SmartKem, Inc.(SMTK) - 2023 Q2 - Quarterly Report

Part I Financial Information Item 1. Financial Statements This section presents SmartKem, Inc.'s unaudited interim condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, with detailed notes on business, liquidity, accounting, equity, and warrant issuances Condensed Consolidated Balance Sheets Total assets and stockholders' equity significantly increased from December 2022 to June 2023, driven by cash and additional paid-in capital, while liabilities rose due to warrant recognition Balance Sheet Summary | Metric | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | Change ($ thousands) | % Change | | :--------------------------- | :-------------------------- | :------------------------------ | :------------------- | :------- | | Cash and cash equivalents | 13,774 | 4,235 | 9,539 | 225.2% | | Total current assets | 15,071 | 6,442 | 8,629 | 133.9% | | Total assets | 16,050 | 7,525 | 8,525 | 113.3% | | Accounts payable & accrued expenses | 1,494 | 931 | 563 | 60.5% | | Warrant liability | 1,834 | — | 1,834 | N/A | | Total liabilities | 3,721 | 1,642 | 2,079 | 126.6% | | Additional paid-in capital | 104,424 | 92,930 | 11,494 | 12.4% | | Accumulated deficit | (90,642) | (86,567) | (4,075) | 4.7% | | Total stockholders' equity | 12,329 | 5,883 | 6,446 | 109.6% | Condensed Consolidated Statements of Operations and Comprehensive Loss Net loss decreased for both three and six months ended June 30, 2023, driven by minimal revenue, stable operating expenses, and significant foreign currency transaction gains Statements of Operations and Comprehensive Loss Summary | Metric ($ thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenue | 8 | 4 | 24 | 34 | | Cost of revenue | 6 | 2 | 22 | 25 | | Gross profit | 2 | 2 | 2 | 9 | | Other operating income | 169 | 294 | 438 | 578 | | Research and development | 1,257 | 1,344 | 2,536 | 2,802 | | Selling, general and administrative | 1,324 | 1,370 | 2,757 | 2,611 | | Total operating expenses | 2,538 | 2,714 | 5,361 | 5,413 | | Loss from operations | (2,367) | (2,418) | (4,921) | (4,826) | | Gain/(loss) on foreign currency transactions (non-operating) | 533 | (1,284) | 1,035 | (1,638) | | Net loss | (2,027) | (3,701) | (4,075) | (6,463) | | Basic and diluted net loss per common share | (0.05) | (0.13) | (0.12) | (0.23) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity rose significantly to $12.3 million by June 30, 2023, primarily from $11.0 million in preferred stock issuance and stock-based compensation, despite net loss Stockholders' Equity Summary | Metric ($ thousands) | January 1, 2023 | March 31, 2023 | June 30, 2023 | | :------------------------------- | :-------------- | :------------- | :------------ | | Total Stockholders' Equity | 5,883 | 3,727 | 12,329 | | Stock-based compensation expense | 293 | 119 | 412 (total for 6 months) | | Issuance of preferred stock, net of issuance costs | — | 11,027 | 11,027 | | Net loss | (2,048) | (2,027) | (4,075) (total for 6 months) | Condensed Consolidated Statements of Cash Flows Net cash increased by $9.5 million for the six months ended June 30, 2023, primarily from $12.7 million in financing activities, offsetting $3.1 million used in operations Cash Flow Summary | Metric ($ thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net loss | (4,075) | (6,463) | | Net cash used in operating activities | (3,070) | (5,651) | | Net cash used by investing activities | (6) | (58) | | Net cash provided by financing activities | 12,666 | 1,830 | | Net change in cash | 9,539 | (4,469) | | Cash, beginning of period | 4,235 | 12,226 | | Cash, end of period | 13,774 | 7,757 | Notes to the Unaudited Interim Condensed Consolidated Financial Statements SmartKem, Inc., formed in 2020 and focused on OTFTs for displays, raised $14.0 million (net $12.7 million) in a private placement, alleviating going concern doubts despite continuous losses - SmartKem develops disruptive organic thin-film transistors (OTFTs) using patented TRUFLEX® semiconductor and dielectric inks for low-cost, high-performance displays across various applications[11][103] - The company possesses an extensive IP portfolio, comprising 125 granted patents across 19 patent families and 40 codified trade secrets[11][104] Financial Highlights (Six Months Ended June 30, 2023) | Metric | Six Months Ended June 30, 2023 ($ millions) | | :----------------------------------- | :---------------------------------------- | | Net loss | 4.1 | | Cash as of June 30, 2023 | 13.8 | | Funds raised in June 2023 private placement | 14.0 | | Net proceeds from private placement | 12.7 | | Cash used in operating activities (6 months) | 3.1 | - Management believes existing cash of $13.8 million as of June 30, 2023, is sufficient to fund operations for the next twelve months, alleviating substantial doubt about the company's going concern ability, though additional capital may be required thereafter[15][16][119] 1. ORGANIZATION, BUSINESS, LIQUIDITY AND BASIS OF PRESENTATION SmartKem, Inc., formed in 2020 and focused on OTFTs, raised $14.0 million (net $12.7 million) in a private placement, alleviating going concern doubts despite continuous losses - SmartKem, Inc. (formerly Parasol Investments Corporation) was formed on May 13, 2020, as a shell company and became the successor to SmartKem Limited in February 2021[10] - The company develops disruptive organic thin-film transistors (OTFTs) using patented TRUFLEX® inks for next-generation displays, with an extensive IP portfolio[11][103][104] - Despite continuous losses, a June 2023 private placement raised $14.0 million (net $12.7 million), increasing cash to $13.8 million and alleviating substantial doubt about the company's going concern ability for the next twelve months[15][16][119] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section details key accounting policies, noting no material changes from the prior annual report, emphasizing management's estimates for share and warrant valuations, and discussing recent accounting pronouncements - No material changes to significant accounting policies from the Annual Report on Form 10-K for fiscal year ended December 31, 2022, other than those specifically listed[20] - Management's preparation of financial statements involves significant estimates, especially for common share valuation, fair value of share options, and warrant liabilities, which are subject to inherent uncertainties[21][22] - Warrants not meeting equity treatment criteria are classified as liabilities at fair value and re-measured each reporting period, with changes recognized in the statements of operations[23] - Issuance costs for equity contracts classified as liabilities are expensed immediately; total issuance costs were $1.6 million, with $0.2 million expensed[24] - The adoption of ASU No. 2016-13 (Credit Losses) and ASU No. 2020-06 (Convertible Instruments) on January 1, 2023, did not have a material impact on the financial statements[25][26] 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets decreased to $0.941 million by June 30, 2023, mainly due to lower prepaid consulting fees and VAT receivable, partially offset by other increases Prepaid Expenses and Other Current Assets Details | (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Prepaid service charges and property taxes | 99 | 55 | | Prepaid utilities | 78 | 51 | | Prepaid insurance | 461 | 358 | | Prepaid administrative expenses | 77 | 35 | | Prepaid consulting fees | 32 | 304 | | Research grant receivable | 35 | — | | Prepaid technical fees | 15 | 22 | | VAT receivable | 104 | 195 | | Other receivable and other prepaid expenses | 40 | 36 | | Total prepaid expenses and other current assets | 941 | 1,056 | 4. PROPERTY, PLANT AND EQUIPMENT Net property, plant and equipment decreased to $0.558 million by June 30, 2023, primarily due to accumulated depreciation, with $0.1 million depreciation expense for the three-month period Property, Plant and Equipment Details | (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Plant and equipment | 1,568 | 1,478 | | Furniture and fixtures | 231 | 218 | | Computer hardware and software | 24 | 24 | | Less: Accumulated depreciation | (1,265) | (1,118) | | Property, plant and equipment, net | 558 | 602 | - Depreciation expense was $0.1 million for both the three months ended June 30, 2023 and 2022, with $0.1 million classified as research and development expense[28] 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses increased to $1.494 million by June 30, 2023, driven by higher accounts payable, legal/professional services, and payroll liabilities Accounts Payable and Accrued Expenses Details | (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Accounts payable | 680 | 230 | | Accrued expenses – lab refurbishments | 123 | 117 | | Accrued expenses – technical fees | 76 | 130 | | Accrued expenses – variable rent & utilities | 2 | 15 | | Accrued expenses – audit & accounting fees | 143 | 128 | | Accrued expenses – legal & other professional services | 126 | — | | Accrued expenses – other | 5 | 80 | | Credit card liabilities | 17 | 20 | | Payroll liabilities | 322 | 211 | | Total accounts payable and accrued expenses | 1,494 | 931 | 6. LEASES The company's operating lease costs were $0.211 million for six months ended June 30, 2023, with right-of-use assets and lease liabilities decreasing, and a weighted average remaining lease term of 1.80 years - The Company has operating leases for office space, lab space, and equipment with remaining lease terms of 1 to 3 years[30] Lease Costs | (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Operating lease cost | 75 | 68 | 139 | 131 | | Short-term lease cost | 3 | 2 | 7 | 4 | | Variable lease cost | 20 | 41 | 65 | 95 | | Total lease cost | 98 | 111 | 211 | 230 | Lease Assets and Liabilities | (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Right-of-use assets, net | 415 | 475 | | Lease liability, current | 245 | 206 | | Lease liability, non-current | 135 | 239 | | Total lease liabilities | 380 | 445 | Lease Term and Discount Rate | Metric | June 30, 2023 | | :---------------------------------------- | :------------ | | Weighted average remaining lease term (years) | 1.80 | | Weighted average discount rate | 8.03% | 7. COMMITMENTS AND CONTINGENCIES Management believes potential liabilities from legal disputes would not materially affect the interim condensed consolidated financial statements - Management believes any potential liabilities from legal disputes would not materially affect the interim condensed consolidated financial statements[37] 8. STOCKHOLDERS' EQUITY This section details preferred and common stock, including the June 2023 issuance of Series A-1/A-2 Preferred Stock and Warrants for $12.2 million, outlining their rights, preferences, and restrictions, and the Purchase Agreement's operational limitations - The board of directors has the authority to issue up to 10,000,000 shares of preferred stock in one or more series, with rights and preferences determined by the board[38] - In June 2023, the Company sold Series A-1 and A-2 Convertible Preferred Stock and Class A and B Warrants for aggregate gross proceeds of $12.2 million in a private placement[59] - The Purchase Agreement for the June 2023 PIPE imposes restrictions on the Company's operations and ability to raise additional capital, including limits on cash usage from operating activities and significant purchasers' rights in future financings[64][65][66] Preferred Stock The board is authorized to issue up to 10 million preferred stock shares in series, with rights and restrictions that may exceed common stock - The board of directors has the authority to issue up to 10,000,000 shares of preferred stock in one or more series[38] - The board can fix the rights, preferences, privileges, and restrictions of preferred stock, which may be greater than those of common stock[38] Series A-1 Preferred Stock Series A-1 Preferred Stock, designated June 2023 at $1,000 stated value, offers as-if converted dividends, accrues 19.99% annual dividends under certain conditions, has limited voting rights, liquidation preference, and is convertible at $0.25 per share - Series A-1 Preferred Stock has a stated value of $1,000 per share and entitles holders to as-if converted dividends equal to common stock dividends[39][40] - If the 30-day VWAP is less than the conversion price after 18 months, Series A-1 Preferred Stock will accrue dividends at an annual rate of 19.99% of the stated value, payable in cash or, if equity conditions are met, in common stock[40][144] - The Series A-1 Preferred Stock has limited voting rights, a liquidation preference over common stock (and other preferred stock except Series A-2), and is convertible into common stock at $0.25 per share, subject to anti-dilution and beneficial ownership limitations[41][43][44][46] Series A-2 Preferred Stock Series A-2 Preferred Stock, designated June 2023 at $1,000 stated value, offers as-if converted dividends, has limited voting rights, liquidation preference, is convertible at $0.25 per share, and automatically converts upon exchange listing - Series A-2 Preferred Stock has a stated value of $1,000 per share and entitles holders to as-if converted dividends equal to common stock dividends[49][50] - It has limited voting rights, a liquidation preference over common stock (and other preferred stock except Series A-1), and is convertible into common stock at $0.25 per share, subject to anti-dilution and beneficial ownership limitations[51][53][54][56] - The Series A-2 Preferred Stock automatically converts into common stock upon listing on a national securities exchange (NYSE American, Nasdaq Capital Market, etc.)[55] Series A-1 and A-2 Preferred Stock and Class A and Class B Warrant Issuances June 2023 private placement of Series A-1/A-2 Preferred Stock and Warrants generated $14.2 million gross proceeds (net $12.7 million), with warrants classified as derivative liabilities, and the Purchase Agreement imposing significant operational and capital raising restrictions PIPE Financing Details | Metric | Amount | | :----------------------------------- | :----- | | Total gross proceeds from June 2023 PIPE | $14.2 million | | Net proceeds after expenses | $12.7 million | | Class A Warrants exercise price | $0.25 | | Class B Warrants exercise price | $0.01 | - The Class A and Class B Warrants are accounted for as derivative instruments and classified as liabilities due to provisions that adjust the number of shares issued and the existence of a pre-specified volatility input for fundamental transactions[62] - The Purchase Agreement imposes restrictions, including a limit on cash usage from operating activities (average of $2.8 million for any consecutive three-month period until June 14, 2024) and significant purchasers' rights to participate in or consent to future financings[64][65][66] Common Stock Each common stock share carries one vote, and the company has never paid cash dividends nor anticipates doing so. Its common stock began trading on the OTCQB® Market in February 2022, and shares were issued to vendors for services in early 2023 - Each holder of common stock is entitled to one vote per share on all matters[71] - The company has never paid cash dividends and does not anticipate doing so in the foreseeable future[72] - Common stock began trading on the OTCQB® Market under the ticker symbol "SMTK" in February 2022[73] - In January and February 2023, the company issued 102,777 shares of common stock as payment for investor relations and other financial consulting services[73][74] Common Stock Warrants As of June 30, 2023, 91.5 million common stock warrants (average exercise price $0.19, 4.94-year term) and 2.2 million pre-funded warrants ($0.01 exercise price) were outstanding, valued using Black-Scholes with peer company volatility Common Stock Warrants Outstanding | Metric | June 30, 2023 | January 1, 2023 | | :----------------------------------- | :------------ | :-------------- | | Common Stock Warrants Outstanding | 91,490,975 | 985,533 | | Weighted-Average Exercise Price | $0.19 | $2.00 | | Weighted-Average Remaining Contractual Term (Years) | 4.94 | 3.15 | Pre-funded Warrants Outstanding | Metric | June 30, 2023 | January 1, 2023 | | :----------------------------------- | :------------ | :-------------- | | Pre-funded Warrants Outstanding | 2,168,000 | 2,168,000 | | Weighted-Average Exercise Price | $0.01 | $0.01 | - The fair value of common stock warrants is determined using the Black-Scholes option-pricing model, with expected stock volatility estimated based on historical volatility of publicly traded peer companies due to insufficient historical data for the company[77][82] 9. SHARE-BASED COMPENSATION The 2021 Equity Incentive Plan authorizes up to 4.4 million shares; share-based compensation was $0.412 million for six months ended June 30, 2023, with no options granted, and fair value determined via Black-Scholes - The 2021 Equity Incentive Plan authorizes a maximum of 4,376,571 shares, with annual increases[78] Share-Based Compensation Expense | (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Research and development | 49 | 38 | 119 | 78 | | Selling, general and administrative | 70 | 59 | 293 | 117 | | Total | 119 | 97 | 412 | 195 | - No options were granted under the 2021 Plan for the three and six months ended June 30, 2023 and 2022[80] - Total compensation cost related to non-vested stock option awards not yet recognized as of June 30, 2023, was $1.1 million, to be recognized through July 2026[85] 10. NET LOSS PER COMMON SHARE Basic and diluted net loss per share are equal due to net operating losses, with 121.4 million potentially dilutive securities excluded as anti-dilutive as of June 30, 2023 - Basic and diluted net loss per share are equal in periods with net operating losses, as all common stock options and warrants are deemed anti-dilutive[86] Potentially Dilutive Securities Excluded | Potentially Dilutive Securities | June 30, 2023 | June 30, 2022 | | :------------------------------ | :------------ | :------------ | | Common stock warrants | 62,047,115 | 985,533 | | Assumed conversion of preferred stock | 56,597,464 | — | | Stock options | 2,745,920 | 1,937,382 | | Total | 121,390,499 | 2,922,915 | Weighted Average Shares Outstanding | Weighted Average Shares Outstanding | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Weighted average shares issued | 27,087,773 | 26,583,365 | 27,083,982 | 26,427,550 | | Weighted average pre-funded warrants | 2,168,000 | 2,168,000 | 2,168,000 | 2,168,000 | | Weighted average penny warrants | 9,660,613 | - | 4,856,993 | - | | Weighted average shares outstanding | 38,916,386 | 28,751,365 | 34,108,976 | 28,595,550 | 11. DEFINED CONTRIBUTION PENSION The company operates a defined contribution pension scheme for UK employees, with total pension cost for six months ended June 30, 2023, at $0.077 million, a slight decrease year-over-year - The Company operates a defined contribution pension scheme for its UK employees[89] Defined Contribution Pension Costs | (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Research and development | 22 | 26 | 44 | 53 | | Selling, general and administrative | 15 | 13 | 33 | 27 | | Total | 37 | 39 | 77 | 80 | 12. FAIR VALUE MEASUREMENTS Warrant liability, valued at $1.834 million as of June 30, 2023, is a Level 3 fair value measurement, determined using option pricing models with inputs like stock price, peer volatility, and risk-free rate Warrant Liability Rollforward | (in thousands) | Warrant Liability | | :---------------------------------- | :---------------- | | Balance at January 1, 2023 | — | | Fair value of warrant issued in Private Placement Offering | 1,837 | | Total change in the liability included in earnings | (3) | | Balance at June 30, 2023 | 1,834 | - The warrant liability is classified within Level 3 of the fair value hierarchy due to the use of unobservable inputs like historical volatility (based on peer companies) in the option pricing models[91][93] Warrant Valuation Inputs | Option Pricing Model Inputs | June 30, 2023 | June 22, 2023 | June 14, 2023 | | :-------------------------- | :------------ | :------------ | :------------ | | Expected term (years) | 4.96 | 5.00 | 5.00 | | Risk-free interest rate | 4.05% | 3.95% | 3.98% | | Expected volatility | 50.0% | 50.0% | 50.0% | | Expected dividend yield | 0.0% | 0.0% | 0.0% | | Underlying stock price | $0.06 | $0.06 | $0.06 | 13. SUBSEQUENT EVENTS Subsequent to June 30, 2023, 2.5 million common share warrants were exercised for $25,000, and 200 Series A-2 Preferred Stock shares converted into 800,000 common shares - Subsequent to June 30, 2023, warrants to purchase 2,500,000 common shares were exercised for $25,000[95] - Subsequent to June 30, 2023, 200 Series A-2 Preferred Stock shares were converted into 800,000 common shares[95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, and liquidity for the three and six months ended June 30, 2023, covering OTFT business, revenue, expenses, foreign currency impact, recent capital raise, and critical accounting estimates - The discussion should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes in Item 1, and the audited consolidated financial statements in the Annual Report on Form 10-K for December 31, 2022[96] - The company is focused on developing disruptive organic thin-film transistors (OTFTs) and patented TRUFLEX® inks for next-generation displays, with R&D in the UK and a field application office in Taiwan[103][104] - The company has incurred substantial operating losses since inception, with an accumulated deficit of $90.6 million as of June 30, 2023, primarily from R&D and general and administrative costs[105][106] DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This section contains forward-looking statements subject to risks and uncertainties that could cause material differences in actual results; readers should consult "Risk Factors" in the 10-K and this report - The report contains forward-looking statements identified by words like "anticipates," "expects," "intends," and "plans," which are subject to risks and uncertainties[98] - Risks include the implementation of business plans, market acceptance of technology, product development, capital requirements, intellectual property protection, dependence on third parties, and international operations[98][99] - Readers should not place undue reliance on forward-looking statements and should review "Risk Factors" in the 10-K and this report, as actual results may differ materially[101][102] Company Overview SmartKem develops OTFTs and TRUFLEX® inks for advanced displays, with R&D in the UK and Taiwan, backed by extensive IP, incurring significant operating losses and an accumulated deficit of $90.6 million by June 30, 2023 - SmartKem develops disruptive organic thin-film transistors (OTFTs) and patented TRUFLEX® semiconductor and dielectric inks for next-generation displays, including microLED, miniLED, and AMOLED[103] - The company has an extensive IP portfolio with 125 granted patents and 40 codified trade secrets, with R&D in Manchester, UK, and a field application office in Taiwan[104] - Since inception in 2009, substantial resources have been devoted to R&D, leading to an accumulated deficit of $90.6 million as of June 30, 2023, primarily from R&D and general and administrative costs[105][106] Results of Operations for the three and six months ended June 30, 2023 Results for three and six months ended June 30, 2023, show minimal revenue, stable operating expenses (R&D, SG&A), and reduced net loss due to significant foreign currency transaction gains - Revenue and cost of revenue are minimal, stemming from sales of OTFT backplanes and TRUFLEX® materials for customer assessment and development[107][112] - Operating expenses are primarily driven by research and development (payroll, technical costs) and selling, general, and administrative expenses (payroll, professional services)[109][110][114][115] - Non-operating income was significantly impacted by favorable foreign currency transaction gains related to intercompany loans, increasing by $1.8 million for the three-month period and $2.6 million for the six-month period compared to prior year losses[112][117] Three months ended June 30, 2023 compared with three months ended June 30, 2022 For Q2 2023, revenue doubled to $8.0 thousand, operating expenses decreased to $2.5 million, and a $1.8 million foreign currency gain reduced net loss to $2.0 million from $3.7 million year-over-year Three Months Ended June 30, 2023 vs 2022 Financial Summary | Metric ($ thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($ thousands) | % Change | | :------------------------------- | :--------------------------- | :--------------------------- | :------------------- | :------- | | Revenue | 8 | 4 | 4 | 100.0% | | Cost of revenue | 6 | 2 | 4 | 200.0% | | Other operating income | 169 | 294 | (125) | (42.5%) | | Total operating expenses | 2,538 | 2,714 | (176) | (6.5%) | | Research and development | 1,257 | 1,344 | (87) | (6.5%) | | Selling, general and administrative | 1,324 | 1,370 | (46) | (3.4%) | | Gain/(loss) on foreign currency transactions (non-operating) | 533 | (1,284) | 1,817 | N/A | | Net loss | (2,027) | (3,701) | 1,674 | (45.2%) | - Issuance costs of $0.2 million allocated to warrant liability were expensed in full during the three months ended June 30, 2023, primarily for legal, placement, and consulting fees related to the private placement[111] Six months ended June 30, 2023 compared with six months ended June 30, 2022 For H1 2023, revenue decreased to $24.0 thousand, total operating expenses remained stable at $5.4 million, and a $2.6 million foreign currency gain reduced net loss to $4.1 million from $6.5 million year-over-year Six Months Ended June 30, 2023 vs 2022 Financial Summary | Metric ($ thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($ thousands) | % Change | | :------------------------------- | :--------------------------- | :--------------------------- | :------------------- | :------- | | Revenue | 24 | 34 | (10) | (29.4%) | | Cost of revenue | 22 | 25 | (3) | (12.0%) | | Other operating income | 438 | 578 | (140) | (24.2%) | | Total operating expenses | 5,361 | 5,413 | (52) | (1.0%) | | Research and development | 2,536 | 2,802 | (266) | (9.5%) | | Selling, general and administrative | 2,757 | 2,611 | 146 | 5.6% | | Gain/(loss) on foreign currency transactions (non-operating) | 1,035 | (1,638) | 2,673 | N/A | | Net loss | (4,075) | (6,463) | 2,388 | (37.0%) | - Issuance costs of $0.2 million allocated to warrant liability were expensed in full during the six months ended June 30, 2023, primarily for legal, placement, and consulting fees related to the private placement[116] Liquidity and Capital Resources Cash and cash equivalents rose to $13.8 million by June 30, 2023, driven by $12.7 million net proceeds from PIPE financing, offsetting $3.1 million operating cash use; management expects sufficient liquidity for 12 months, with $1.7 million in capital commitments Liquidity and Capital Resources Summary | Metric | June 30, 2023 ($ millions) | December 31, 2022 ($ millions) | | :----------------------------------- | :------------------------- | :----------------------------- | | Cash and cash equivalents | 13.8 | 4.2 | | Net proceeds from June 2023 PIPE financing | 12.7 | N/A | | Cash used in operating activities (6 months) | 3.1 | N/A | - Management believes existing cash is sufficient to fund operations for the next twelve months, but additional capital may be required thereafter for continued operations and R&D[119] Capital Commitments | Capital Commitments (next 12 months) | Amount ($ millions) | | :----------------------------------- | :------------------ | | Accounts payable and accrued expenses | 1.5 | | Lease liabilities | 0.2 | Critical Accounting Estimates The primary critical accounting estimate is warrant liability valuation from the June 2023 private placement, classified as long-term derivative liabilities and valued using option pricing models with various inputs - The primary critical accounting estimate is the valuation of warrant liability, arising from the June 2023 private placement of preferred A-1 and A-2 shares[120][122] - Warrants are classified as long-term derivative liabilities and valued using option pricing models that consider underlying stock price, expected volatility (based on peer companies), risk-free interest rate, expected life, and the probability of uplisting[122][124] - Issuance costs for equity contracts classified as liabilities are expensed immediately, while those for equity securities are deferred and charged against gross proceeds[125] Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk disclosures are not applicable for the company - Not applicable[126] Item 4. Controls and Procedures Disclosure controls and procedures were ineffective as of June 30, 2023, due to a material weakness in accounting for the complex June 2023 private placement, with no impact on prior financial statements or material changes to internal controls - Management concluded that disclosure controls and procedures were not effective as of June 30, 2023[130] - A material weakness was identified in internal control over financial reporting related to the complex financial reporting and accounting associated with the June 2023 private placement (a non-cash item)[131] - No prior financial statements were impacted, and no changes in internal controls over financial reporting materially affected financial reporting during the period[131][132] Part II Other Information Item 1. Legal Proceedings The company reported no legal proceedings - None[133] Item 1A. Risk Factors This section updates 10-K risk factors with new risks from the June 2023 PIPE financing, including cash usage restrictions, significant purchasers' rights impacting future capital raises, and potential high cash dividends on Series A-1 Preferred Stock - No material changes to risk factors previously disclosed in the 10-K, except for new risks related to the June 2023 PIPE financing[133][134] - The June 2023 PIPE includes restrictions on cash usage from operating activities (average of $2.8 million for any consecutive three-month period until June 14, 2024)[135] - Significant purchasers in the PIPE have rights to participate in or consent to future financings, which may make it more difficult or expensive to raise additional capital and could adversely affect the amount of capital raised[136][139][141] - The Series A-1 Preferred Stock may accrue 19.99% annual dividends payable in cash if the 30-day VWAP falls below the conversion price after 18 months, which would materially and adversely affect financial condition[144][145] - The Series A-1 Preferred Stock also imposes negative covenants, such as prohibitions on issuing parity preferred stock, incurring new debt over $1 million, granting liens, or repurchasing junior securities without consent, potentially limiting capital raising and operational flexibility[147] - The company lacks commercial-scale production ability and relies on third-party foundries, which may lead to unanticipated costs and delays in transferring technology and adapting manufacturing processes[148][149] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds - None[150] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[151] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[151] Item 5. Other Information The company reported no other information - None[151] Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including various agreements, certificates of designation for preferred stock, warrant forms, and certifications - The exhibit index lists various documents, including the Share Exchange Agreement, Amended and Restated Certificate of Incorporation and Bylaws, Certificates of Designation for Series A-1 and A-2 Preferred Stock, forms of Class A, Class B, and Placement Agent Warrants, and the Purchase Agreement[153] - Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[153] - Inline XBRL documents (Instance, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, Presentation Linkbase, and Cover Page Interactive Data File) are filed herewith[152][154][155] SIGNATURES SIGNATURES The report was signed on August 14, 2023, by Ian Jenks (CEO and Chairman) and Barbra C. Keck (CFO) - The report was signed on August 14, 2023, by Ian Jenks (CEO and Chairman) and Barbra C. Keck (CFO)[158]