SmartKem, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Financial amounts below are in U.S. dollars, in thousands unless stated otherwise.
Business context
SmartKem develops organic semiconductor materials and processes, including TRUFLEX inks for organic thin-film transistor circuits. Potential applications include display technologies, AR/VR devices, sensors and integrated logic. The company reported more than 125 issued patents across 19 patent families and relies on a third-party facility to manufacture product prototypes for prospective customers.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $16 | $30 |
| Cost of revenue | $16 | $23 |
| Gross profit / margin | $0 / 0% | $7 / approximately 23% |
| Operating expenses | $2,823 | $2,699 |
| Loss from operations | $(2,554) | $(2,408) |
| Net loss | $(2,048) | $(2,762) |
| Net loss per share, basic and diluted | $(0.07) | $(0.10) |
| Net cash used in operating activities | $(2,433) | $(3,215) |
| Cash and cash equivalents at period end | $1,700 | $4,235 at Dec. 31, 2022 |
Other operating income was $269, primarily reflecting grants and R&D tax credits. Foreign-currency items were significant: the company recorded a $111 operating expense and a $502 non-operating gain in Q1 2023. Total comprehensive loss was $2,504, including a $456 currency translation loss.
At March 31, 2023, total assets were $5,291, total liabilities $1,564, and stockholders’ equity $3,727. Liabilities included $413 of operating lease obligations; the filing reports no other borrowings in the presented balance sheet. Current assets were $4,278 and current liabilities $1,376. Accumulated deficit was $88,615.
Changes versus the prior comparable period
- Revenue declined by $14, while cost of revenue fell by $7; gross profit consequently decreased from $7 to zero.
- R&D expense fell by about $180 to $1,279, mainly due to reduced personnel and professional-service fees. SG&A rose by about $193 to $1,433, primarily due to higher investor-relations expense.
- Operating expenses increased by 4.6% to $2,823. The operating loss widened by $146, although net loss narrowed by $714, helped by a $502 foreign-currency gain versus a $354 loss in Q1 2022.
- Operating cash use improved by $782 year over year, but cash declined $2,535 from year-end, including a $102 adverse exchange-rate effect. There were no financing proceeds in Q1 2023; Q1 2022 included $1,840 of net private-placement proceeds.
- The company issued 102,777 shares to consultants for services during the quarter. Shares outstanding at March 31 were 27,087,773.
Outlook, risks and contingencies
Management said the $1.7 million of cash at March 31 was expected to fund operations only through the end of May 2023 at forecast spending levels. Additional capital is required thereafter. The company expects continuing operating losses and says substantial doubt about its ability to continue as a going concern is not alleviated by management’s plans.
Potential funding routes include equity or debt financing, collaborations, strategic alliances, and marketing, distribution or licensing arrangements. Availability and terms are uncertain; equity financing could dilute shareholders, debt could add repayment obligations and covenants, and collaborations could require giving up valuable rights. The filing warns that insufficient funding could force the company to curtail development or commercialization.
Unusual and other relevant items include $540 of contracted but not yet incurred capital-expenditure commitments and unconditional purchase obligations, primarily for R&D and administrative services. Management reported no material change to previously disclosed risk factors, no legal proceedings, and no subsequent events to report. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether SmartKem secured financing after the stated May 2023 cash runway, and the terms, dilution and resulting liquidity.
- Whether customer assessments and development sales convert into recurring commercial revenue; Q1 revenue was only $16.
- Whether cash consumption, operating expenses and grant or R&D tax-credit receipts differ materially from forecast.
- How much reported earnings and cash-flow movement depend on foreign-exchange fluctuations.
- The share-count basis: the income statement reports 29,248,150 weighted-average shares for Q1 2023, while period-end shares outstanding were 27,087,773; investors should reconcile this difference and assess potential dilution from outstanding options and warrants.
- Continued access to the third-party prototype fabrication facility and progress toward product development and commercialization.