SmartKem, Inc.(SMTK) - 2025 Q2 - Quarterly Report

Part I. Financial Information This section presents SmartKem, Inc.'s unaudited condensed consolidated financial statements and related disclosures Item 1. Financial Statements Presents SmartKem's unaudited consolidated financial statements, highlighting net loss and significant going concern doubt Unaudited Condensed Consolidated Balance Sheets Unaudited Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Cash and cash equivalents | $1,152 | $7,141 | | Total current assets | $3,430 | $8,509 | | Total assets | $4,282 | $8,904 | | Total current liabilities | $3,988 | $2,288 | | Total liabilities | $4,409 | $2,313 | | Total stockholders' (deficit) / equity | $(127) | $6,591 | - Cash and cash equivalents decreased significantly from $7.1 million at December 31, 2024, to $1.2 million at June 30, 2025[9] - Total stockholders' (deficit) / equity shifted from a positive $6.6 million to a deficit of $(127) thousand[9] Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Revenue | $32 | $40 | $55 | $40 | | Gross profit | $4 | $8 | $26 | $8 | | Other operating income | $279 | $236 | $530 | $438 | | Total operating expenses | $4,655 | $3,021 | $8,066 | $5,672 | | Loss from operations | $(4,372) | $(2,777) | $(7,510) | $(5,226) | | Total non-operating income / (expense) | $1,973 | $(321) | $2,952 | $432 | | Net loss | $(2,400) | $(3,099) | $(4,534) | $(4,795) | | Basic net loss per common share | $(0.30) | $(0.98) | $(0.62) | $(1.63) | | Total comprehensive loss | $(4,464) | $(2,925) | $(7,603) | $(4,639) | - Net loss for the three months ended June 30, 2025, improved to $(2.4) million from $(3.1) million in the prior year, while for the six months, it improved to $(4.5) million from $(4.8) million[12] - Operating expenses significantly increased by 54.1% for the three-month period and 42.2% for the six-month period, driven by higher R&D and G&A costs[12][90][97] Unaudited Condensed Consolidated Statements of Stockholders' (Deficit) / Equity Unaudited Condensed Consolidated Statements of Stockholders' (Deficit) / Equity (in thousands) | Metric | January 1, 2025 (in thousands) | June 30, 2025 (in thousands) | | :------------------------------------ | :----------------------------- | :--------------------------- | | Total stockholders' (deficit) / equity | $6,591 | $(127) | | Stock-based compensation expense | — | $510 | | Issuance of common stock to vendor | — | $375 | | Foreign currency translation adjustment | — | $(3,069) | | Net loss | — | $(4,534) | - Total stockholders' equity decreased from $6.6 million at January 1, 2025, to a deficit of $(127) thousand at June 30, 2025, primarily due to net loss and foreign currency translation adjustments[14] - Preferred stock was fully converted into common stock and pre-funded warrants by May 7, 2025, eliminating all Series A-1 Preferred Stock outstanding[14][56][57] Unaudited Condensed Consolidated Statements of Cash Flows Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash used in operating activities | $(6,121) | $(4,402) | | Net cash provided by financing activities | $0 | $3 | | Net change in cash | $(5,989) | $(4,485) | | Cash, end of period | $1,152 | $4,351 | - Net cash used in operating activities increased to $6.1 million for the six months ended June 30, 2025, from $4.4 million in the prior year, mainly due to increased net loss[17][104] - The company had no cash flows from investing or financing activities during the six months ended June 30, 2025, compared to $3 thousand from financing activities in the prior year[17][104] Notes to the Unaudited Interim Condensed Consolidated Financial Statements - SmartKem, Inc. develops proprietary advanced semiconductor materials (TRUFLEX® polymers) for low-cost, high-performance displays in MicroLED, LCD, AMOLED, AI chip packaging, sensors, and logic[23][83] - The company's operations are subject to significant risks, including the need for additional funding, technological innovation by competitors, dependence on key personnel and third-party manufacturers, and protection of IP[25] - Costs at the CPI facility have significantly increased due to short-term extensions of the framework agreement, and longer-term agreements are expected to remain higher[27][28] - The company's cash and cash equivalents of $1.2 million as of June 30, 2025, are not sufficient to fund operations for the next 12 months, necessitating additional capital or potential curtailment of operations[32] - The company operates as a single operating segment: Semiconductor materials, with revenue primarily from R&D grants and tax credits[42][71] - As of June 30, 2025, 4,441,165 shares of common stock were issued and outstanding, and 3,600,914 pre-funded warrants were outstanding[9][59] - The 2021 Equity Incentive Plan was amended in 2025 to increase shares reserved for issuance to 1,643,692 and set the 'evergreen' share amount to 4% of outstanding common stock[62] - During the six months ended June 30, 2025, 710,268 stock options were granted to employees, directors, and consultants, vesting over three years with an exercise price of $2.51[63] - Subsequent to June 30, 2025, 20,000 shares of common stock were issued to a vendor, and 83,325 shares were issued upon cashless exercise of 83,333 pre-funded warrants[75][76] - The company's financial statements are unaudited and prepared in accordance with GAAP for interim reporting, including all wholly-owned subsidiaries[37] - The company has incurred continuing losses, with a net loss of $4.5 million for the six months ended June 30, 2025, and an accumulated deficit of $119.2 million[31][86] - Cash and cash equivalents were $1.2 million as of June 30, 2025, with net cash used in operating activities of $6.1 million for the six months ended June 30, 2025, indicating insufficient funds to cover operating expenses for the next 12 months[31][32] - There is substantial doubt about the company's ability to meet its obligations as they fall due, and management's plans do not alleviate this doubt, leading to a going concern disclosure[35] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, liquidity, increased operating expenses, and non-operating foreign currency gains DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS - This section identifies statements about future business, financial condition, liquidity, and results of operations as 'forward-looking statements,' subject to risks and uncertainties[80] - Key risks include market acceptance of technology, timing of product releases, ability to develop new products, meeting management goals, maintaining Nasdaq listing, estimates of expenses and capital requirements, and dependence on collaborators and third-party facilities[80][87] Company Overview - SmartKem aims to revolutionize the display industry with TRUFLEX® semiconductor polymers for low-cost, high-performance displays, applicable in MicroLED, LCD, AMOLED, AI chip packaging, sensors, and logic[83] - The company maintains an extensive IP portfolio with 140 granted patents, 14 pending patents, and 40 codified trade secrets[84] Results of Operations for the three and six months ended June 30, 2025 Revenue and Cost of Revenue Comparison (in thousands) | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | | :---------------- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Revenue | $32 | $40 | $55 | $40 | | Cost of revenue | $28 | $32 | $29 | $32 | - Revenue and cost of revenue are primarily from sales of OTFT backplanes and TRUFLEX® materials for customer assessment[88][95] Operating Income and Expenses Comparison (in thousands) | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Other operating income | $279 | $236 | $530 | $438 | | Research and development expenses | $2,426 | $1,158 | $3,923 | $2,434 | | General and administrative expenses | $2,360 | $1,844 | $4,369 | $3,206 | | Total operating expenses | $4,655 | $3,021 | $8,066 | $5,672 | - Research and development expenses increased by 109.5% for the three-month period and 61.2% for the six-month period, largely due to an $800 thousand increase in CPI Framework agreement costs[91][98] - General and administrative expenses rose by 28.0% for the three-month period and 36.3% for the six-month period, driven by increased professional service fees, including non-cash expenses[92][99] Non-Operating Income/(Expense) Comparison (in thousands) | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Non-operating income/(expense) | $1,973 | $(321) | $2,952 | $432 | - Non-operating income saw a significant increase, primarily due to a $3.2 million gain on foreign currency related to intercompany loan revaluation, partially offset by a $0.7 million loss in 2024 from warrant liability changes[93][100] Liquidity and Capital Resources - Cash and cash equivalents decreased from $7.1 million at December 31, 2024, to $1.2 million at June 30, 2025[101] - The company's current cash balance is expected to fund operations only through September 30, 2025, requiring additional capital to continue operations and R&D[101] - Future funding plans include equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements, with potential for dilution or increased debt obligations[103] - Expected cash payments over the next twelve months include $3.1 million for accounts payable and accrued expenses, and $0.2 million for current lease liabilities[102] Cash Flow - Net cash used in operating activities increased by $1.7 million to $6.1 million for the six months ended June 30, 2025, compared to $4.4 million in the prior year, primarily due to increased comprehensive net loss[104] - There were no cash flows from investing or financing activities during the six months ended June 30, 2025[104] Contractual Payment Obligations - Principal commitments include obligations under office and lab space leases and purchase commitments for R&D facilities and services[105] Critical Accounting Estimates - Critical accounting estimates involve assumptions about highly uncertain matters, where changes could materially impact financial condition or results of operations[107] - Management discusses these estimates with the Audit Committee of the Board of Directors[108] - The company's business model focuses on proprietary advanced semiconductor materials (TRUFLEX® polymers) for display and AI chip packaging, with R&D facilities in the UK and a field application office in Taiwan[83][84] - Loss before income taxes was $4.5 million for the six months ended June 30, 2025, an improvement from $4.8 million in the prior year, primarily due to non-operating foreign currency gains[86][100] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - The company has no applicable quantitative and qualitative disclosures about market risk[109] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025. No material changes in internal control over financial reporting were identified during the period - Management concluded that disclosure controls and procedures were effective as of June 30, 2025[112] - No material changes in internal control over financial reporting were identified during the quarter ended June 30, 2025[113] - Control systems provide only reasonable, not absolute, assurance due to inherent limitations and resource constraints[110] Part II. Other Information This section covers other required information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - There are no material legal proceedings[115] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors previously disclosed in the 10-K[116] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended June 30, 2025, the company issued a total of 130,000 shares of common stock to vendors for services, exempt from registration under Section 4(a)(2) of the Securities Act and Regulation D Unregistered Sales of Common Stock to Vendors (Q2 2025) | Date | Shares Issued | Value | | :----------- | :------------ | :------ | | April 1, 2025 | 10,000 | $29,000 | | April 23, 2025 | 100,000 | $223,000 | | May 1, 2025 | 10,000 | $23,700 | | June 2, 2025 | 10,000 | $14,300 | | Total | 130,000 | $290,000 | - These issuances were exempt from registration under Section 4(a)(2) of the Securities Act and Regulation D[117][118] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - There are no defaults upon senior securities[119] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[120] Item 5. Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025 - No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter[121] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, corporate documents, certifications, and XBRL data files - The exhibit index includes various documents such as the Share Exchange Agreement, Amended and Restated Certificate of Incorporation, Bylaws, amendments to the Equity Incentive Plan, Letters of Variation with CPI Innovation Services Limited, a lease agreement, and certifications[124] - Certain annexes, schedules, and exhibits have been omitted but can be furnished to the SEC upon request[124]