UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
EXCHANGE ACT OF 1934
For the quarterly period ended
or
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
(Address of Principal Executive Offices)
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 13, 2023, there were
TABLE OF CONTENTS
2
Item 1. Financial Statements
SMARTKEM, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except number of shares and per share data)
September 30, | December 31, | |||||
| 2023 | 2022 | ||||
Assets |
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Current assets | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable |
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Research and development tax credit receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Right-of-use assets, net |
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Other assets, non-current |
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Total assets | $ | | $ | | ||
Liabilities and stockholders’ equity |
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Current liabilities | ||||||
Accounts payable and accrued expenses | $ | | $ | | ||
Lease liabilities, current |
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Income tax payable | — | | ||||
Other current liabilities | | | ||||
Total current liabilities |
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Lease liabilities, non-current |
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Warrant liability | |
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Total liabilities |
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Commitments and contingencies (Note 6) |
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Stockholders’ equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
| ( |
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Accumulated deficit |
| ( |
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Total stockholders' equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
* reflects a (1:35) reverse stock split effected on September 21, 2023 | ||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
SMARTKEM, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(in thousands, except number of shares and per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Revenue | $ | | $ | | $ | | $ | | ||||
Cost of revenue |
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Gross profit |
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Other operating income |
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Operating expenses |
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Research and development |
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Selling, general and administrative |
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Loss on foreign currency transactions |
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| — | |||||
Total operating expenses |
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Loss from operations |
| ( |
| ( |
| ( |
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Non-operating income/(expense) |
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Gain/(loss) on foreign currency transactions | ( | ( | | ( | ||||||||
Transaction costs allocable to warrants | — | — | ( | — | ||||||||
Change in fair value of the warrant liability, net | | — | | — | ||||||||
Interest income |
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Total non-operating income/(expense) |
| ( |
| ( |
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Loss before income taxes |
| ( |
| ( |
| ( |
| ( | ||||
Income tax expense |
| — | — |
| — | — | ||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive loss: |
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Foreign currency translation |
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| ( |
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Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Basic and diluted net loss per common share * | ( | ( | ( | ( | ||||||||
Basic and diluted weighted average shares outstanding * | | | | | ||||||||
* reflects a (1:35) reverse stock split effected on September 21, 2023 | ||||||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
SMARTKEM, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share data)
Accumulated | ||||||||||||||||||||||
Preferred Stock | Common stock | Additional | other | Total | ||||||||||||||||||
$0.0001 par value | $0.0001 par value | paid-in | comprehensive | Accumulated | Stockholders' | |||||||||||||||||
Shares |
| Amount | Shares |
| Amount |
| capital |
| income / (loss) |
| deficit |
| equity | |||||||||
Balance at January 1, 2023 | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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| — |
| — |
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Issuance of common stock to vendor | — |
| — | |
| — |
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| — |
| — |
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Foreign currency translation adjustment | — |
| — | — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at March 31, 2023 | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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| — |
| — |
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Issuance of preferred stock, net of issuance costs | |
| — | — |
| — |
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Foreign currency translation adjustment | — |
| — | — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at June 30, 2023 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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Conversion of Preferred stock into common stock | ( |
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Exercise of warrants into common stock | — |
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Foreign currency translation adjustment | — |
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Net loss | — |
| — | — |
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| — |
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| ( |
| ( | ||||||||
Balance at September 30, 2023 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
* reflects a (1:35) reverse stock split effected on September 21, 2023 | ||||||||||||||||||||||
5
SMARTKEM, INC.
Condensed Consolidated Statements of Stockholders’ Equity, continued
(Unaudited)
(in thousands, except share data)
Accumulated | ||||||||||||||||||||||
Preferred Stock | Common stock | Additional | other | Total | ||||||||||||||||||
$0.0001 par value | $0.0001 par value | paid-in | comprehensive | Accumulated | Stockholders' | |||||||||||||||||
Shares |
| Amount | Shares |
| Amount |
| capital |
| income / (loss) |
| deficit |
| equity | |||||||||
Balance at January 1, 2022 | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
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Issuance of common stock to vendor | — |
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Issuance of common stock in private placement | — | — | | — | | — | — | | ||||||||||||||
Issuance costs related to common stock in private placement | — | — | — | — | ( | — | — | ( | ||||||||||||||
Foreign currency translation adjustment | — |
| — | — |
| — |
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Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at March 31, 2022 | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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| — |
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Issuance of common stock to vendor | — |
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Issuance costs related to preferred stock in private placement | — |
| — | — |
| — |
| ( |
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Foreign currency translation adjustment | — |
| — | — |
| — |
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Net loss | — |
| — | — |
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| — |
| — |
| ( |
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Balance at June 30, 2022 | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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| — |
| — |
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Foreign currency translation adjustment | — |
| — | — |
| — |
| — |
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Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at September 30, 2022 | — | $ | — | | $ | — | $ | | $ | | $ | ( | $ | | ||||||||
* reflects a (1:35) reverse stock split effected on September 21, 2023 | ||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
]
6
SMARTKEM, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||
| 2023 |
| 2022 | |||
Cash flow from operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation | | | ||||
Stock-based compensation expense | | | ||||
Issuance of common stock to vendor | | | ||||
Right-of-use asset amortization | | | ||||
Gain/(loss) on foreign currency transactions | ( | | ||||
Transaction costs allocable to warrant liability | | — | ||||
Warrant liability fair value adjustment | ( | — | ||||
Change in operating assets and liabilities: | ||||||
Accounts receivable | ( | ( | ||||
Research and development tax credit receivable | | | ||||
Prepaid expenses and other current assets | ( | ( | ||||
Accounts payable and accrued expenses | | ( | ||||
Lease liabilities | ( | ( | ||||
Income tax payable | ( | — | ||||
Other current liabilities | ( | — | ||||
Net cash used in operating activities |
| ( |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment | ( | ( | ||||
Net cash used by investing activities |
| ( |
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Cash flow from financing activities: |
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Proceeds from the issuance of preferred stock in private placement | | — | ||||
Proceeds from the issuance of warrants in private placement | | — | ||||
Proceeds from the issuance of common stock in private placement | — | | ||||
Payment of issuance costs | ( | ( | ||||
Proceeds from the exercise of warrants | | — | ||||
Net cash provided by financing activities |
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Effect of exchange rate changes on cash | ( |
| ( | |||
Net change in cash |
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Cash, beginning of period | | | ||||
Cash, end of period | $ | | $ | | ||
Supplemental disclosure of cash and non-cash investing and financing activities |
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Initial classification of fair value of warrants | $ | | $ | — | ||
Right-of-use asset and lease liability additions | $ | | $ | | ||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
7
1. | ORGANIZATION, BUSINESS, LIQUIDITY AND BASIS OF PRESENTATION |
Organization
SmartKem, Inc. (the “Company”) formerly known as Parasol Investments Corporation (“Parasol”), was formed on May 13, 2020, and is the successor of SmartKem Limited, which was formed under the Laws of England and Wales. The Company was founded as a “shell” company registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with no specific business plan or purpose until it began operating the business of SmartKem Limited following the closing of the transactions contemplated by the Securities Exchange Agreement (the “Exchange Agreement”), dated February 21, 2021, with SmartKem Limited. Pursuant to the Exchange Agreement all of the equity interests in SmartKem Limited, except certain deferred shares which had no economic or voting rights and which were purchased by Parasol for an aggregate purchase price of $
Business
The Company is seeking to reshape the world of electronics with its disruptive organic thin-film transistors (OTFTs) that have the potential to drive the next generation of displays. SmartKem’s patented TRUFLEX® semiconductor and dielectric inks, or electronic polymers, are used to make a new type of transistor that could potentially revolutionize the display industry. SmartKem’s inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing technologies. The company’s electronic polymer platform can be used in a number of display technologies including microLED, miniLED and AMOLED displays for next generation televisions, laptops, augmented reality (AR) and virtual reality (VR) headsets, smartwatches and smartphones. SmartKem develops its materials at its research and development facility in Manchester, UK, its semiconductor manufacturing processes at the Centre for Process Innovation (CPI) at Sedgefield, UK and retains a field application office in Taiwan. The Company has an extensive IP portfolio including 125 granted patents across 19 patent families and 40 codified trade secrets.
Risk and Uncertainties
The Company’s activities are subject to significant risks and uncertainties including the risk of failure to secure additional funding to properly execute the Company’s business plan. The Company is subject to risks that are common to companies in the growth stage, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology and compliance with regulatory requirements.
The Company has access under a framework agreement to equipment which is used in the manufacturing of demonstrator products employing the Company’s inks. If the Company lost access to this fabrication facility, it would materially and adversely affect the Company’s ability to manufacture prototypes and demonstrate products for potential customers. The loss of this access could significantly impede the Company’s ability to engage in product development and process improvement activities. Alternative providers of similar services exist but would take effort and time to bring into the Company’s operations.
Liquidity
The accompanying unaudited interim condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business.
The Company has incurred continuing losses including net losses of $
8
In June 2023 the Company raised $
Management believes that the Company’s existing cash as of September 30, 2023 will be sufficient to fund the operations of the Company for the twelve months from the issuance of this financial statement and that the Company may require additional capital funding to continue its operations and research and development activity thereafter.
Basis of Presentation
The unaudited interim condensed consolidated financial statements of the Company as of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022 should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023 and may also be found on the Company’s website (www.smartkem.com). In these notes to the interim condensed consolidated financial statements the terms “us,” “we” or “our” refer to the Company and its consolidated subsidiaries.
These interim condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. They include the accounts of all wholly owned subsidiaries and all significant inter-company accounts and transactions have been eliminated in consolidation. Amounts are presented in thousands, except number of shares and per share data.
The preparation of interim condensed consolidated financial statements requires management to make assumptions and estimates that impact the amounts reported. These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended September 30, 2023 and 2022; however, certain information and footnote disclosures normally included in our audited consolidated financial statements included in our Annual Report have been condensed or omitted as permitted by GAAP. It is important to note that the Company’s results of operations and cash flows for interim periods are not necessarily indicative of the results of operations and cash flows to be expected for a full fiscal year or any interim period.
Reverse Stock Split
All share numbers and per share amounts presented in these financial statements, including these footnotes reflect a (1:35) reverse stock split effected on September 21, 2023.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Other than the policies listed below, there have been no material changes to the Company’s significant accounting policies as set forth in Note 3 Summary of Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report.
Management’s Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relates to the valuation of common share, fair value of share options and fair value of warrant liabilities. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis
9
for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates.
Warrant Liability
The Company assessed its warrants in accordance with the guidance contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 480, Distinguishing Liabilities from Equity and 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, under which warrants that do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company will classify those warrants as liabilities at their fair value and adjusts the warrants to fair value in respect of each reporting period. This liability is subject to re-measurement at each balance sheet date and any change in fair value is recognized in the statements of operations.
Issuance Costs
The Company assessed the issuance cost in connection with the issuance of an equity offering. ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A, Expenses of Offering, states that specific incremental costs directly attributable to a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering. Analogizing to that guidance, specific incremental costs directly attributable to the issuance of an equity contract to be classified in equity should generally be recorded as a reduction in equity. However, issuance costs for equity contracts that are classified as a liability should be expensed immediately. The issuance costs are allocated to the equity and liability components of the underlying transaction on a basis of the allocated fair value of the gross proceeds in the overall transactions. The total issuance costs were $
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments: Credit Losses (Topic 326), which requires measurement and recognition of expected losses for financial assets held. The new standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require organizations to incorporate considerations of historical information, current conditions and reasonable and supportable forecasts. The standards update is effective prospectively for annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted, for U.S. Securities Exchange filers. However, the standard was not applicable until January 1, 2023, because the company has elected to apply the extended transition period available for emerging growth companies. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies, which is effective prospectively for annual and interim periods beginning after December 15, 2022. The adoption of this guidance did not have a material impact in the interim condensed consolidated financial statements of the Company.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted the ASU on January 1, 2023. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company has determined that the impact this ASU did not have material effect on its consolidated financial statements.
10
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
September 30, | December 31, | |||||
(in thousands) |
| 2023 | 2022 | |||
Prepaid service charges and property taxes | $ | | $ | | ||
Prepaid utilities |
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Prepaid insurance |
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Prepaid administrative expenses |
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Prepaid consulting fees | | | ||||
Research grant receivable | | — | ||||
Prepaid technical fees | | | ||||
VAT receivable | | | ||||
Other receivable and other prepaid expenses | | | ||||
Total prepaid expenses and other current assets | $ | | $ | | ||
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, | December 31, | |||||
(in thousands) |
| 2023 | 2022 | |||
Plant and equipment | $ | | $ | | ||
Furniture and fixtures |
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Computer hardware and software |
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Less: Accumulated depreciation |
| ( |
| ( | ||
Property, plant and equipment, net | $ | | $ | | ||
Depreciation expense was $
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
September 30, | December 31, | |||||
(in thousands) |
| 2023 | 2022 | |||
Accounts payable | $ | | $ | | ||
Accrued expenses – lab refurbishments |
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Accrued expenses – technical fees |
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Accrued expenses – variable rent & utilities | | | ||||
Accrued expenses – audit & accounting fees |
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Accrued expenses – legal & other professional services | | — | ||||
Accrued expenses – other |
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Credit card liabilities | | | ||||
Payroll liabilities |
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Total accounts payable and accrued expenses | $ | | $ | | ||
11
6. LEASES
The Company has operating leases consisting of office space, lab space and equipment with remaining lease terms of
The Company is not the lessor in any lease agreement, and no related party transactions for lease arrangements have occurred.
The table below presents certain information related to the lease costs for the Company’s operating leases for the periods ended:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||
Short-term lease cost |
| — |
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Variable lease cost |
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Total lease cost | $ | | $ | | $ | | $ | | ||||
The total lease cost is included in the unaudited condensed consolidated statements of operations as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
(in thousands) | 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Research and development | $ | | $ | | $ | | $ | | ||||
Selling, general and administrative |
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| |
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Total lease cost | $ | | $ | | $ | | $ | | ||||
Right of use lease assets and lease liabilities for our operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:
| September 30, | December 31, | ||||
(in thousands) |
| 2023 |
| 2022 | ||
Assets |
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Right of use assets - Operating Leases | $ | | $ | | ||
Total lease assets | $ | | $ | | ||
Liabilities |
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Current liabilities: |
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Lease liability, current - Operating Leases | $ | | $ | | ||
Noncurrent liabilities: |
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Lease liability, non-current - Operating Leases |
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Total lease liabilities | $ | | $ | | ||
The Company had
12
The table below presents certain information related to the cash flows for the Company’s operating leases for the periods ended:
September 30, | ||||||
(in thousands) | 2023 |
| 2022 | |||
Operating cash outflows from operating leases | $ | | $ | | ||
Supplemental non-cash amounts of operating lease liabilities arising from obtaining right of use assets |
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The table below presents certain information related to the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases as of the period ended:
September 30, | |||
2023 | |||
Weighted average remaining lease term (in years) – operating leases | |||
Weighted average discount rate – operating leases | |||
Remaining maturities of the Company’s operating leases, excluding short-term leases, are as follows:
September 30, | |||
(in thousands) | 2023 | ||
2023 | $ | | |
2024 | | ||
2025 | | ||
Total undiscounted lease payments | | ||
Less imputed interest | ( | ||
Total net lease liabilities | $ | | |
7. COMMITMENTS AND CONTINGENCIES
Legal proceedings
In the normal course of business, the Company may become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material effect on the interim condensed consolidated financial statements.
8. STOCKHOLDERS’ EQUITY
Reverse Stock Split
At the Company’s Annual Meeting of Stockholders held on August 25, 2023 (the “Annual Meeting”), the Company’s stockholders approved a proposal to approve and adopt an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of its shares of common stock, issued and outstanding or reserved for issuance, at a specific ratio within a range from 1-for to 1-for, inclusive, prior to the first anniversary of stockholder approval of the proposal, and to grant authorization to the Board of Directors to determine, in its sole discretion, whether to effect the reverse stock split, as well as its specific timing and ratio. On September 19, 2023, the Company’s Board of Directors adopted resolutions to effect as soon as reasonably practicable the reverse split of the issued and outstanding shares of the Common Stock at a ratio of 1-for.
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On September 19, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to effect a reverse stock split of the issued and outstanding shares of the Company’s common stock, $
Preferred Stock
The board of directors has the authority, without further action by the stockholders, to issue up to
Series A-1 Preferred Stock
On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating
Dividends
The holders of Series A-1 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of Common Stock, when and if actually paid. In addition, in the event that on the 18th month anniversary of the Closing Date, the trailing
Voting Rights
The shares of Series A-1 Preferred Stock have
As long as any shares of Series A-1 Preferred Stock are outstanding, the Company may not, without the approval of a majority of the then outstanding shares of Series A-1 Preferred Stock which must include AIGH Investment Partners LP and its affiliates (“AIGH”) for so long as AIGH is holding at least $
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Stock except pursuant to the Purchase Agreement, or (f) enter into any agreement to do any of the foregoing.
Liquidation
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), the then holders of the Series A-1 Preferred Stock are entitled to receive out of the assets available for distribution to stockholders of the Company an amount equal to
Conversion
The Series A-1 Preferred Stock is convertible into Common Stock at any time at a conversion price of $
Conversion at the Option of the Holder
The Series A-1 Preferred Stock is convertible at the then-effective Series A-1 Conversion Price at the option of the holder at any time and from time to time.
Mandatory Conversion at the Option of the Company
So long as certain equity conditions are satisfied, the Company may give notice requiring the holders to convert all of the outstanding shares of Series A-1 Preferred Stock into shares of Common Stock at the then-effective Series A-1 Conversion Price.
Beneficial Ownership Limitation
The Series A-1 Preferred Stock cannot be converted to Common Stock if the holder and its affiliates would beneficially own more than
Preemptive Rights
Redemption
The shares of Series A-1 Preferred Stock are not redeemable by the Company.
Negative Covenants
As long as any Series A-1 Preferred Stock is outstanding, unless the holders of more than
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otherwise acquire more than a de minimis number of shares of its Common Stock, Common Stock equivalents or junior securities, (d) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company, (e) declare or pay a dividend on junior securities or (f) enter into any agreement with respect to any of the foregoing.
Trading Market
There is no established trading market for any of the Series A-1 Preferred Stock, and the Company does not expect a market to develop. The Company does not intend to apply for a listing for any of the Series A-1 Preferred Stock on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series A-1 Preferred Stock will be limited.
Series A-2 Preferred Stock
On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating
Dividends
The holders of Series A-2 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of Common Stock, when and if actually paid.
Voting Rights
The shares of Series A-2 Preferred Stock have
As long as any shares of Series A-2 Preferred Stock are outstanding, the Company may not, without the approval of a majority of the then outstanding shares of Series A-2 Preferred Stock (a) alter or change the powers, preferences or rights of the Series A-2 Preferred Stock, (b) alter or amend the Charter, the Series A-2 Certificate of Designation or the Bylaws in such a manner so as to materially adversely affect any rights given to the Series A-2 Preferred Stock, (c) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to, or otherwise pari passu with, the Series A-2 Preferred Stock or (d) enter into any agreement to do any of the foregoing.
Liquidation
Upon a Liquidation, the then holders of the Series A-2 Preferred Stock are entitled to receive out of the assets available for distribution to stockholders of the Company an amount equal to
Conversion
The Series A-2 Preferred Stock is convertible into Common Stock at any time at a conversion price of $
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Conversion at the Option of the Holder
The Series A-2 Preferred Stock is convertible at the then-effective Series A-2 Conversion Price at the option of the holder at any time and from time to time.
Automatic Conversion
On the trading day immediately preceding the date on which shares of Common Stock commence trading on the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange all, but not less than all, of the outstanding shares of Series A-2 Preferred Stock shall automatically convert, without any action on the part of the holder thereof and without payment of any additional consideration, into that number of shares of Common Stock determined by dividing the stated of such share of Series A-2 Preferred Stock by the then applicable Series A-2 Conversion Price.
Beneficial Ownership Limitation
The Series A-2 Preferred Stock cannot be converted to common stock if the holder and its affiliates would beneficially own more than
Preemptive Rights
Redemption
The shares of Series A-2 Preferred Stock are not redeemable by the Company.
Trading Market
There is no established trading market for any of the Series A-2 Preferred Stock, and the Company does not expect a market to develop. The Company does not intend to apply for a listing for any of the Series A-2 Preferred Stock on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series A-2 Preferred Stock will be limited.
Series A-1 and A-2 Preferred Stock and Class A and Class B Warrant Issuances
On June 14, 2023, the Company and certain investors entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold an aggregate of (i)
On June 22, 2023, in a second closing of the June 2023 PIPE, the Company sold an aggregate of (i)
17
proceeds of $
Each Class A Warrant has an exercise price of $
There were an additional
The Company has accounted for the Class A and Class B Warrants as derivative instruments in accordance with ASC 815, Derivatives and Hedging. The Company classified the Warrants as a liability because they cannot be considered indexed to the Company’s stock due to provisions that, in certain circumstances, adjust the number of shares to be issued if the exercise price is adjusted and the existence of a pre-specified volatility input to the Black-Scholes calculation which could be used to calculate consideration in the event of a Fundamental Transaction, as defined in the agreements.
The Company received net proceeds after expenses of $
Under the terms of the Purchase Agreement, for a period ending on December 15, 2025, in the event that we issue common stock or common stock equivalents in a subsequent financing (as defined in the Purchase Agreement), the significant purchasers (defined in the Purchase Agreement as a purchaser acquiring at least
In addition, during such period, the Company may not issue common stock or common stock equivalents in a subsequent financing with an effective price per share of common stock that is or may become lower than the then-effective conversion price of the Series A-1 Preferred Stock without the consent of the significant purchasers, which must include AIGH Investment Partners LP and its affiliates for so long as they are holding at least $
In the event that the Company issues common stock or common stock equivalents in a subsequent financing prior to the time the common stock is listed on a national securities exchange, the Purchase Agreement provides that if a significant purchaser reasonably believes that any of the terms and conditions of the subsequent financing are more favorable to an investor in the subsequent financing than the terms of the June 2023 PIPE, such significant purchaser has the right to require the Company to amend the terms of the June 2023 PIPE to include such more favorable term for such significant purchaser. This provision may make it more expensive to obtain additional capital prior to an uplisting because it permits any significant purchaser to “cherry pick” the terms of the
18
subsequent financing and to require any term deemed to be more favorable to be included retroactively in the terms of the June 2023 PIPE. This provision also potentially creates uncertainty around the terms of a subsequent financing because the significant purchasers have the right to review terms of a completed subsequent financing before deciding which, if any, of the terms thereof they find more favorable to them.
The Purchase Agreement provides that, until June 14, 2025, a significant purchaser may participate in a subsequent transaction by exchanging some or all of its Series A-1 Preferred Stock having a stated value equal to its subscription amount in the subsequent financing. This provision may adversely affect the amount of capital the Company raises in a subsequent financing, as it permits a significant purchaser to roll its existing investment into the new financing rather than being required to invest cash. This provision also has the potential to make it more difficult for the Company to raise additional capital as other investors may want to provide all or a larger portion of the capital provided in the subsequent financing or may require the Company to raise a minimum amount of new capital or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers in cash.
If the Company is unable to raise additional capital when needed, the Company may be required to delay, limit, reduce or terminate commercialization, its research and product development, or grant rights to develop and market its products that the Company would otherwise prefer to develop and market itself and may have a material adverse effect on the Company’s business, financial condition and results of operations.
Common Stock
Voting Rights
Each holder of common stock is entitled to
Dividends
The Company has never paid any cash dividends to stockholders and do not anticipate paying any cash dividends to stockholders in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant.
Market Information
Quotations on the Company’s common stock on the OTC Market Group’s OTCQB® Market quotation system (“OTCQB”) commenced under the ticker symbol “SMTK” in February 2022. There was no trading of the common stock on the OTCQB or any other over-the-counter market prior to February 2022.
Common Stock Issued to Vendors for Services
On January 6, 2023, the Company issued
On February 27, 2023, the Company issued
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Common Stock Warrants
A summary of the Company’s warrants to purchase common stock activity is as follows:
|
|
| Weighted- | |||||||
Average | ||||||||||
Weighted- | Remaining | |||||||||
Average | Contractual | |||||||||
Number of | Exercise Price | Exercise | Term | |||||||
Shares | per Share | Price | (Years) | |||||||
Warrants outstanding at January 1, 2023 |
| | $ | $ | |
| ||||
Issued |
| | |
|
| |||||
Exercised |
| ( |
| |
|
| ||||
Expired |
| — |
|
|
| |||||
Warrants outstanding at September 30, 2023 |
| | $ | $ | |
| ||||
A summary of the Company’s pre-funded warrants to purchase common stock activity is as follows:
Weighted- | ||||||
Average | ||||||
Number of | Exercise | |||||
Shares | Price | |||||
Pre-funded warrants outstanding at January 1, 2023 |
| | $ | | ||
Issued |
| — |
| |||
Exercised |
| — |
| |||
Expired |
| — |
| |||
Pre-funded warrants outstanding at September 30, 2023 |
| | $ | | ||
For any issuance dates prior to February 2022, the fair value of common stock warrants is determined using the Black Scholes option-pricing model. There was no public trading market for our shares before February 2022 and the Company estimates its expected stock volatility based on historical volatility of publicly traded peer companies.
9. SHARE-BASED COMPENSATION:
On February 23, 2021, the Company approved the 2021 Equity Incentive Plan (“2021 Plan”), in which a maximum aggregate number of shares of common stock that may be issued under the 2021 Plan is
At the Annual Meeting, the Company’s stockholders approved an amendment (the “2021 Plan Amendment”) to the Company’s 2021 Plan, increasing the number of the shares of common stock, par value $
Determining the appropriate fair value of share-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for share options, the expected life of the option, and expected share price volatility. The Company uses the Black-Scholes option pricing model to value its share option awards. The assumptions used in calculating the fair value of share-based awards represent
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management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, the share-based compensation expense could be materially different for future awards.
There were
Prior to February 2022, in the absence of a public trading market for the common stock, on each grant date, the Company developed an estimate of the fair value of the shares of common stock underlying the option grants. The Company estimated the fair value of the shares of common stock by referencing arms-length transactions inclusive of the shares of common stock underlying which occurred on or near the valuation date(s). The Company determined the fair value of the common stock using methodologies, approaches and assumptions consistent with the AICPA Practice Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation and based in part on input from an independent third-party valuation firm. From February 2022, the Company’s common stock is publicly traded, and the Company no longer has to estimate the fair value of the shares of common stock, rather the value is determined based on quoted market prices.
The Company estimates its expected volatility by using a combination of historical share price volatilities of similar companies within our industry. The risk-free interest rate assumption is based on observed interest rates for the appropriate term of the Company’s options on a grant date. The contractual term is
The following table reflects share activity under the share option plans for the nine months ended September 30, 2023:
|
|
| Weighted- |
|
|
| |||||||
Average |
| ||||||||||||
Weighted- | Remaining | Weighted- | Aggregate | ||||||||||
Average | Contractual | Average | Intrinsic | ||||||||||
Number of | Exercise | Term | Fair Value at | Value | |||||||||
Shares | Price | (Years) | Grant Date | (in thousands) | |||||||||
Options outstanding at January 1, 2023 |
| |
| $ | |
|
| $ | |
| |||
Exercised | — | — | |||||||||||
Cancelled/Forfeited |
| — |
|
| — |
|
|
|
|
|
| ||
Expired |
| ( |
|
| |
|
|
|
|
|
| ||
Granted |
| — |
|
| — |
|
|
|
|
|
| ||
Options outstanding at September 30, 2023 |
| |
| $ | |
|
| $ | |
| |||
Options exercisable at September 30, 2023 | | $ | | $ | |||||||||
Stock-based compensation is included in the unaudited interim condensed consolidated statements of operations as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
(in thousands) | 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Research and development | $ | | $ | | $ | | $ | | |||||
Selling, general and administration |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | |||||
Total compensation cost related to non-vested stock option awards not yet recognized as of September 30, 2023 was $
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10. NET LOSS PER COMMON SHARE:
Basic net loss per share is determined by dividing net loss by the weighted average shares of common stock outstanding during the period, without consideration of potentially dilutive securities, except for those shares that are issuable for little or no cash consideration. Diluted net loss per share is determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflects the dilutive effect, if any, of potentially dilutive common shares, such as stock options and warrants calculated using the treasury stock method. In periods with reported net operating losses, all common stock options and warrants are generally deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.
The following potentially dilutive securities were excluded from the computation of earnings per share as of September 30, 2023 and 2022 because their effects would be anti-dilutive:
September 30, | ||||||
| 2023 | 2022 | ||||
Common stock warrants | | | ||||
Assumed conversion of preferred stock | | — | ||||
Stock options | | | ||||
Total | | | ||||
At September 30, 2023, the Company had
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Weighted average shares issued | | | | | ||||||||
Weighted average pre-funded and penny warrants | | | | | ||||||||
Weighted average shares outstanding | | | | | ||||||||
11. DEFINED CONTRIBUTION PENSION:
The Company operates a defined contribution pension scheme for its UK employees. The assets of the scheme are held separately from those of the Company in an independently administered fund. The pension cost charge represents contributions payable by the Company to the fund. Pension cost is included in the unaudited interim condensed consolidated statements of operations as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
(in thousands) | 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Research and development | $ | | $ | | $ | | $ | | |||||
Selling, general and administration |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | |||||
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12. FAIR VALUE MEASUREMENTS
The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value for the quarter ended September 30, 2023:
(in thousands) | Warrant Liability | ||
Balance at January 1,2023 | $ | — | |
Fair value of warrant issued in Private Placement Offering | | ||
Total change in the liability included in earnings |
| ( | |
Balance at September 30, 2023 | $ | | |
As disclosed in Note 7 of the Company’s consolidated financial statements, the Company allocated part of the proceeds of private placement of the Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock to
warrant liability issued in connection with the transaction. The valuations of the warrants were determined using option pricing models. These models use inputs such as the underlying price of the shares issued at the measurement date, expected volatility, risk free interest rate and expected life of the instrument. Since our common stock was not publicly traded until February 2022 there has been insufficient volatility data available. Accordingly, we have used an expected volatility based on historical common stock volatility of our peers. The Company has accounted for them as derivative instruments in accordance with ASC 815, adjusting the fair value at the end of each reporting period.
The fair value of the common warrants at September 30, June 22 and June 14, 2023 was determined by using option pricing models assuming the following:
September 30, | June 22 | June 14 | |||||||
2023 | 2023 | 2023 | |||||||
Expected term (years) |
| ||||||||
Risk-free interest rate |
| ||||||||
Expected volatility |
| ||||||||
Expected dividend yield |
| ||||||||
Additionally, the Company has determined that the warrant liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the option pricing models against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820. There are six inputs: closing price of SmartKem stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of the Company’s stock over that term; annual rate of dividends; and the risk-free rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of SmartKem stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10). The risk-free rate of return is a Level 2 input as defined in ASC 820-10,
while the historical volatility is a Level 3 input as defined in ASC 820. Since the lowest level input is a Level 3, the Company determined the warrant liability is most appropriately classified within Level 3 of the fair value hierarchy.
23
The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of September 30, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value. In general, the fair values were determined using Level 3:
Quoted Prices | Significant Other | Significant | ||||||||||
in Active | Observable | Unobservable | ||||||||||
Markets | Inputs | Inputs | September 30, | |||||||||
(Level 1) | (Level 2) | (Level 3) | 2023 | |||||||||
Description | ||||||||||||
Liabilities: | ||||||||||||
Warrant liability | $ | — | $ | — | $ | | $ | | ||||
Total liabilities | $ | — | $ | — | $ | | $ | | ||||
13. SUBSEQUENT EVENTS:
Preferred Stock Conversions
Subsequent to September 30, 2023, the Company issued
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of SmartKem, Inc. (“SmartKem” or the “Company”) should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto contained in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 to provide an understanding of its results of operations, financial condition and cash flows.
All references in this Quarterly Report to “we,” “our,” “us” and the “Company” refer to SmartKem, Inc., and its subsidiaries unless the context indicates otherwise.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 with respect to our business, financial condition, liquidity, and results of operations. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” “continue,” “potential,” “should,” and the negative of these terms or other comparable terminology often identify forward-looking statements. Statements in this Quarterly Report on Form 10-Q (this “Report”) that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements, including the risks discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “10-K”) in Item 1A under “Risk Factors” and the risks detailed from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”). These forward-looking statements include, but are not limited to, statements about:
| ● | the implementation of our business model and strategic plans for our business, technologies and products; |
| ● | the rate and degree of market acceptance of any of our products or organic semiconductor technology in |
| ● | general, including changes due to the impact of (i) new semiconductor technologies, (ii) the performance of organic semiconductor technology, whether perceived or actual, relative to competing semiconductor materials, and (iii) the performance of our products, whether perceived or actual, compared to competing silicon-based and other products; |
| ● | the timing and success of our, and our customers’, product releases; |
| ● | our ability to develop new products and technologies; |
| ● | our estimates of our expenses, ongoing losses, future revenue and capital requirements, including our |
our needs for additional financing;
| ● | our ability to obtain additional funds for our operations and our intended use of any such funds; |
| ● | our ability to remain eligible on an over-the-counter quotation system; |
| ● | our receipt and timing of any royalties, milestone payments or payments for products, under any current or future collaboration, license or other agreements or arrangements; |
| ● | our ability to obtain and maintain intellectual property protection for our technologies and products and our ability to operate our business without infringing the intellectual property rights of others; |
| ● | the strength and marketability of our intellectual property portfolio; |
| ● | our dependence on current and future collaborators for developing, manufacturing or otherwise bringing our products to market; |
| ● | the ability of our third-party supply and manufacturing partners to meet our current and future business needs; |
| ● | our exposure to risks related to international operations; |
| ● | our dependence on third-party fabrication facilities; |
| ● | the impact of the COVID-19 pandemic and any future communicable disease outbreak on our business and operations; |
| ● | our relationships with our executive officers, directors, and significant stockholders; |
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| ● | our expectations regarding our classification as a “smaller reporting company,” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”) in future periods; |
| ● | our future financial performance; |
| ● | the competitive landscape of our industry; |
| ● | the impact of government regulation and developments relating to us, our competitors, or our industry; and |
| ● | other risks and uncertainties, including those listed under the caption “Risk Factors” in our 10-K. |
These statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” in our 10-K and in this Report and elsewhere in this Report.
Any forward-looking statement in this Report reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our business, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Report and the documents that we reference in this Report and have filed with the SEC as exhibits hereto completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
Company Overview
We are seeking to reshape the world of electronics with our disruptive organic thin-film transistors (OTFTs) that have the potential to drive the next generation of displays. Our patented TRUFLEX® semiconductor and dielectric inks, or electronic polymers, are used to make a new type of transistor that could potentially revolutionize the display industry. Our inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing technologies. Our electronic polymer platform can be used in a number of display technologies including microLED, miniLED and AMOLED displays for next generation televisions, laptops, augmented reality (AR) and virtual reality (VR) headsets, smartwatches, and smartphones.
We develop our materials at its research and development facility in Manchester, UK, our semiconductor manufacturing processes at the Centre for Process Innovation (CPI) at Sedgefield, UK and retain a field application office in Taiwan. We have an extensive IP portfolio including 125 granted patents across 19 patent families and 40 codified trade secrets.
Since our inception in 2009, we have devoted substantial resources to the research and development of materials and production processes for the manufacture of organic thin film transistors and the enhancement of our intellectual property.
Our loss before income taxes was $3.0 million and $4.0 million for the three months ended September 30, 2023 and 2022, and $7.1 million and $10.4 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, our accumulated deficit was $93.7 million. Substantially all our operating losses have resulted from expenses incurred in connection with research and development activities and from general and administrative costs associated with our operations.
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Results of Operations for the three and nine months ended September 30, 2023
Three months ended September 30, 2023 compared with three months ended September 30, 2022
Revenue and Cost of revenue
Revenues were $3.0 thousand in the three months ended September 30, 2023, compared with $26.0 thousand in the same period of 2022. Cost of revenue was $1.0 thousand in the three months ended September 30, 2023, compared with $26.0 thousand in the same period of 2022. The decrease is mainly the results of less unit sales in 2023 compared to 2022. Both revenues and related cost of revenue for the three months ended September 30, 2023 and 2022 are a result of sales of organic thin-film transistor (OTFT) backplanes and TRUFLEX® materials for customer assessment and development purposes.
Other operating income
Other operating income was $0.3 million in the three months ended September 30, 2023, compared to $0.3 million in the same period of 2022. The primary source of the income is related to a research grant and research and development tax credits.
Operating expenses
Operating expenses were $3.0 million for the three months ended September 30, 2023, compared to $2.7 million in the same period of 2022, an increase of $0.3 million.
Research and development expenses are incurred for the development of TRUFLEX® inks to make OTFT circuits and consists primarily of payroll and technical development costs. The research and development expenses represent 53.1% and 49.2% of the total operating expenses for the three months ended September 30, 2023 and 2022, respectively. Research and development expenses increased $0.2 million for the three months ended September 30, 2023 compared to the same period for the prior year. This increase was mainly due personnel severance expenses and technical service fees.
Selling, general and administrative expenses consist primarily of payroll and professional services such as accounting, legal services and investor relations. These expenses represent 42.9% and 50.8% of our total operating expenses for the three months ended September 30, 2023 and 2022, respectively. Selling, general and administrative expenses decreased by $0.1 million for the three months ended September 30, 2023 compared to the same period for the prior year. This decrease was primarily a result of a reductions in investor relations expenses.
Non-Operating income/(expense)
We recorded a gain of $0.5 million related to the valuation of the warrant liability for the three months ended September 30, 2023. There were no similar gains or losses during the same period of the prior year. We recorded losses on foreign currency transactions related to intercompany loans of $0.8 million for the three months ended September 30, 2023 compared to the losses of $1.5 million for the three months ended September 30, 2022. The decrease of $0.7 million is related to favorable changes in the exchange rates.
Nine months ended September 30, 2023 compared with nine months ended September 30, 2022
Revenue and Cost of revenue
Revenues were $27.0 thousand in the nine months ended September 30, 2023, compared with $60.0 thousand in the same period of 2022. Cost of revenue was $23.0 thousand in the nine months ended September 30, 2023, compared with $50.0 thousand in the same period of 2022. The decrease is mainly the results of less unit sales in 2023 compared to 2022. Both revenues and related cost of revenue for the nine months ended September 30, 2023 and 2022 are a result of sales of organic thin-film transistor (OTFT) backplanes and TRUFLEX® materials for customer assessment and development purposes.
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Other operating income
Other operating income was $0.7 million and $0.9 million the nine months ended September 30, 2023 and 2022. The primary source of the other operating income is related to a research grant and research and development tax credits.
Operating expenses
Operating expenses for the nine months ended September 30, 2023 were $8.3 million compared to $8.2 million in the same period of 2022.
Research and development expenses are incurred for the development of TRUFLEX® inks to make OTFT circuits and consists primarily of payroll and technical development costs. Research and development expenses were $4.1 million and $4.2 million for the nine months ended September 30, 2023 and 2022. The decrease of $0.1 million is primarily due to the reduction of personnel and professional service fee expenses. The research and development expenses represents 49.4% and 50.9% of total operating expenses for the nine months ended September 30, 2023 and 2022, respectively.
Selling, general and administrative expenses consist primarily of payroll and professional services such as accounting, legal services and investor relations, These expenses represent 48.4% and 49.1% of our total operating expenses for the nine months ended September 30, 2023 and 2022, respectively. Selling, general and administrative expenses were $4.0 million for the nine months ended September 30, 2023, as compared to $4.0 million for the nine months ended September 30, 2022.
Losses on foreign currency transactions related to operating expense were $0.2 million for the nine months ended September 30, 2023.
Non-Operating income/(expense)
Issuance costs of $0.2 million allocated to the warrant liability were expensed in full during the nine months ended September 30, 2023. The majority of costs were legal, placement and consulting fees specifically related to the private placement transaction. We recorded a gain of $0.5 million related to the valuation of the warrant liability for the nine months ended September 30, 2023. There were no similar gains or losses during the same period of the prior year. We recorded gains on foreign currency transactions related to intercompany loans of $0.2 million for the nine months ended September 30, 2023 compared to the losses of $3.1 million for the nine months ended September 30, 2022. The increase of $3.3 million is related to the favorable changes in the exchange rates.
Liquidity and Capital Resources
To date, we have funded our liquidity and capital requirements primarily with proceeds from the private sale of our equity and debt securities and borrowing against our research and development credits. As of September 30, 2023, our cash and cash equivalents were $11.2 million compared with $4.2 million as of December 31, 2022. The increase of $7.0 million is due to net proceeds of $12.7 million received related to the June 2023 PIPE financing and was offset by cash usage of $5.6 million related to operating activities.
We believe that our existing cash as of September 30, 2023 will be sufficient to fund our operations through for the next twelve months if we continue to spend to our forecast, and that we may require additional capital funding to continue our operations and research and development activity thereafter.
Our capital commitments over the next twelve months include (a) $1.5 million to satisfy accounts payable and accrued expenses and (b) $0.2 million to satisfy the lease liabilities. Additional capital commitments beyond the next twelve months include $0.1 million of lease liabilities.
Critical Accounting Estimates
We allocated part of the proceeds of private placement of the Series A-1 and Series A-2 Preferred Stock to warrant liability relating to the warrants issued in connection with the transaction. The valuations of the
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warrants were determined using option pricing models. These models use inputs such as the underlying price of the shares issued at the measurement date, volatility, risk free interest rate and expected life of the instrument. We have classified the warrants as a long-term liability due to certain provisions relating to the holders’ ability to exercise the warrants beyond twelve months of the reporting date and has accounted for them as derivative instruments in accordance with ASC 815, adjusting the fair value at the end of each reporting period.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim reporting. Other than the accounting for the valuation of warrant liability, during the three and nine months ended September 30, 2023, there were no material changes to our critical accounting policies as reported in the 10-K. A description of certain accounting policies that may have a significant impact on amounts reported in the financial statements is disclosed in Note 3 to the audited consolidated financial statements contained in the 10-K.
Warrant Liability
We account for our outstanding warrants in accordance with the guidance contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging, under which warrants that do not meet the criteria for equity treatment must be recorded as liabilities. In accordance with that guidance, we have classified our outstanding warrants as liabilities at their fair value and adjust the warrants to fair value in respect of each reporting period. The valuation of the warrant liability is determined using an option pricing model. This model uses inputs such as the underlying price of the shares issued at the measurement date, expected volatility, risk free interest rate and expected life of the instrument. Since our common stock was not publicly traded until February 2022 there has been insufficient volatility data available. Accordingly, we have used an expected volatility based on historical common stock volatility of our peers. In addition, we have used the probability of uplisting as an input in the model to determine the fair value of the warrant liability as certain features of the warrants will be eliminated or adjusted upon an uplisting. We will adjust the fair value of the warranty liability at the end of each reporting period.
Issuance Costs
We have assessed the issuance cost in connection with the issuance of an equity offering. ASC 340-10-S99-1 states that specific incremental costs directly attributable to a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering. Analogizing to that guidance, specific incremental costs directly attributable to the issuance of an equity contract to be classified in equity should generally be recorded as a reduction in equity. However, issuance costs for equity contracts that are classified as a liability are required to be expensed immediately. The issuance costs are allocated to the equity and liability components of the underlying transaction on a basis of the allocated fair value of the gross proceeds in the overall transactions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023, because of the material weaknesses in internal control over financial reporting described below.
Material Weakness in Internal Control Over Financial Reporting
In connection with the preparation of the financial statements for the second quarter of 2023 a material weakness in the Company’s internal control over financial reporting was identified relating to the complex financial reporting and accounting associated with the Company’s June 2023 private placement, a non-cash item. None of the Company’s filed financial statements are impacted. The September 30, 2023 financial statements contained in this Form 10-Q reflect the appropriate accounting for this transaction and no prior financial statements were impacted.
Remediation
In connection with the preparation of its quarterly report for the three and nine months ended September 30, 2023 the Company implemented and used the adjusted review procedures. Management continues to implement measures designed to ensure that the control deficiency contributing to the material weakness is remediated, such that the controls are designed, implemented, and operating effectively. The remediation actions include the enhancement of control activity evidence, improvement of management review controls, and recording of the fair value of the warrant liability.
While we believe that these actions will be sufficient to remediate the material weakness, it will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2023.
Changes in Internal Controls over Financial Reporting
Aside from the steps taken to address the material weakness discussed above, there were no other changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act) that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the 10-K, which could materially affect our business, financial condition or future results. The risks described in the 10-K may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Except as set forth below there have been no material changes to the risk factors previously disclosed in the 10-K.
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In order to comply with environmental laws and regulations, we may need to modify our activities or incur substantial costs, and such laws and regulations, including any failure to comply with such laws and regulations, could subject us to substantial costs, liabilities, obligations and fines.
We must comply with federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of materials used in our products and manufacturing processes. Our failure to comply with such regulations could result in significant fines, suspension of production, cessation of operations or future liabilities. Such regulations could also require us in the future to incur significant expenses to comply with such regulations. Our use of potentially hazardous materials could also restrict our ability to manufacture or sell our products to certain countries, require us to modify our logistics, or require us to incur other significant costs and expenses.
For example, in February 2023 the Member States Committee of the European Chemicals Agency, or the ECHA, published a report and supporting annexes related to a proposal to ban the manufacturing, placing on the market, and use of per-and polyfluoroalkyl substances (“PFAS”) in the European Union. In this regulatory process, more than 10,000 substances, including chemicals we use, are being considered for potential broad regulatory action. We submitted evidence in September 2023 supporting requests to be exempt from the ban for specific uses of PFAS, both in materials formulations and packaging materials for chemicals. If the PFAS ban in the EU is ultimately enacted, and our derogation requests are not granted, we will not be able to manufacture and sell our products in the EU as they are currently manufactured, and our business would be adversely affected. In addition, any exemptions may be limited in time, and in such case, we would eventually be required to eliminate the use of PFAS in our products, which may make it more expensive for us to manufacture, sell and ship our products.
Environmental laws and regulations continue to expand with a focus on reducing or eliminating hazardous substances in electronic products and it may be difficult for us to timely comply with any future environmental laws applicable to us. In addition, we may have to write off inventory if we hold unsaleable inventory as a result of changes to regulations. These requirements may increase our own costs, as well as those passed on to us by our supply chain.
The terms of the June 2023 PIPE contain restrictions on our operations and on our ability to raise additional capital that may have an adverse effect on us.
The terms of the June 2023 PIPE include a number of restrictions on our operations and on our ability to raise additional capital. The Purchase Agreement, among other things, provides that, for a period ending on June 14, 2024, we may not use cash from operating activities (as defined under U.S. generally accepted accounting principles) of more than an average of $2.8 million for any consecutive three-month period (subject to certain exceptions). This provision may cause us to delay certain actions that may benefit our business and may prevent us from pursuing potentially favorable business opportunities, even if a majority of our board of directors believes such actions or opportunities are in the best interest of our company and our stockholders.
Under the terms of the Purchase Agreement, for a period ending on December 15, 2025, in the event that we issue common stock or common stock equivalents in a subsequent financing (as defined in the Purchase Agreement), the significant purchasers (defined in the Purchase Agreement as a purchaser acquiring at least 1,000 shares of Series A-1 Preferred Stock) will have the right to purchase up to 40% of the securities sold in the subsequent financing. This provision may make it more difficult for us to raise additional capital because other investors may want to provide all, or a larger portion of the capital provided in the subsequent financing or may be unwilling to co-invest with one or more of the significant purchasers or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers.
In addition, during such period, we may not issue common stock or common stock equivalents in a subsequent financing with an effective price per share of common stock that is or may become lower than the then-effective conversion price of the Series A-1 Preferred Stock without the consent of the significant purchasers, which must include AIGH Investment Partners LP and its affiliates for so long as they are holding at least $1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement. This provision may prevent us from obtaining additional capital on market terms even if a majority of our board of directors believes that the terms of the subsequent financing are in the best interests of our company and our
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stockholders. This provision may also have the effect of increasing the cost of obtaining additional capital either because the significant purchasers refuse to consent to any such subsequent financing unless provided by them on terms approved by them or because we are required to provide additional consideration to such significant purchasers in exchange for their consent.
In the event that we issue common stock or common stock equivalents in a subsequent financing prior to the time our common stock is listed on a national securities exchange, the Purchase Agreement provides that if a significant purchaser reasonably believes that any of the terms and conditions of the subsequent financing are more favorable to an investor in the subsequent financing than the terms of the June 2023 PIPE, such significant purchaser has the right to require us to amend the terms of the June 2023 PIPE to include such more favorable term for such significant purchaser. This provision may make it more expensive to obtain additional capital prior to an uplisting because it permits any significant purchaser to “cherry pick” the terms of the subsequent financing and to require any term deemed to be more favorable to be included retroactively in the terms of the June 2023 PIPE. This provision also potentially creates uncertainty around the terms of a subsequent financing because the significant purchasers have the right to review terms of a completed subsequent financing before deciding which, if any, of the terms thereof they find more favorable to them.
The Purchase Agreement provides that, until June 14, 2025, a significant purchaser may participate in a subsequent transaction by exchanging some or all of its Series A-1 Preferred Stock having a stated value equal to its subscription amount in the subsequent financing. This provision may adversely affect the amount of capital we raise in a subsequent financing, as it permits a significant purchaser to roll its existing investment into the new financing rather than being required to invest cash. This provision also has the potential to make it more difficult for us to raise additional capital as other investors may want to provide all or a larger portion of the capital provided in the subsequent financing or may require us to raise a minimum amount of new capital or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers in cash.
If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce or terminate commercialization, our research and product development, or grant rights to develop and market our products that we would otherwise prefer to develop and market ourselves and may have a material adverse effect on our business, financial condition and results of operations.
The Series A-1 Preferred Stock contains certain terms and restrictions that may have a material adverse effect on our business, financial condition and results of operations.
The Series A-1 Preferred Stock provides that if the volume weighted average price of our common stock for the 30-day period ending on December 14, 2024 is less than the then-current conversion price of the Series A-1 Preferred Stock, the Series A-1 Preferred Stock will accrue dividends at an annual rate of 19.99% of the stated value thereof. Those dividends must be paid in cash unless certain equity conditions are met, in which case we may pay such dividends by issuing shares of common stock having a per share value equal to 90% of the volume weighted average price of our common stock for the 10-day period ending on the date of payment. No assurance can be given that we would satisfy the conditions permitting us to pay dividends on the Series A-1 Preferred Stock in shares of common stock. Any cash dividends required to be paid would materially and adversely affect our financial condition. Even if we are able to pay such dividends in shares of common stock, the issuance of such shares would have a dilutive effect on the ownership interests of the holders of our common stock.
Among other things, the Series A-1 Preferred Stock prohibits us from (i) issuing additional shares of preferred stock ranking on a parity as to dividends or upon liquidation, (ii) incurring more than $1,000,000 in new debt, (iii) granting liens and security interests on our assets (subject to certain exceptions), or (iv) repurchasing shares of common stock, common stock equivalents or junior securities (as defined in the certificate of designation) subject to certain exceptions, or paying dividends on junior securities debt, without the vote or consent of the holders of a majority of the then outstanding shares of Series A-1 Preferred Stock which must include AIGH Investment Partners LP and its affiliates for so long as they are holding at least $1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement. These restrictions have the potential to limit our ability to issue shares of preferred stock to raise capital as investors are unlikely to invest in preferred stock which is structurally subordinated to the Series A-1 Preferred Stock or to make the use of preferred stock more expensive as investors are likely to demand premium terms to invest in a series of junior
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preferred stock. These provisions may also have the effect of increasing the cost of obtaining additional capital either because the holders of the Series A-1 Preferred Stock refuse to consent to the issuance of a parity series of preferred stock unless issued to them on terms approved by them or because we are required to provide additional consideration to such holders in exchange for their consent. The restrictions on our ability to incur debt or grant liens on our assets may prevent us from acquiring equipment or other assets using purchase price financing or leasing even if the acquisition of such equipment or other assets is in the best interests of our stockholders.
The terms and restrictions summarized above may have a material adverse effect on our business, financial condition and results of operations.
The transfer of our technology and manufacturing know-how to a third-party commercial manufacturer may result in unanticipated costs and delays that could have a material and adverse effect our business, financial condition and results of operations.
We do not have the ability to produce our flexible transistors at commercial scale. We have recently engaged a third-party foundry service in Taiwan to assist us in developing a commercial manufacturing process for our products with the ultimate goal of enabling one or more third parties to manufacture our products at commercial scale for customers that do not have their own facilities. While we believe that display products utilizing our proprietary OTFTs can be made using existing commercial processes, we expect that transferring our technology and manufacturing know-how to a third-party manufacturer will be a time-intensive and costly process. We may also be required to adapt our manufacturing processes to enable our display products to be made at commercial scale. Any contract manufacturer will be required to manufacture products to our customers’ specifications. We may be required to expend significant management and financial resources to enable contract manufacturers to meet those specifications. In addition, any contract manufacturer may not be able to manufacture products meeting the required specifications at the cost, in the volume or on the schedule that we expect. As a result, we may be subject to unanticipated costs and delays that could have a material adverse effect on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
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EXHIBIT INDEX
Exhibit No. | Description |
2.1 * | |
3.1† | Amended and Restated Certificate of Incorporation of the Registrant, as amended to date |
3.2 | |
3.3† | Certificate of Designation of Preferences, Rights and Limitations of Series A-1 Preferred Stock |
3.4 | |
10.1 | |
31.1† | |
31.2† | |
32.1†† | |
32.2†† | |
101.INS† | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH† | Inline XBRL Taxonomy Extension Schema Document |
101.CAL† | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF† | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB† | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE† | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104† | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
* Annexes, schedules and/or exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant hereby undertakes to furnish supplementally a copy of any of the omitted schedules and exhibits to the SEC on a confidential basis upon request.
† Filed herewith.
†† This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: November 13, 2023
SMARTKEM, INC. | ||
By: | /s/ Ian Jenks | |
Name: | Ian Jenks | |
Title: | Chief Executive Officer and Chairman of the Board | |
(Principal Executive Officer) | ||
By: | /s/ Barbra C. Keck | |
Name: | Barbra C. Keck | |
Title: | Chief Financial Officer | |
(Principal Financial Officer) | ||
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