SmartKem, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. SmartKem develops organic semiconductor inks and processes for flexible-electronics thin-film transistors. On February 23, 2021, it completed a reverse recapitalization with Parasol Investments Corporation and became a public reporting company. The financial statements treat SmartKem Limited as the accounting acquirer, so the comparative results are those of the predecessor business.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $0 | $20,770 |
| Gross profit | $0; margin not meaningful | $8,422 |
| Operating expenses | $9.31 million | $1.64 million |
| Operating loss | $8.88 million | $1.44 million |
| Net loss | $9.37 million | $20.02 million |
| Basic and diluted loss per share | $0.51 | $1.94 |
| Cash used in operations | $3.74 million | $1.62 million |
| Cash at period end | $19.23 million | $2.87 million |
- Other operating income was $433,000, comprising government grants and U.K. R&D tax credits. R&D tax-credit receivables were $1.24 million.
- Operating expenses included $6.02 million of stock-based compensation and $1.31 million of transaction expenses related to the Exchange. R&D expense was $4.01 million and selling, general and administrative expense was $3.98 million.
- Net loss improved year over year despite a substantially higher operating loss, primarily because Q1 2020 included large noncash interest, derivative remeasurement and convertible-note conversion losses.
- Financing activities provided $22.20 million, primarily from the February private placement; proceeds were $24.64 million before $2.45 million of issuance costs. The company issued 10.162 million common shares and 2.168 million pre-funded warrants in the offering.
- Total assets were $22.54 million; total liabilities were $1.72 million, including $188,935 of lease liabilities. The $737,898 tax-credit-backed facility drawn in January was repaid on March 2, 2021. No convertible notes remained outstanding.
- Accumulated deficit was $67.31 million. Common shares outstanding at March 31 were 25.437 million; 25.437 million were also reported outstanding as of May 14, 2021.
Changes, outlook and risks
- Revenue fell to zero from a small prior-year base; the company said it had not commercialized products and might not generate significant product revenue in 2021. It expects ongoing losses and significant expenses, with R&D and public-company costs continuing.
- Management gave differing cash-runway descriptions: the financial-statement note says March 31 cash should fund operations for at least 12 months after issuance, while MD&A says cash and offering proceeds are expected to support operations through the first half of 2023. The company also says additional funding will be needed for operating and growth plans.
- SmartKem reported recurring losses and substantial accumulated deficit, but prepared the statements on a going-concern basis. The filing cites an explanatory going-concern paragraph in the auditor’s reports for 2019 and 2020.
- Key business risks include no commercialized products, uncertain market adoption and long sales cycles, competition and technology change, dependence on third-party fabrication access (including CPI), intellectual-property protection, international and foreign-exchange exposure, and COVID-19-related disruption.
- Disclosure controls were judged ineffective. Material weaknesses involved segregation of duties and inadequate review, supervision and monitoring of accounting and reporting. Management described remediation steps, including additional finance personnel and access restrictions.
- The common stock was not listed on a national exchange or quoted on an OTC market, and the filing says there was no active trading market. The company also disclosed that a proposed $2 million Octopus share purchase was conditional and not assured.
- Management said ordinary-course legal matters were not expected to have a material adverse effect; Part II reports no legal proceedings. The board authorized dissolution of SmartKem Delaware Inc. on April 28, 2021.
Most important facts for investors to verify
- Whether the stated cash runway is closer to 12 months or through the first half of 2023, and the assumptions behind each estimate.
- Cash burn, future financing needs, and the timing and terms of any additional funding, including the conditional Octopus purchase.
- Progress toward customer adoption, product commercialization, revenue generation and access to fabrication facilities.
- Remediation of the disclosed material weaknesses and whether disclosure controls become effective.
- Potential dilution from registered resale shares, pre-funded warrants, options and other equity awards, alongside the lack of an established trading market.