SmartKem, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2022; comparisons are with the three and nine months ended September 30, 2021. Financial statement amounts are in U.S. dollars, in thousands unless noted. The company develops TRUFLEX organic semiconductor inks and processes for organic thin-film transistors used in display, sensor and logic applications. Revenue remained at an early customer-evaluation stage.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $26 | $0 | $60 | $0 |
| Gross profit | $0 | $0 | $10 | $0 |
| Operating expenses | $2,738 | $2,724 | $8,152 | $14,749 |
| Loss from operations | $(2,461) | $(2,277) | $(7,287) | $(13,614) |
| Net loss | $(3,953) | $(2,662) | $(10,415) | $(14,429) |
| Basic and diluted loss per share | $(0.14) | $(0.10) | $(0.36) | $(0.59) |
| Operating cash used | Not provided by quarter in this filing excerpt | $(6,835) | $(7,301) |
- Margins: Q3 revenue was fully offset by cost of revenue. Nine-month gross margin was approximately 17% ($10 on $60 revenue).
- Liquidity: Cash was $6,304 at September 30, 2022, down from $12,226 at December 31, 2021. Current assets were $8,486 and current liabilities $1,414.
- Debt and commitments: No notes payable were outstanding; liabilities were primarily leases. Lease liabilities totaled $474. Contracted capital-expenditure and purchase commitments were $770; scheduled lease payments were $518 undiscounted.
Material changes versus prior comparable periods
- Nine-month operating expenses fell 45% to $8,152, primarily reflecting substantially lower stock-based compensation and the absence of $1,329 of 2021 transaction expenses. The company also reported increased spending on product development, marketing and public-company costs.
- Despite lower nine-month operating expenses, net loss improved to $10,415 from $14,429; increased foreign-exchange losses partly offset the operating improvement. Foreign-currency transaction losses were $3,131 for the nine months, versus $799 in 2021.
- Q3 net loss widened to $3,953 from $2,662, chiefly as foreign-currency transaction losses increased to $1,493 from $386 and other operating income declined.
- Revenue of $60 for the first nine months came from sales of OTFT backplanes and TRUFLEX materials for customer assessment and development; no revenue was reported in the comparable 2021 period.
- The company raised $2,000 gross through a January 2022 private placement of 1,000,000 shares; nine-month net financing cash flow was $1,830, compared with $22,204 in 2021.
Outlook, risks and unusual items
- Runway and financing: Management said September 30 cash was expected to fund operations through April 2023, assuming spending as forecast. Additional capital would be needed thereafter, with no assurance it would be available on acceptable terms or in time. Management cited equity or debt financing, collaborations, strategic alliances and commercial arrangements as possible funding sources.
- Going concern: Recurring losses, an accumulated deficit of $85,488 and the need for further financing create substantial uncertainty about the company’s ability to continue operations. If funding is unavailable, it may delay, reduce or eliminate research, development or product-expansion plans.
- Controls and restatement: Management concluded internal control over financial reporting and disclosure controls were ineffective at September 30 because of a material weakness in cash-flow-statement presentation controls. The company said it had identified an error that overstated operating cash used in prior periods and restated prior financial statements. The filing excerpt does not provide the quantified restatement adjustments. Remediation procedures were being implemented, with no assurance of success.
- Operating risks: The filing cites uncertain adoption and demand for OTFT technology, competition and technological change, reliance on collaborators and third-party fabrication, intellectual-property risks, and COVID-19-related and semiconductor supply-chain disruption, including component delays and higher costs.
- Other matters: Management reported no material expected adverse effect from ordinary-course legal disputes and no material subsequent events identified through issuance. There was no specific revenue or profitability forecast.
Important facts for investors to verify
- Whether SmartKem secures financing before its stated April 2023 cash runway ends, and on what terms.
- Cash burn, available liquidity and the timing of customer evaluations converting into material recurring revenue.
- The full details and quantified effects of the prior cash-flow-statement restatements, and progress in remediating the material weakness.
- Whether foreign-exchange exposure, supply-chain constraints and contracted commitments change cash needs or development schedules.
- Whether product-development and commercialization progress supports management’s spending and collaboration plans.