SmartKem, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. SmartKem develops TRUFLEX organic thin-film transistor materials and processes for display, sensor and logic applications.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Revenue | $30,000 | $0 |
| Gross profit / margin | $7,000 / 23.3% | $0 |
| Operating expenses | $2.699 million | $9.310 million |
| Operating loss | $2.408 million | $8.877 million |
| Net loss | $2.762 million | $9.366 million |
| Basic and diluted loss per share | $0.10 | $0.51 |
| Cash used in operations | $3.569 million | $3.741 million |
| Cash and cash equivalents | $10.647 million at March 31 | $12.226 million at December 31, 2021 |
| Total liabilities | $1.235 million | $1.538 million at December 31, 2021 |
Q1 revenue arose from a one-time sale of TRUFLEX materials to an applied technology research institute. Other operating income was $284,000, primarily UK R&D tax credits. The company reported no income tax expense and no debt outstanding at quarter-end. Cash used in investing activities was $41,000; financing provided $1.840 million net, including $2.0 million of gross proceeds from a January share sale and $160,000 of issuance costs. Current assets were $13.266 million and current liabilities were $1.216 million.
Changes versus Q1 2021
- Net loss narrowed by $6.604 million, or 71%; operating expenses fell $6.611 million, or 71%.
- R&D expense decreased 64% to $1.459 million, and selling, general and administrative expense decreased 69% to $1.240 million. Management attributed much of the decline to lower stock-based compensation; Q1 2021 also included $1.314 million in exchange-related transaction costs.
- Q1 2022 R&D and SG&A stock-based compensation totaled $98,000, compared with $6.020 million in Q1 2021.
- Other operating income decreased 34%, mainly because Q1 2021 included a $179,000 R&D grant not received in Q1 2022. Foreign-currency losses were $354,000 versus $470,000.
- Operating cash use was broadly similar year over year. Ending cash was lower than the $19.234 million at March 31, 2021; the prior-year period included substantially larger private-placement proceeds.
Outlook, risks and other notable items
- Management expects continued operating losses and estimates March 31 cash will fund operations through April 2023, assuming spending tracks forecasts. Additional capital will be needed thereafter; availability and terms are uncertain. The filing identifies substantial doubt regarding the company’s ability to continue as a going concern.
- Potential funding sources include equity or debt, collaborations, strategic alliances, and marketing, distribution or licensing arrangements. If financing is unavailable, the company may need to delay, reduce or eliminate R&D or product expansion; equity financing could dilute shareholders.
- In February 2022, SmartKem entered a joint development agreement with Nanosys to work on low-cost solution-printed micro-LED and quantum-dot materials for advanced displays. The filing gives no financial terms or revenue forecast for the agreement.
- COVID-19 and semiconductor supply constraints may disrupt procurement, increase lead times and costs, and affect shipments. The company also cites market adoption, competition, technology changes, trade conditions and intellectual-property protection as business risks.
- Capital expenditure commitments and unconditional purchase obligations totaled $1.350 million at quarter-end. Management did not expect normal-course legal matters to have a material adverse effect; no legal proceedings were listed. An April 2022 Manchester lease renewal runs to 2025, with an option to terminate in 2024.
- The common stock began OTCQB trading in February 2022. The January private placement issued 1,000,000 shares at $2.00 each; 12,500 shares were issued to a consultant in February.
Important facts for investors to verify
- Whether actual cash burn and spending remain consistent with management’s April 2023 runway estimate, and what financing is available thereafter.
- Whether the Nanosys collaboration, demonstrator sales, or other customer activity produces recurring commercial revenue; Q1 revenue was only $30,000 and described as a one-time sale.
- How much of the year-over-year expense reduction reflects sustainable cost changes versus unusually high Q1 2021 stock compensation and transaction expenses.
- The timing and collectability of the $1.324 million R&D tax-credit receivable and the company’s $1.350 million purchase commitments.
- Potential dilution and financing terms, as well as the effects of supply-chain constraints and market adoption on product development and commercialization.
Management reported that disclosure controls and procedures were effective as of March 31, 2022 and that no material change in internal control over financial reporting occurred during the quarter.