SmartKem, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions. The interim financial statements are unaudited.
Business context
SmartKem is developing patented TRUFLEX organic semiconductor inks and processes for organic thin-film transistors used in display, sensor and logic applications. It reported approximately 120 issued patents and conducts R&D in the U.K. The company remains in development and commercialization activities, with very limited product revenue.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $0.004 | None | $0.034 | None |
| Gross profit | $0.002 | None | $0.009 | None |
| Other operating income, mainly R&D tax credits and grants | $0.294 | $0.256 | $0.578 | $0.688 |
| Operating expenses | $2.714 | $2.716 | $5.413 | $12.026 |
| Operating loss | $(2.418) | $(2.460) | $(4.826) | $(11.338) |
| Net loss | $(3.701) | $(2.401) | $(6.463) | $(11.767) |
| Basic and diluted loss per share | $(0.13) | $(0.09) | $(0.23) | $(0.52) |
- Q2 revenue came from TRUFLEX material sales; six-month cost of revenue was $0.025 million. Gross profit was minimal relative to operating costs.
- Six-month operating expenses declined 55%, largely because stock-based compensation was substantially lower than in 2021 and prior-year transaction expenses did not recur. R&D and SG&A were $2.802 million and $2.611 million, respectively.
- Net loss improved year over year for the first half, despite a $1.638 million foreign-currency transaction loss, compared with a $0.412 million loss in the 2021 first half. In Q2, foreign-currency losses were $1.284 million, contributing to the higher quarterly net loss.
- Cash was $7.757 million at June 30, down from $12.226 million at December 31, 2021. Operating cash use was $5.651 million; investing cash use was $0.058 million; financing provided $1.830 million, principally from a $2.0 million gross private placement. Exchange-rate effects reduced cash by $0.590 million.
- Total assets were $12.313 million, total liabilities $1.718 million, and stockholders’ equity $10.595 million. Liabilities included $0.528 million of lease obligations; the filing reports no notes payable outstanding in 2022.
Changes and developments
- Revenue began to appear in 2022 but remained immaterial. R&D tax-credit income increased, while total other operating income fell 16% in the first half because the prior-year period included R&D grant funding.
- In January, SmartKem sold 1.0 million shares at $2.00 per share to existing investors. In February it entered a joint development agreement with Nanosys for solution-printed micro-LED and quantum-dot materials; in April it entered an agreement with an unnamed leading LED manufacturer to develop prototype displays using its OTFTs.
- In April, the company renewed its Manchester lease through 2025, with an option to end it in 2024. As of June 30, it disclosed $1.087 million in contracted capital-expenditure and purchase obligations, in addition to lease commitments.
Outlook, risks and unusual items
- Management expects operating losses to continue and estimates that June 30 cash will fund operations through April 2023. Additional capital will be needed thereafter; financing availability and terms are uncertain. The company is considering equity, debt, collaborations, alliances and licensing or distribution arrangements.
- Failure to obtain funding could force reductions or delays to R&D, product development or commercialization. Management states there can be no assurance of continued funding on acceptable terms; the filing identifies substantial doubt related to recurring losses and going concern.
- The company restated cash-flow presentation following an error involving foreign-currency gains and losses. The filing says the error overstated operating cash used and exchange-rate effects on cash by $0.412 million for the six months ended June 30, 2021; it had no effect on net change in cash, cash balances, balance sheets or statements of operations. Management identified a material weakness in cash-flow-statement controls and concluded internal control over financial reporting and disclosure controls were ineffective as of June 30, 2022. Remediation is underway, with no assurance it will succeed.
- Other disclosed risks include uncertain adoption of OTFT technology, competition and technological change, COVID-related disruption and semiconductor supply constraints, foreign-exchange volatility, intellectual-property risks, and reliance on third-party manufacturing and supply partners. Management said ordinary-course litigation was not expected to have a material adverse effect.
- Subsequent to quarter-end, the company granted additional employee and director options. The filing reports no formal revenue or profitability guidance.
Important facts for investors to verify
- Whether financing can be secured before the stated April 2023 cash runway ends, and the resulting dilution, debt terms or licensing concessions.
- Whether joint-development work converts into customer programs, meaningful product revenue or other commercial milestones.
- The precise scope and status of the cash-flow restatement across previously filed periods, and whether remediation resolves the material weakness.
- Cash burn, foreign-currency exposure, R&D tax-credit collection, and the timing of the $1.087 million purchase commitments and lease payments.
- The filing’s period-specific revenue discussion: reported Q2 revenue is $0.004 million, while management’s narrative refers to first-quarter material sales.