SmartKem, Inc. — Form 10-Q Summary
Period: Quarter ended September 30, 2023; comparisons are with the three and nine months ended September 30, 2022. Financial statement amounts are in thousands of U.S. dollars unless otherwise noted. The company develops organic thin-film transistor technology and TRUFLEX electronic inks for display applications. The statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3 | $26 | $27 | $60 |
| Gross profit | $2 | $0 | $4 | $10 |
| Other operating income | $257 | $277 | $695 | $855 |
| Operating expenses | $2,954 | $2,738 | $8,315 | $8,152 |
| Operating loss | $(2,695) | $(2,461) | $(7,616) | $(7,287) |
| Net loss | $(3,022) | $(3,953) | $(7,097) | $(10,415) |
| Basic and diluted loss per share | $(1.78) | $(4.75) | $(5.82) | $(12.61) |
Revenue and related costs mainly reflect sales of OTFT backplanes and TRUFLEX materials for customer assessment and development, not scaled commercial sales. Gross margins are not meaningful at this very low revenue level. Research and development expense was $1.6 million for Q3 and $4.1 million for the nine-month period; selling, general and administrative expense was $1.3 million and $4.0 million, respectively.
Cash used in operating activities was $5.6 million in the first nine months, compared with $6.8 million in 2022. Investing cash use was $12,000; financing provided $12.7 million, principally from the June 2023 private placement. Cash increased to $11.2 million at September 30, 2023 from $4.2 million at year-end 2022. Accumulated deficit was $93.7 million.
Liquidity, capital structure and material changes
- Current assets were $12.7 million and current liabilities $1.8 million at quarter-end. Total liabilities were $3.3 million, including $1.4 million of warrant liability and $303,000 of lease liabilities. The filing reports no conventional borrowings on the balance sheet.
- In June, SmartKem raised approximately $14.2 million gross across two closings of a preferred-stock-and-warrant financing; net proceeds after expenses were $12.7 million. The filing also describes the initial closing as $12.2 million gross and the second as $2.0 million gross.
- The company recorded a $461,000 gain from remeasuring the warrant liability in the first nine months, and $198,000 of related issuance costs as expense. Foreign-currency results also shifted substantially: nine-month non-operating foreign-currency results were a $248,000 gain in 2023 versus a $3.1 million loss in 2022. These items helped reduce reported net loss year over year, despite a higher operating loss.
- A 1-for-35 reverse stock split took effect September 21, 2023. Common shares outstanding were 876,278 at September 30; the cover reports 883,595 shares outstanding at November 13. Per-share figures and share counts reflect the reverse split.
Outlook, risks and unusual items
- Management expects operating losses to continue as it funds research, technology and product development, and commercialization. It believes September 30 cash will fund operations for 12 months from issuance of the financial statements, based on forecast spending, but says additional capital may be needed thereafter. The company used $5.6 million in operating cash during the first nine months.
- The June financing terms limit average operating cash use to $2.8 million per consecutive three-month period through June 14, 2024, subject to exceptions. Other provisions through 2025 can restrict future financing, including investor participation rights, consent rights over certain below-conversion-price financings, and rights to apply more favorable financing terms to the existing investment.
- Series A-1 preferred stock may accrue dividends at 19.99% annually if the specified 30-day VWAP test is not met on the 18-month anniversary of the financing. Such dividends are payable in cash unless conditions permit payment in shares. Preferred stock has liquidation preferences and conversion rights; conversion and warrant issuance could materially dilute common holders. Certain preferred-stock provisions also restrict debt, liens and other corporate actions without investor consent.
- Key business risks include the need to commercialize technology, dependence on third-party manufacturing and fabrication facilities, and the time and cost of transferring manufacturing know-how to a commercial manufacturer. The company says it does not yet have the ability to produce flexible transistors at commercial scale.
- SmartKem uses chemicals potentially affected by a proposed EU restriction on PFAS. It has requested exemptions; if the ban is enacted without applicable exemptions, the company says it may be unable to manufacture and sell products in the EU as currently made, or may face higher costs to reformulate.
- Disclosure controls were deemed ineffective as of September 30 because of a material weakness in controls over accounting for the June private placement. Management said the current-quarter statements appropriately reflect the transaction, no prior statements were impacted, and remediation was underway; it expected remediation before year-end, subject to successful testing.
- No material legal proceedings were reported. The filing gives no quantified revenue or earnings guidance.
Important facts for investors to verify
- Whether cash burn tracks management’s forecast and whether the stated 12-month runway remains adequate; confirm the timing and amount of any additional financing need.
- Commercial progress beyond assessment and development sales, including customer adoption, product launches, and the timing and cost of commercial-scale manufacturing.
- The preferred-stock and warrant terms, potential dilution, the contingent 19.99% Series A-1 dividend, and how financing covenants affect operating flexibility and future capital raises.
- Progress in remediating the material weakness and whether management later concludes the relevant controls are operating effectively.
- The outcome of the EU PFAS exemption process and any resulting reformulation, compliance or supply-chain costs.