have very limited resources. To date our primary activities have been limited to, and our limited resources have been dedicated to, raising capital, non-clinical research on our programs, recruiting service providers, negotiating with business partners and licensors of intellectual property, filing patent applications, and complying with public reporting requirements.
As of May 31, 2019, our current executive officers and certain large stockholders of the Company hold approximately 70.0% of the voting power of our outstanding shares. These officers and investors have a controlling influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant corporate actions. As such, our executive officers and these investors have the power to prevent or cause a change in control; therefore, without their consent we could be prevented from entering into transactions that could be beneficial to us. The interests of our executive officers may give rise to a conflict of interest with the Company and the Company’s stockholders.
During the three months ended May 31, 2019, the Company received cash of $417,732 for 54,940 units at a price of $7.60 per unit (a “Series E Unit”) pursuant to the Company’s Series E Offering. Each Series E Unit consists of: (i) one (1) share of common stock; and (ii) one (1) Series E Stock Purchase Warrant to purchase one-half (1/2) share of common stock at a price of $16.00 per share for a period of 3 years from the issue date.
During three months ended May 31, 2019, the Company issued 61,297 shares of common stock to NEOMED for the exercise of the license.
During three months ended May 31, 2019, the Company issued 25,000 shares of our common stock to Blackrock Ventures, Ltd., a Company owned by a former director, in exchange for its prior services to the Company.
During three months ended May 31, 2019, the Company issued 11,363 shares of common stock to NEOMED pursuant to the terms of the First Amendment to NEOMED Agreement for payment of services valued at $100,000.