SmartKem, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; financial statements are unaudited. Amounts below are in U.S. dollars, generally millions unless stated otherwise.
Business context
SmartKem is a development-stage materials and technology company working on organic thin-film transistors and TRUFLEX semiconductor and dielectric inks for display applications, including microLED, miniLED and AMOLED. It develops materials in the U.K. and provides prototyping services through a third-party facility. The company reported 125 granted patents across 19 patent families and 40 codified trade secrets.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 or prior balance-sheet date |
|---|---|---|
| Revenue | $0 | $16,000 |
| Operating expenses | $2.651 | $2.823 |
| Loss from operations | $2.449 | $2.554 |
| Net loss | $1.696 | $2.048 |
| Net cash used in operating activities | $1.571 | $2.433 |
| Cash and cash equivalents | $7.251 at March 31 | $8.836 at December 31, 2023 |
| Total assets | $9.757 at March 31 | $11.272 at December 31, 2023 |
| Total liabilities | $3.202 at March 31 | $3.159 at December 31, 2023 |
Gross profit and gross margin were not meaningful in Q1 2024 because the company had no revenue or cost of revenue. Operating expenses comprised $1.276 million of research and development and $1.362 million of selling, general and administrative expense. Other operating income was $202,000, primarily from research grants and R&D tax credits. The filing reports no conventional borrowings; liabilities included $178,000 of operating lease obligations and a $619,000 warrant liability.
Q1 net loss includes a $753,000 noncash gain from the decrease in the fair value of the warrant liability. A $7.094 million deemed preferred-stock dividend is presented separately from net loss: it increased the loss attributable to common stockholders, producing reported basic loss per share of $0.62 and diluted loss per share of $3.21. Weighted-average shares were 2.735 million; the filing gives effect to a 1-for-35 reverse stock split.
Changes and notable items
- Revenue fell from $16,000 to zero; the prior-year revenue came from customer-assessment sales of OTFT backplanes and TRUFLEX materials.
- Operating expenses decreased $172,000 year over year. R&D was nearly unchanged; lower professional and investor-relations consulting costs contributed to lower SG&A.
- Net loss improved by $352,000. The comparison includes different non-operating currency effects and the 2024 warrant-valuation gain.
- Cash declined by $1.585 million during the quarter. Operating cash use improved by $862,000, which management attributed primarily to the timing of vendor payments.
- Under a January 2024 agreement, holders converted 90% of their Series A-1 preferred stock into common shares or near-zero-exercise-price Class C warrants, subject to beneficial-ownership limits. The company recorded the $7.094 million deemed dividend associated with the exchange and amendment. At March 31, 1,106 Series A-1 and 2,486 Series A-2 preferred shares remained outstanding.
Outlook, risks and controls
Management expects operating losses to continue and estimates that March 31 cash will fund operating expenses and capital expenditures into June 2025. That estimate could shorten if spending rises or development advances faster than anticipated. The company expects to need additional capital; possible sources include equity or debt financing, collaborations, strategic alliances, and licensing or marketing arrangements. No specific revenue or earnings guidance was provided.
Management says financing availability is uncertain and warns that equity financing may dilute holders, debt may add service obligations and restrictive covenants, and collaborations may require relinquishing rights. The 2023 financing agreement includes spending limits through June 14, 2024 and investor rights affecting potential future financings, including participation and favorable-term provisions. Other risks include dependence on third-party fabrication access and partners, early-stage commercialization and customer acceptance, and Taiwan-related operational disruption risks.
Management concluded disclosure controls were not effective as of March 31, 2024 because of a material weakness in accounting for the January preferred-stock transaction. The company stated that the weakness did not affect filed financial statements and that the Q1 statements reflect the appropriate accounting; remediation is ongoing. No legal proceedings were reported.
Important facts for investors to verify
- Whether cash burn, spending and development plans remain consistent with management’s estimated runway into June 2025, and what financing will be needed thereafter.
- Progress toward commercial revenue, customer adoption and product development, given zero Q1 revenue and continuing losses.
- Potential dilution from outstanding warrants, preferred-stock conversion rights and other equity awards; the filing reports 1.438 million common shares outstanding as of May 20, 2024.
- Whether the material weakness is remediated and whether future filings maintain reliable financial reporting.
- The practical effect of the 2023 financing agreement’s spending restrictions and investor rights on the company’s ability to raise capital.