SmartKem, Inc.(SMTK) - 2021 Q3 - Quarterly Report

Part I Item 1. Financial Statements This section presents SmartKem, Inc.'s unaudited condensed consolidated financial statements for the quarter ended September 30, 2021, highlighting a net loss despite increased cash and equity from a reverse recapitalization Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $14,719 | $764 | | Total current assets | $16,577 | $2,023 | | Total assets | $17,558 | $2,949 | | Total current liabilities | $1,448 | $1,078 | | Total liabilities | $1,464 | $1,098 | | Total Stockholders' equity | $16,094 | $1,851 | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $0 | $50 | $0 | $71 | | Total operating expenses | $2,724 | $1,394 | $14,749 | $4,274 | | Net loss | $(2,662) | $(622) | $(14,429) | $(21,700) | | Basic & diluted net loss per share | $(0.10) | $(0.05) | $(0.59) | $(1.73) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(8,100) | $(2,593) | | Net cash used by investing activities | $(282) | $(90) | | Net cash provided by financing activities | $22,204 | $4,592 | | Net change in cash | $13,822 | $1,909 | - On February 23, 2021, the company completed a reverse recapitalization with Parasol Investments Corporation, with SmartKem Limited being the accounting acquirer, resulting in SmartKem Limited becoming a wholly-owned subsidiary of the public entity, now named SmartKem, Inc[21][22][24] - The company has incurred substantial losses and negative cash flows since inception, with a net loss of $14.4 million for the nine months ended September 30, 2021, and an accumulated deficit of $72.4 million, though management believes its cash of $14.7 million is sufficient to fund operations for at least the next twelve months[30][31] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, emphasizing the impact of the February 2021 reverse recapitalization and private placement, increased operating expenses, and identified material weaknesses in internal controls - Following a reverse acquisition on February 23, 2021, the company sold 10,162,000 shares and 2,168,000 pre-funded warrants in a private placement, generating gross proceeds of approximately $24.6 million[155] Comparison of Operations for the Nine Months Ended September 30 (in thousands) | Metric | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $0 | $71 | (100)% | | Research and development | $6,725 | $3,213 | 109% | | Selling, general and administrative | $6,695 | $1,061 | 531% | | Loss before income taxes | $(14,429) | $(21,700) | (34)% | - The increase in operating expenses for the nine months ended Sep 30, 2021, was primarily due to stock-based compensation, increased R&D on core materials, and additional legal, accounting, and insurance expenses associated with operating as a public company[186][189] - As of September 30, 2021, the company had $14.7 million in cash and cash equivalents, which management expects will be sufficient to fund operations through the first quarter of 2023[198][202] - Management identified material weaknesses in internal controls related to segregation of duties and ineffective review and supervision of accounting functions, with remediation efforts underway[215][216] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable to the company's operations - This section is not applicable for the company[219] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2021, due to identified material weaknesses, with remediation efforts underway - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective as of September 30, 2021[222] - Material weaknesses were identified related to (i) segregation of duties risks within the IT infrastructure and (ii) ineffective design or operation of policies for the review, supervision, and monitoring of accounting and reporting functions[223] - The company is in the process of remediating these weaknesses by recruiting additional finance personnel, restricting system access, and designing new policies and procedures[224] Part II Item 1. Legal Proceedings The company reports no legal proceedings to disclose for the period - None[229] Item 1A. Risk Factors This section outlines significant business, financial, and stock-related risks, including historical losses, reliance on third-party fabrication, intense competition, and challenges related to public company status and internal controls - The company has a history of substantial net losses, with an accumulated deficit of $72.4 million as of September 30, 2021, and anticipates continued operating expenses, raising doubts about its ability to achieve or maintain profitability[230] - The company relies on the Centre for Process Innovation (CPI) for fabricating prototypes and demonstration products and will depend on other third-party fabricators for commercial scale production, creating risks related to access, capacity, and quality control[248] - Material weaknesses in internal financial reporting controls have been identified, related to segregation of duties and inadequate review procedures, which could impact the reliability of financial reports[290] - The company's common stock is not listed on a national exchange, and an active trading market may not develop, potentially leading to its designation as a 'penny stock,' which could limit liquidity and deter brokers[302][306] - A significant concentration of ownership exists, with executive officers, directors, and 5% stockholders beneficially owning 65.7% of the common stock, allowing them to substantially influence corporate matters[316] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company disclosed one unregistered sale of equity securities during the quarter, involving 60,000 common shares issued to a consultant on August 13, 2021 - On August 13, 2021, the Company issued 60,000 shares of common stock valued at $2.00 per share to a consultant, which was exempt from registration under Section 4(a)(2) of the Securities Act of 1933[331] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - None[334] Item 4. Mine Safety Disclosures This section is not applicable to the company's operations - Not Applicable[335] Item 5. Other Information The company reports no other information to disclose for the period - None[336] Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents, officer certifications, and interactive data files - The Exhibit Index lists all documents filed with the report, including CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, and Inline XBRL documents[340]