SmartKem, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021. Financial statement amounts are in U.S. dollars, in thousands, unless stated otherwise. The interim statements are unaudited. In February 2021, SmartKem completed a reverse recapitalization with former shell company Parasol; SmartKem Limited is the accounting predecessor.
Business context
SmartKem develops TRUFLEX organic semiconductor inks and processes for organic thin-film transistor circuits, targeting display, sensor and logic applications. It reported approximately 120 issued patents and relies on research and development in Manchester and access to the Centre for Process Innovation (CPI) for fabrication. It had not commercialized products and generated no revenue in the first nine months of 2021.
Financial results and liquidity
- Revenue: $0 for both Q3 and the first nine months of 2021, versus $50 and $71, respectively, in 2020. Gross profit was also zero in 2021; gross margin is not meaningful.
- Operating costs and losses: Q3 operating expenses were $2.724 million, up 95% from $1.394 million; operating loss was $2.277 million versus $0.623 million. Nine-month operating expenses were $14.749 million, up 245%, and operating loss was $13.614 million versus $3.116 million.
- Net loss: Q3 loss was $2.662 million ($0.10 per share), compared with $0.622 million ($0.05 per share). Nine-month loss was $14.429 million ($0.59 per share), compared with $21.700 million ($1.73 per share). The improvement in the nine-month comparison largely reflects substantial 2020 non-cash interest, derivative remeasurement and convertible-note conversion losses—not improved revenue.
- Operating income support: Grants and U.K. R&D tax credits contributed $447,000 in Q3 and $1.135 million for nine months, approximately level with the prior-year nine-month period. These amounts are reported as other operating income.
- Cash flow: Nine-month operating cash use was $8.100 million, versus $2.593 million in 2020; investing cash use was $282,000 versus $90,000. Financing provided $22.204 million, primarily from the February private placement. Cash rose from $764,000 at year-end 2020 to $14.719 million at September 30, 2021.
- Balance sheet and debt: Total assets were $17.558 million, total liabilities $1.464 million and stockholders’ equity $16.094 million. No notes payable or convertible notes remained outstanding at September 30; lease liabilities totaled $141,000. Accumulated deficit was $72.375 million.
- Capital and dilution: The February private placement issued common stock and pre-funded warrants for approximately $24.6 million gross proceeds; offering costs were $2.454 million. There were 25,541,809 common shares outstanding at September 30 and November 11. The company also reported 2,168,000 pre-funded warrants, 985,533 other warrants and 2,036,882 options outstanding.
Material changes versus the prior comparable period
- Q3 revenue fell from $50,000 to zero; nine-month revenue fell from $71,000 to zero.
- Research and development expense increased 23% in Q3 and 109% for nine months, reflecting development work, demonstrator fabrication and, for the nine-month period, stock-based compensation.
- Selling, general and administrative expense rose 368% in Q3 and 531% for nine months, reflecting staffing, public-company costs and stock-based compensation. Nine-month transaction expenses of $1.329 million related to the Exchange.
- Q3 included a $386,000 foreign-currency transaction loss; the nine-month loss was $799,000. The 2020 comparison included significant convertible-debt accounting charges that did not recur in 2021.
Outlook, risks and unusual items
- Management expects continued significant expenses and operating losses, with spending on product development, sales and marketing, and public-company infrastructure. The filing gives no revenue or profitability guidance.
- Cash runway estimates differ by section: the financial-statement notes say cash should fund operations for at least 12 months after issuance; MD&A says through the first quarter of 2023. The company also states it will need additional funding to support operations and growth.
- Key risks include lack of commercialized products and uncertain customer adoption, intense competition and technology change, long and unpredictable sales cycles, dependence on CPI and future third-party manufacturers, and potential effects of COVID-19, international operations and foreign-exchange movements.
- Disclosure controls were concluded to be ineffective, with material weaknesses involving segregation of duties/system access and accounting review and monitoring procedures. Management reported remediation efforts, including additional finance personnel and access restrictions.
- The company repaid a $738,000 secured facility in March 2021 using offering proceeds; the Exchange triggered a change-of-control default provision, but repayment occurred within the specified period. Management said ordinary-course legal matters were not expected to have a material adverse effect; Part II reports no legal proceedings.
- The common stock was not listed on a national securities exchange or quoted on an over-the-counter market, and the filing said no active trading market existed. A proposed $2 million Octopus share purchase remained conditional and was not assured.
Most important facts for investors to verify
- Reconcile the differing cash-runway statements and assess the assumptions behind projected cash needs and future financing.
- Track whether SmartKem obtains paying customers and converts development activity into recurring product revenue.
- Monitor cash burn, R&D and public-company spending, and the contribution and timing of grants and tax-credit receipts.
- Confirm progress and effectiveness of remediation of the disclosed material weaknesses and ineffective disclosure controls.
- Review potential dilution from outstanding options and warrants, resale registrations, and the conditional Octopus purchase.
- Assess access to CPI and qualified commercial fabrication capacity, and the status of any market quotation or listing plans.