SmartKem, Inc.(US:SMTK)2024-03-27 21:15Part I Business SmartKem is a development-stage company focused on its proprietary TRUFLEX® organic thin-film transistor (OTFT) technology for low-temperature manufacturing of flexible displays - The company's core technology is its patented TRUFLEX® organic thin-film transistors (OTFTs), which are electronic polymers designed to enable low-temperature (as low as 80°C) manufacturing of flexible, low-cost displays1115 - A key technological breakthrough is the monolithic integration of OTFT backplanes directly on top of GaN mini/microLED arrays, simplifying manufacturing by eliminating complex mass transfer and laser welding steps, potentially increasing yield and efficiency152830 - The commercialization strategy is based on three pillars: 1) Continuous development of polymer materials, 2) Development of Electronic Design Automation (EDA) tools for circuit design, and 3) Development of robust commercial manufacturing processes with partners like ITRI in Taiwan34 - The company has an extensive intellectual property portfolio, including 125 granted patents across 19 patent families, 15 pending patents, and 40 codified trade secrets, covering materials, formulations, and processes1271 - SmartKem has entered into several key joint development and technology transfer agreements with partners including RiTdisplay, ITRI, and Tianma Microelectronics to develop and commercialize its technology for AMOLED displays, miniLEDs, and microarray biochips646566 - The company anticipates a long and resource-intensive sales cycle of approximately 12-24 months, from initial customer evaluation to a potential sales agreement, requiring significant upfront expense without assurance of a final order48 Risk Factors The company faces substantial risks, highlighted by a history of significant financial losses and the need for future capital to sustain operations - The company has a history of substantial net losses, with an accumulated deficit of $95.1 million as of December 31, 2023, and anticipates continued operating losses, requiring additional capital to fund operations beyond April 202598100101 - SmartKem relies on third-party facilities, specifically the Centre for Process Innovation (CPI) and the Industrial Technology Research Institute (ITRI), for prototype fabrication and process development, and will depend on other third-party fabricators for commercial-scale manufacturing, where loss of access could materially harm business development115116 - The terms of the June 2023 private placement (PIPE) impose significant restrictions on operations, including limits on cash use from operating activities and constraints on future capital raises, which may hinder the company's ability to pursue business opportunities or obtain financing on favorable terms174175177 - The company's common stock is designated as a "penny stock," which subjects it to regulations that can limit liquidity, make it difficult for brokers to recommend, and may result in less trading activity199 - A material weakness in internal control over financial reporting was identified in Q2 2023 related to the accounting for the June 2023 PIPE financing, and although management has implemented remediation measures, failure to maintain effective controls could harm financial reporting and investor confidence171172 - The company faces political and operational risks from conducting business in Taiwan, where key partners like ITRI are located, due to the tense relationship between Taiwan and China139140 Unresolved Staff Comments The company reports that there are no unresolved staff comments - Not Applicable224 Cybersecurity The company has implemented policies and processes to manage cybersecurity risks, including engaging a third-party consultant for threat monitoring and response - The company utilizes a third-party consultant for its cybersecurity risk management framework, which includes monitoring, detection, and response to threats226 - As of December 31, 2023, the company has not identified any cybersecurity incidents that would materially impact its business or financial statements227 Properties SmartKem's headquarters, including R&D and corporate offices, are in a 10,000 sq. ft. leased space in Manchester, England - The company's main facilities are leased, including its headquarters in Manchester, UK, an office in Taiwan, and fabrication and office space at the CPI facility in Sedgefield, UK228 - A new twelve-month Framework Agreement with CPI Innovation Services Limited (CPIIS) was executed on March 22, 2024, commencing April 1, 2024, ensuring continued access to fabrication facilities228 Legal Proceedings The company is not currently a party to any legal proceedings that management believes would have a material adverse effect on its business - The company is not currently involved in any material litigation229 Mine Safety Disclosures This item is not applicable to the company - Not Applicable230 Part II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities The company's common stock is traded on the OTCQB Market under the ticker symbol 'SMTK' - Common stock trades on the OTCQB Market under the ticker 'SMTK'231 - As of March 27, 2024, there were 1,355,361 shares of common stock outstanding231 - The company has never paid cash dividends and does not plan to in the foreseeable future232 [Reserved]](index=74&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations For the fiscal year 2023, SmartKem's net loss decreased to $8.5 million from $11.5 million in 2022, primarily due to a significant gain on foreign currency transactions and slightly lower operating expenses Results of Operations (in thousands) | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $27 | $40 | ($13) | | Total Operating Expenses | $10,831 | $10,873 | ($42) | | Loss from Operations | ($9,991) | ($9,694) | ($297) | | Net Loss | ($8,499) | ($11,495) | $2,996 | | Basic and Diluted Net Loss per Share | ($6.32) | ($13.88) | $7.56 | Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($8,037) | ($9,049) | | Net cash used by investing activities | ($18) | ($79) | | Net cash provided by financing activities | $12,691 | $1,830 | - The company's cash and cash equivalents increased to $8.8 million as of December 31, 2023, from $4.2 million in 2022, which management believes is sufficient to fund operations through the end of April 2025260 - Net cash from financing activities was $12.7 million in 2023, primarily from a private placement of preferred stock and warrants in June 2023 which yielded net proceeds of $12.4 million263 - The decrease in net loss for 2023 was largely driven by a $1.2 million gain on foreign currency transactions, compared to a $1.8 million loss in 2022, and a $0.5 million gain on the valuation of warrant liability257259 Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, SmartKem is not required to provide the information for this item - The company is exempt from this disclosure requirement as it qualifies as a smaller reporting company270 Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal years ended December 31, 2023, and 2022, including reports from independent auditors and comprehensive notes Consolidated Balance Sheet Data (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $10,525 | $6,442 | | Total Assets | $11,272 | $7,525 | | Total Current Liabilities | $1,768 | $1,403 | | Total Liabilities | $3,159 | $1,642 | | Total Stockholders' Equity | $8,113 | $5,883 | Consolidated Statement of Operations Data (in thousands) | Metric | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Revenue | $27 | $40 | | Loss from Operations | ($9,991) | ($9,694) | | Net Loss | ($8,499) | ($11,495) | | Total Comprehensive Loss | ($9,594) | ($10,615) | - The company effected a 1-for-35 reverse stock split on September 21, 2023, with all share and per-share amounts in the financial statements retroactively adjusted304373 - In June 2023, the company raised $14.2 million in gross proceeds ($12.7 million net) through a private placement of preferred stock and warrants, which alleviated the going concern uncertainty noted in the 2022 financial statements306 - The company recognized a warrant liability of $1.4 million as of December 31, 2023, related to warrants issued in the June 2023 PIPE financing, which are accounted for as derivatives and re-measured to fair value each period284402 Changes In And Disagreements With Accountants On Accounting And Financial Disclosure The company reports no disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None447 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023, with a previously identified material weakness remediated by year-end - Management concluded that disclosure controls and procedures were effective as of December 31, 2023450 - A material weakness in internal control over financial reporting, identified in Q2 2023 concerning the accounting for the June 2023 PIPE, was remediated by the end of the fiscal year452 - The company's management concluded that internal control over financial reporting was effective as of December 31, 2023451 Other Information The company reports that none of its directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fourth quarter of 2023 - None456 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable456 Part III Directors, Executive Officers and Corporate Governance The company's leadership includes Chairman and CEO Ian Jenks, CFO Barbra C. Keck, Chief Scientist Dr. Beverley Brown, and CTO Dr. Simon Ogier Executive Officers and Directors (as of March 27, 2024) | Name | Position | | :--- | :--- | | Ian Jenks | Chairman of the Board, Chief Executive Officer and President | | Barbra C. Keck | Chief Financial Officer | | Beverley Brown, Ph.D. | Chief Scientist | | Simon Ogier, Ph.D. | Chief Technology Officer | | Klaas de Boer | Director | | Steven DenBaars, Ph.D. | Director | | Melisa Denis | Director | | Sriram Peruvemba | Director | - The Board of Directors is divided into three staggered classes, with directors serving three-year terms, a structure that may delay or prevent changes in management or control473476 - The Board has determined that directors Klaas de Boer, Steven DenBaars, and Melisa Denis are independent, while CEO Ian Jenks and director Sriram Peruvemba are not considered independent472534 - The company has adopted a code of business conduct and ethics, available on its website470 Executive Compensation For fiscal year 2023, CEO Ian Jenks received total compensation of $409,450, including a base salary of $342,333 and a bonus of $50,000 Summary Compensation Table (2023) | Officer Name and Principle Position | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Ian Jenks, CEO | 342,333 | 50,000 | 17,117 | 409,450 | | Barbra Keck, CFO | 314,773 | 37,500 | 19,800 | 372,073 | | Beverly Brown, Chief Scientist | 200,093 | - | - | 200,093 | - In September 2023, CEO Ian Jenks' annual base salary was increased to $400,000 and his target bonus was increased to 50% of his base salary489 - In September 2023, the compensation committee approved one-time bonuses of $100,000 for CEO Ian Jenks and $75,000 for CFO Barbra Keck, with 50% paid upfront and 50% payable upon a national exchange uplisting492 - The non-employee director compensation policy provides an annual cash retainer of $36,000 and initial and annual stock option grants497 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 27, 2024, the company's executive officers and directors as a group beneficially owned 58.4% of the common stock Security Ownership of 5% Stockholders (as of March 27, 2024) | Name of Beneficial Owner | Percentage Beneficially Owned (%) | | :--- | :--- | | Octopus Investments Limited | 15.8% | | Entrepreneurs Fund LP | 7.6% | | Orin Hirschman (and affiliates) | 9.9% | | The Hewlett Fund, LP | 9.9% | | Five Narrow Lane | 9.9% | - All executive officers and directors as a group beneficially own 58.4% of the company's common stock as of March 27, 2024210 - The 2021 Equity Incentive Plan was amended to increase the share reserve to 743,106 shares, with 70,411 outstanding options and 676,565 shares available for future issuance as of December 31, 2023502 Certain Relationships and Related Transactions, and Director Independence The company discloses several related party transactions, notably a consulting agreement with director Sriram Peruvemba's firm, which terminated upon his board appointment in July 2023 - Prior to his appointment to the board, director Sriram Peruvemba provided consulting services to the company through his firm, Marketer International Inc., with the agreement terminated in July 2023516518 - Major shareholders, including affiliates of Orin Hirschman, The Hewlett Fund, LP, and Five Narrow Lane, participated in the June 2023 PIPE financing and the subsequent January 2024 Consent, Conversion and Amendment Agreement524531532 - The company has multiple registration rights agreements in place with directors, executive officers, and holders of more than 5% of its capital stock, stemming from the February 2021 reverse merger, the January 2022 Octopus Share Purchase, the June 2023 PIPE, and the January 2024 Consent Agreement519521526530 - The board has adopted a policy requiring Audit Committee approval for related party transactions exceeding $100,000533 Principal Accountant Fees and Services The company paid its independent registered public accounting firms a total of $336,000 in 2023 and $368,000 in 2022 Principal Accountant Fees (in thousands) | Fee Category | 2023 | 2022 | | :--- | :--- | :--- | | Audit fees | $336 | $368 | | Audit-related fees | $0 | $0 | | Tax fees | $0 | $0 | | All other fees | $0 | $0 | | Total | $336 | $368 | - The Audit Committee has established a policy for pre-approving all audit and permissible non-audit services provided by the independent auditor537 Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section provides an index of all exhibits filed with the Form 10-K, including the Share Exchange Agreement, corporate governance documents, material contracts such as employment and financing agreements, and required certifications540542 Form 10-K Summary The company reports that there is no Form 10-K summary - None546