SmartKem, Inc.(SMTK) - 2021 Q2 - Quarterly Report

Part I - Financial Information Financial Statements The company's financials reflect a significant cash increase from a private placement, with zero revenue and a net loss of $11.8 million for H1 2021 Condensed Consolidated Balance Sheets Total assets and stockholders' equity grew substantially due to a financing event, increasing cash to $16.4 million and equity to $18.6 million Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $16,430,719 | $763,814 | | Total current assets | $19,125,234 | $2,022,813 | | Total assets | $20,081,843 | $2,949,669 | | Liabilities & Equity | | | | Total current liabilities | $1,484,356 | $1,077,946 | | Total liabilities | $1,517,904 | $1,098,421 | | Total Stockholders' equity | $18,563,939 | $1,851,248 | | Total Liabilities and Stockholders' Equity | $20,081,843 | $2,949,669 | Condensed Consolidated Statements of Operations and Comprehensive Loss The company reported zero revenue and a reduced net loss of $11.8 million for H1 2021, despite a higher operating loss of $11.3 million Statement of Operations Highlights (Unaudited, in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $0 | $0 | $0 | $20.8 | | Loss from operations | $(2,460.0) | $(1,055.6) | $(11,337.7) | $(2,493.1) | | Net loss | $(2,400.9) | $(1,054.3) | $(11,767.2) | $(21,078.3) | | Basic & dilutive net loss per share | $(0.09) | $(0.08) | $(0.52) | $(1.80) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity rose to $18.56 million, driven by a $24.6 million private placement and $6.0 million in stock-based compensation - In the first half of 2021, the company issued 10,162,000 shares of common stock and warrants in a private placement, raising $24.6 million[13] - Stock-based compensation expense for the first six months of 2021 amounted to $6.0 million[13] Condensed Consolidated Statements of Cash Flows Net cash increased by $15.6 million, with $22.2 million from financing activities offsetting $6.4 million used in operations Cash Flow Summary (Unaudited, for six months ended June 30) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(6,440,537) | $(2,835,358) | | Net cash used by investing activities | $(120,568) | $(88,359) | | Net cash provided by financing activities | $22,203,539 | $4,278,930 | | Net change in cash | $15,642,434 | $1,355,213 | | Cash, end of period | $16,430,719 | $1,570,039 | Notes to the Unaudited Condensed Consolidated Financial Statements Notes detail the reverse recapitalization, accounting policies, equity transactions, and confirm sufficient liquidity for the next twelve months - On February 23, 2021, the company completed a reverse recapitalization with Parasol Investments Corporation, with SmartKem Limited being the accounting acquirer[17][18][20] - Management believes that existing cash of $16.4 million as of June 30, 2021, is sufficient to fund operations for at least the next twelve months[28] - In January 2020, convertible notes with a principal of $11.8 million were converted into common shares, resulting in a $5.5 million loss on conversion and recognition of $6.8 million in non-cash interest expense[90] - On February 23, 2021, the company issued 985,533 warrants to a vendor and 2,168,000 pre-funded warrants to investors in connection with its private placement[109][110] - Subsequent to the quarter end, in August 2021, the company issued an additional 411,150 EMI Options to employees and directors[129] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A explains increased operating expenses from public company costs and expansion, with sufficient liquidity through Q1 2023 Results of Operations Operating expenses for H1 2021 surged to $12.0 million, while the net loss narrowed due to the absence of prior-year non-operating charges Comparison of Results for Six Months Ended June 30 (in thousands) | Account | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $0 | $20.8 | $(20.8) | (100)% | | Research and development | $5,368.5 | $2,110.6 | $3,257.9 | 154% | | Selling, general and administrative | $5,328.1 | $768.9 | $4,559.2 | 593% | | Transaction expenses | $1,329.3 | $0 | $1,329.3 | N/A | | Total operating expenses | $12,025.9 | $2,879.5 | $9,146.4 | 318% | | Loss before income tax | $(11,767.2) | $(21,078.3) | $9,311.1 | (44)% | - The increase in R&D and SG&A expenses in H1 2021 was primarily due to stock-based compensation, development of core materials, expansion of sales teams in the US and Asia, and additional costs of operating as a public company[181][182][184] Liquidity and Capital Resources The company holds $16.4 million in cash from a recent financing, which is expected to fund operations through Q1 2023 - As of June 30, 2021, the company had an accumulated deficit of $69.7 million and cash and cash equivalents of $16.4 million[191] - Net cash provided by financing activities was $22.2 million for the six months ended June 30, 2021, primarily from the net proceeds of the private placement offering[195] - Management expects current cash reserves will be sufficient to support operations through the first quarter of 2023[196] Quantitative and Qualitative Disclosures About Market Risk The company has determined that this disclosure is not applicable for the reporting period - The company states that quantitative and qualitative disclosures about market risk are not applicable[212] Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in segregation of duties and financial oversight - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of the end of the period[214] - Material weaknesses were identified related to segregation of duties risks in IT infrastructure and ineffective policies for review and monitoring of accounting functions[215][216] - Remediation efforts are underway, including recruiting additional finance personnel, restricting system access, and designing new policies and procedures with external support[217] Part II - Other Information Legal Proceedings The company reports no legal proceedings during the period - The company reports no legal proceedings[222] Risk Factors The company faces significant risks from its loss history, competition, IP protection, and material weaknesses in internal controls Risks Related to Business and Industry Key risks include a history of losses, lack of commercial products, reliance on a single third-party fabricator, and COVID-19 impacts - The company has a history of losses, with an accumulated deficit of $69.7 million as of June 30, 2021, and expects operating expenses to increase[223] - The company relies on the Centre for Process Innovation (CPI) for access to fabrication facilities, and the loss of this access would materially harm its ability to produce prototypes and engage in product development[241] - The COVID-19 pandemic has restricted travel and may continue to significantly affect the company's ability to obtain customers and create a market for its inks, particularly in Asia[250] Risks Related to Intellectual Property The company's competitiveness depends on protecting its IP, but it faces risks of patent invalidation and costly litigation - The company relies on a combination of patents, trademarks, copyrights, and trade secret laws to protect its intellectual property[265] - The semiconductor industry is characterized by frequent and expensive patent litigation, and the company may be accused of infringing third-party patents or need to defend its own[271] Risks Related to Financial Control Environment The company has identified material weaknesses in internal controls and faces increased compliance costs as a new public entity - The company has identified material weaknesses in its internal control over financial reporting related to segregation of duties and ineffective review and supervision of accounting functions[283] - Being a public company significantly increases legal and financial compliance costs and administrative burdens[275] Risks Related to Our Common Stock Stockholder risks include limited liquidity, 'penny stock' classification, and substantial control by principal stockholders - The company's common stock is not listed on a national securities exchange, and an active trading market may not develop, which could make it difficult for investors to sell shares[295] - Executive officers, directors, and 5%+ stockholders beneficially own 52.8% of the common stock, giving them substantial control over stockholder matters[309] - The company is an "emerging growth company" and has elected to use the extended transition period for new accounting standards, which may make its financial statements not comparable to other public companies[291][293] Unregistered Sales of Equity Securities and Use of Proceeds The company issued 25,000 shares of common stock to a consultant in a transaction exempt from registration - On May 27, 2021, the Company issued 25,000 shares of common stock valued at $2.00 per share to a consultant, exempt from registration under Section 4(a)(2) of the Securities Act[324] Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[327] Mine Safety Disclosures The company states that this item is not applicable - Not Applicable[328] Other Information The company reports no other information - None[329] Exhibits This section refers to the Exhibit Index for a list of filed documents - Refers to the Exhibit Index for a list of filed exhibits, including certifications and XBRL data[330][333]