Business Context and Reporting Period
SmartKem, Inc. filed a Form 8-K on August 15, 2022, announcing a material restatement of its financial statements. The filing addresses errors in the presentation of gains and losses from changes in exchange rates within the consolidated statements of cash flows for periods from March 31, 2021, through March 31, 2022 (the "Non-Reliance Periods").
Key Financial Metrics and Impact
The filing does not provide updated revenue, profit, or debt figures. The identified errors specifically impacted the cash flow statement:
- Cash Flow Error: Unrealized gains and losses from exchange rate changes were incorrectly presented in the "Effect of exchange rate changes on cash" caption instead of under "Net cash flows used in operating activities."
- Impact on Operating Cash Flow: This error resulted in an overstatement of net cash used in operating activities for each reported period.
- Estimated Magnitude: For the year ended December 31, 2021, the overstatement is preliminarily estimated at less than $1 million.
- Balance Sheet and Income Statement: The errors had no effect on the Company's cash and cash equivalents balance, consolidated balance sheets, or consolidated statements of operations and comprehensive loss.
Material Changes and Restatement Scope
The Audit Committee concluded that previously issued financial statements for the Non-Reliance Periods should no longer be relied upon. The Company will restate the following filings:
- Form 10-K for the fiscal year ended December 31, 2021.
- Form 10-Qs for periods ended September 30, 2021, and March 31, 2022.
- Comparative information for March 31, 2021, and June 30, 2021.
Additionally, the Company expects to file an extension on Form 12b-25 for its Quarterly Report for the period ended June 30, 2022.
Management Commentary, Risks, and Internal Controls
Management is assessing the impact of these errors on internal controls and disclosure procedures. The Company expects to report at least one material weakness in its internal control over financial reporting. Consequently, management believes its internal controls and disclosure procedures were not effective for the Non-Reliance Periods. The Company has discussed these matters with its independent registered public accounting firm, BDO LLP.
Forward-looking statements in the filing are subject to risks, including delays in filing required reports, the timing of the restatement, and potential adverse effects on the business or stock price resulting from these disclosures.
Investor Verification Checklist
- Verify the final restated amounts for net cash used in operating activities once the amended 10-K and 10-Q filings are released.
- Monitor the filing of the Form 12b-25 extension and the subsequent submission of the Q2 2022 10-Q.
- Review the upcoming disclosure regarding the specific material weakness identified in internal controls and the remediation plan.
- Confirm that no other accounting issues require restatement beyond the exchange rate presentation error.