SmartKem, Inc 10-Q for FY2024 Q3
SmartKem, Inc. (SMTK)
About this 10-Q
SmartKem, Inc filed this 10-Q on November 8, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net loss
- $2.84M
- compared with a net loss of $3.02M a year earlier
- Diluted EPS
- -$0.86
- compared with -$1.78 a year earlier
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)
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(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:
Title of each class |
| Trading Symbol(s) |
| Name of exchange on which registered |
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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.
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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 8, 2024, there were
TABLE OF CONTENTS
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| Unaudited Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 | 3 |
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| 7 | |
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| Notes to the Unaudited Interim Condensed Consolidated Financial Statements | 8-23 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |
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2
Item 1. Financial Statements
SMARTKEM, INC.
Condensed Consolidated Balance Sheets
(in thousands, except number of shares and per share data)
| | September 30, | | December 31, | ||
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| 2024 | | 2023 | ||
| | (Unaudited) | | | | |
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 | | $ | | | $ | |
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Liabilities and stockholders’ equity | |
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Current liabilities | | | | | | |
Accounts payable and accrued expenses | | $ | | | $ | |
Lease liabilities, current | |
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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 7) | |
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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 | | $ | | | $ | |
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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, | ||||||||
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| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
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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(Gain)/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 | | | — | | | | | | | | | |
Interest income/(expense) | |
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Total non-operating income/(expense) | |
| ( | |
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Loss before income taxes | | | ( | | | ( | | | ( | | | ( |
Income tax expense | | | — | | | — | |
| ( | |
| — |
Net loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
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Net loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Other comprehensive loss: | |
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Foreign currency translation | |
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Total comprehensive loss | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
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Common share data: | | | | | | | | | | | | |
Basic net loss per common share* | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Diluted net loss per common share* | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Dividend per common share | | $ | — | | $ | — | | $ | ( | | $ | — |
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Weighted average number of basic shares outstanding* | | | | | | | | | | | | |
Weighted average number of diluted shares outstanding* | | | | | | | | | | | | |
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* reflects a one-for-thirty-five (1:) reverse stock split effected on September 21, 2023 | ||||||||||||
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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)
| | Preferred Stock | | Common stock | | Additional | | Accumulated 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, 2024 | | | | $ | — | | | | $ | — | | $ | | | $ | ( | | $ | ( | | $ | |
Stock-based compensation expense | | — | |
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Issuance of stock awards | | — | |
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Issuance of common stock to vendor | | — | |
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Conversion of Preferred stock into common stock | | ( | |
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Exchange of Preferred stock into common stock warrants | | ( | |
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Deemed dividend on extinguishment of Preferred stock | | — | |
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Cashless 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 March 31, 2024 | | | | $ | — | | | | $ | — | | $ | | | $ | ( | | $ | ( | | $ | |
Stock-based compensation expense | | — | |
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Issuance of common stock to vendor | | — | |
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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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Fair value of warrants reclassified from liability to equity | | — | |
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Foreign currency translation adjustment | | — | |
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Net loss | | — | |
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Balance at June 30, 2024 | | | | $ | — | | | | $ | — | | $ | | | $ | ( | | $ | ( | | $ | |
Stock-based compensation expense | | — | |
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Issuance of common stock to vendor | | — | |
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Conversion of Preferred stock into common stock | | ( | |
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Foreign currency translation adjustment | | — | |
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Net loss | | — | |
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Balance at September 30, 2024 | | | | $ | — | | | | $ | — | | $ | | | $ | ( | | $ | ( | | $ | |
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5
SMARTKEM, INC.
Condensed Consolidated Statements of Stockholders’ Equity (continued)
(Unaudited)
(in thousands, except share data)
| | Preferred Stock | | Common stock | | Additional | | Accumulated 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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Issuance of common stock to vendor | | — | |
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Foreign currency translation adjustment | | — | |
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| ( | |
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Net loss | | — | |
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| ( | |
| ( |
Balance at March 31, 2023 | | — | | $ | — | | | | $ | — | | $ | | | $ | ( | | $ | ( | | $ | |
Stock-based compensation expense | | — | |
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Issuance of preferred stock, net of issuance costs | | | |
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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, 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 | | | | $ | — | | | | $ | — | | $ | | | $ | ( | | $ | ( | | $ | |
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* reflects a one-for-thirty-five (1:) 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, | ||||
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| 2024 |
| 2023 | ||
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 | | | | | | |
Loss on foreign currency transactions | | | | | | ( |
Transaction costs allocable to warrants | | | — | | | |
Change in fair value of the warrant liability | | | ( | | | ( |
Change in operating assets and liabilities: | | | | | | |
Accounts receivable | | | | | | ( |
Research and development tax credit receivable | | | ( | | | |
Prepaid expenses and other current assets | | | | | | ( |
Other non-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 | | | — | | | |
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 | | | | |
| ( |
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Net change in cash | |
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Cash, beginning of period | | | | | | |
Cash, end of period | | $ | | | $ | |
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Supplemental disclosure of cash and non-cash investing and financing activities | |
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Issuance of common shares for consulting services | | $ | | | $ | |
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, GOING CONCERN 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 revolutionize the display industry. The Company’s patented TRUFLEX® liquid semiconductor polymers are used to make a new type of transistor that can be used in a number of display technologies including next generation microLED displays. The Company’s inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing technology. The Company develops its materials at its research and development facility in Manchester, UK and provides prototyping services at the Centre for Process Innovation (“CPI”) at Sedgefield, UK. The Company entered into a technology transfer agreement (TTA) with the Industrial Technology Research Institute (ITRI) in Taiwan for product prototyping on its Gen2.5 fabrication line and it also has 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 development 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.
Going Concern
The Company has incurred continuing losses including net losses of $
The Company expects that its cash and cash equivalents of $
8
its operations and research development activity thereafter. It is possible this period could be shortened if there are any significant increases in spending or more rapid progress of development programs than anticipated.
The Company’s future viability is dependent on its ability to raise additional capital to fund its operations. The Company will need to obtain additional funds to satisfy its operational needs and to fund its sales and marketing efforts, research and development expenditures, and business development activities. Until such time, if ever, as the Company can generate sufficient cash through revenue, management’s plans are to finance the Company’s working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. If the Company raises additional funds by issuing equity securities, the Company’s existing security holders will likely experience dilution. If the Company borrows money, the incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that could restrict its operations. If the Company enters into a collaboration, strategic alliance or other similar arrangement, it may be forced to give up valuable rights. There can be no assurance however that such financing will be available in sufficient amounts, when and if needed, on acceptable terms or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including the market demand for the Company’s products and services, the quality of product development efforts, management of working capital, and continuation of normal payment terms and conditions for purchase of services. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows for operations, then the Company will need to raise additional funding.
There is substantial doubt that the Company will be able to pay its obligations as they fall due, and this substantial doubt is not alleviated by management plans. The condensed consolidated financial statements as of September 30, 2024 have been prepared assuming that the Company will continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
Basis of Presentation
The unaudited interim condensed consolidated financial statements of the Company as of September 30, 2024 and December 31, 2023 and for the three and nine months ended September 30, 2024 and 2023 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, 2023 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024 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, 2024 and 2023; 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.
9
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.
The Company records, when necessary, deemed dividends for: (i) the exchange of preferred shares for pre-funded warrants, based on the fair value of the pre-funded warrants in excess of the carrying value of the preferred shares and (ii) the amendment of preferred stock accounted for as an extinguishment, based on the fair value of the preferred stock immediately before and after the amendments.
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 relate to the valuation of common stock, fair value of stock 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 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.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures which will require companies to disclose significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”). The pronouncement is effective for annual filings for the year ended December 31, 2024. The Company is still assessing the impact of the adoption of this standard.
On December 14, 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures which applies to all entities subject to income taxes. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to provide more detailed income tax disclosures. For public business entities (PBEs), the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is still assessing the impact of the adoption of this standard but does not expect it to have a material impact on its results of operations, financial position or cash flows.
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3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
| | September 30, | | December 31, | ||
(in thousands) |
| 2024 | | 2023 | ||
Prepaid insurance | | $ | | | $ | |
Research grant receivable | | | | | | |
Prepaid facility costs | | | | | | |
VAT receivable | | | | | | |
Prepaid software licenses | | | | | | |
Prepaid professional service fees | |
| — | |
| |
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) |
| 2024 | | 2023 | ||
Plant and equipment | | $ | | | $ | |
Furniture and fixtures | |
| | |
| |
Computer hardware and software | |
| | |
| |
| |
| | |
| |
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) |
| 2024 | | 2023 | ||
Accounts payable - trade | | $ | | | $ | |
Payroll liabilities | |
| | |
| |
VAT payable | | | | | | — |
Accrued expenses – audit & accounting fees | |
| — | |
| |
Accrued expenses – technical fees | |
| | |
| |
Accrued expenses – other | |
| | |
| |
Total accounts payable and accrued expenses | | $ | | | $ | |
| | | | | | |
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.
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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) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Operating lease cost | | $ | | | $ | | | $ | | | $ | |
Short-term lease cost | |
| | |
| — | |
| | |
| |
Variable lease cost | |
| — | |
| | |
| — | |
| |
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) | | 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Research and development | | $ | | | $ | | | $ | | | $ | |
Selling, general and administrative | |
| | |
| | |
| | |
| |
Total lease cost | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | |
Right of use lease assets and lease liabilities for the Company’s operating leases were recorded in the unaudited condensed consolidated balance sheet as follows:
|
| September 30, | | December 31, | ||
(in thousands) |
| 2024 |
| 2023 | ||
Assets | | |
|
| |
|
Right of use assets - Operating Leases | | $ | | | $ | |
Total lease assets | | $ | | | $ | |
| | | | | | |
Liabilities | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Lease liability, current - Operating Leases | | $ | | | $ | |
Noncurrent liabilities: | |
|
| |
| |
Lease liability, non-current - Operating Leases | |
| | |
| |
Total lease liabilities | | $ | | | $ | |
| | | | | | |
The Company had
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) | | 2024 |
| 2023 | ||
Operating cash outflows from operating leases | | $ | | | $ | |
Supplemental non-cash amounts of operating lease liabilities arising from obtaining right of use assets | | $ | | | $ | |
| | | | | | |
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, | |
| | 2024 | |
Weighted average remaining lease term (in years) – operating leases | | | |
Weighted average discount rate – operating leases | | | |
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Remaining maturities of the Company’s operating leases, excluding short-term leases, are as follows:
| | September 30, | |
(in thousands) | | 2024 | |
2024 | | $ | |
2025 | | | |
2026 | | | |
2027 | | | |
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 “2023 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-.
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
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of Series A-1 Preferred Stock The following is a summary of the principal amended and restated terms of the Series A-1 Preferred Stock as set forth in the Amended and Restated Series A-1 Certificate of Designation:
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 $
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.
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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
Trading Market
There is no established trading market for any of the Series A-1 Preferred Stock, and we do not expect a market to develop. We do 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
15
(the “Series A-2 Certificate of Designation”). The following is a summary of the principal terms of the Series A-2 Preferred Stock as set forth in the Series A-2 Certificate of Designation:
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 $
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
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of
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)
Each Class A Warrant has an exercise price of $
There were an additional
The Company had 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 could 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. Upon the Company’s May 31, 2024 uplisting to the Nasdaq Capital Market the provisions relating to the adjustment in the number of shares were no longer in effect. Additionally, the Company re-evaluated the pre-specified volatility input and determined that this did not preclude the Warrants from being considered indexed to the Company’s stock. As a result, the Warrants are accounted for as an equity instrument beginning on May 31, 2024.
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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 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 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.
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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.
Consent, Conversion and Amendment Agreement
On January 26, 2024, the Company entered into a Consent, Conversion and Amendment Agreement (the “Consent Agreement”) with each holder of the Series A-1 Preferred Stock (each a “Holder” and together, the “Holders”). Pursuant to the Consent Agreement, each Holder converted, subject to the terms and conditions of the Consent Agreement,
Under the Consent Agreement, the Company issued (i)
Pursuant to the Consent Agreement, the Company and the Holders agreed to amend and restate the Certificate of Designation of Preferences, Rights and Limitations for the Series A-1 Preferred Stock (the “Amended and Restated Series A-1 Certificate of Designation”) to (i) make certain adjustments to reflect the Reverse Split, (ii) remove all voting rights, except as required by applicable law, (iii) increase the stated value of the Series A-1 Preferred Stock to $
The Company credited additional paid in capital $
As of September 30, 2024, there were an aggregate of
Common Stock
Voting Rights
Each holder of common stock is entitled to
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vote, present in person or represented by proxy, constitutes a quorum for the transaction of business at all meetings of the stockholders.
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.
Common Stock Issued to Vendors for Services
On September 10, 2024, the Company issued
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, 2024 |
| | | | $ | | $ | |
| |
Issued |
| — | | | | | | — |
|
|
Exercised |
| ( | | | | |
| |
|
|
Expired |
| — | | | | |
| — |
|
|
Warrants outstanding at September 30, 2024 |
| | | | $ | | $ | |
| |
| | | | | | | | | | |
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, 2024 |
| | | $ | | |
Issued |
| | |
| | |
Exercised |
| — | |
| | |
Expired |
| — | |
| | |
Pre-funded warrants outstanding at September 30, 2024 |
| | | $ | | |
| | | | | | |
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 2023 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 reserved for
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issuance under the 2021 Plan from
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 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.
The Company did not issue any options during the three months ended September 30, 2024. During the nine months ended September 30, 2024, the Company issued options for
The following table reflects share activity under the share option plans for the nine months ended September 30, 2024:
| | | | | |
| 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, 2024 |
| |
| $ | |
|
| $ | |
| | | |
Exercised | | — | | | — | | | | | | | | |
Cancelled/Forfeited |
| ( |
|
| |
|
|
|
|
|
| | |
Expired |
| — |
|
| — |
|
|
|
|
|
| | |
Granted |
| |
|
| |
|
|
|
|
|
| | |
Options outstanding at September 30, 2024 |
| |
| $ | |
|
| $ | |
| | | |
Options exercisable at September 30, 2024 | | | | $ | | | | | | | $ | ||
| | | | | | | | | | | | | |
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) | | 2024 |
| 2023 |
| 2024 |
| 2023 | | ||||
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, 2024 was $
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.
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
(in thousands, except share data) | | 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Net loss - basic | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Preferred stock dividends | | | — | | | — | | | ( | | | — |
Net loss - diluted | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
| | | | | | | | | | | | |
Weighted average shares outstanding - basic* | | | | | | | | | | | | |
Weighted average shares outstanding - diluted* | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net loss per common share - basic* | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Net loss per common share - diluted* | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Dividend per common share | | $ | - | | $ | - | | | ( | | | - |
| | | | | | | | | | | | |
* reflects a one-for-thirty-five (1:) reverse stock split effected on September 21, 2023 | | | | | | | ||||||
| | | | | | | | | | | | |
The following potentially dilutive securities were excluded from the computation of earnings per share as of September 30, 2024 and 2023 because their effects would be anti-dilutive:
| | September 30, | ||||
|
| 2024 | | 2023 | ||
Common stock warrants | | | | | | |
Assumed conversion of preferred stock | | | | | | |
Stock options | | | | | | |
Total | | | | | | |
| | | | | | |
At September 30, 2024, the Company had
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| | 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
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) | | 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
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 during the nine months ended September 30, 2024:
(in thousands) | | Warrant Liability | |
Balance at January 1,2024 | | $ | |
Total change in the liability included in earnings | |
| ( |
Reclass from liability to equity | | | ( |
Balance at September 30, 2024 | | $ | — |
| | | |
The valuation of the warrants was 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 initially accounted for the warrants as derivative instruments in accordance with ASC 815, adjusting the fair value at the end of each reporting period. Upon the Company’s uplisting to the Nasdaq Capital Market on May 31, 2024 certain provisions within the warrant agreements were no longer in effect. As a result, the warrants are accounted for as an equity instrument with the balance of the derivative liability on May 31, 2024 being transferred to Additional Paid-In Capital.
The fair value of the common warrants was determined by using an option pricing model assuming the following:
| | May-24 | | December 31 | ||
| | 2024 |
| 2023 | ||
Expected term (years) |
| | | | ||
Risk-free interest rate |
| | | | ||
Expected volatility |
| | | | ||
Expected dividend yield |
| | | | ||
| | | | | | |
Additionally, the Company had determined that the warrant liability was most appropriately 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 the Company’s common 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 was most appropriately classified within Level 3 of the fair value hierarchy.
The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of December 31, 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 | | December 31, | ||||
| | (Level 1) | | (Level 2) | | (Level 3) | | 2023 | ||||
Description | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Warrant liability | | $ | — | | $ | — | | $ | | | $ | |
Total liabilities | | $ | — | | $ | — | | $ | | | $ | |
| | | | | | | | | | | | |
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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, 2023 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, 2023 (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 ability to comply with the continued listing requirements of Nasdaq; |
| ● | our estimates of our expenses, ongoing losses, future revenue and capital requirements, including |
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 revolutionize the display industry. Our patented TRUFLEX® liquid semiconductor polymers are used to make a new type of transistor that can be used in a number of display technologies, including next generation microLED displays. Our inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing technology.
We develop our materials at our research and development facility in Manchester, UK, and provide prototyping services at the Centre for Process Innovation (“CPI”) at Sedgefield, UK. We have entered into a technology transfer agreement (TTA) with the Industrial Technology Research Institute (“ITRI”) in Taiwan for product prototyping on its Gen2.5 fabrication line. We also have 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 $7.6 million and $7.1 million for the nine months ended September 30, 2024 and 2023. As of September 30, 2024, our accumulated deficit was $109.8 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.
Results of Operations for the three and nine months ended September 30, 2024
Three months ended September 30, 2024 compared with three months ended September 30, 2023
Revenue and Cost of revenue
We had no revenue or cost of revenue in the three months ended September 30, 2024. We had revenue of $3.0 thousand and cost of revenue of $1.0 thousand in the same period of 2023. Both revenues and related cost of
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revenue are a result of sales of 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, 2024, compared to $0.3 million in the same period of 2023. The primary source of the income is related to a research grant and research and development tax credits.
Operating expenses
Operating expenses were $3.1 million for each of the three months ended September 30, 2024 and 2023.
Research and development expenses are incurred for the development of TRUFLEX® inks to make OTFT circuits and consist primarily of payroll and technical development costs. The research and development expenses represent 48.1% and 53.1% of the total operating expenses for the three months ended September 30, 2024 and 2023, respectively. Research and development expenses decreased $64 thousand for the three months ended September 30, 2024 compared to the same period for the prior year. This decrease is primarily related to lower personnel expenses, offset in part by higher technical service costs.
Selling, general and administrative expenses consist primarily of payroll and professional services such as accounting, legal services and investor relations. These expenses represent 50.5% and 42.9% of our total operating expenses for the three months ended September 30, 2024 and 2023, respectively. Selling, general and administrative expenses increased by $0.3 million for the three months ended September 30, 2024 compared to the same period for the prior year. This increase was primarily a result of an increase in personnel expenses as well as professional service fees primarily related to business development initiatives.
Non-Operating income/(expense)
We had a gain of $0.5 million for the three months ended September 30, 2023 related to the valuation of the warrant liability, with no similar gain in the same period of 2024. We recorded a loss on foreign currency of $0.8 million for the three months ended September 30, 2023, with no similar loss in the same period of 2024.
Nine months ended September 30, 2024 compared with nine months ended September 30, 2023
Revenue and Cost of revenue
We had revenue of $40.0 thousand and cost of revenue of $32.0 thousand in the nine months ended September 30, 2024. We had revenue of $27.0 thousand and cost of revenue of $23.0 thousand in the same period of 2023. Both revenues and related cost of revenue for the nine months ended September 30, 2024 and 2023 are a result of sales of OTFT backplanes and TRUFLEX® materials for customer assessment and development purposes.
Other operating income
Other operating income was $0.7 million in the nine months ended September 30, 2024 , compared to $0.7 million in the same period of 2023. The primary source of the income is related to a research grant and research and development tax credits.
Operating expenses
Operating expenses were $8.8 million for the nine months ended September 30, 2024, compared to $8.3 million in the same period of 2023, an increase of $0.5 million.
Research and development expenses are incurred for the development of TRUFLEX® inks to make OTFT circuits and consist primarily of payroll and technical development costs. The research and development expenses represent 44.8% and 49.4% of the total operating expenses for the nine months ended September 30, 2024 and 2023, respectively. Research and development expenses decreased $0.1 million for the
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nine months ended September 30, 2024 compared to the same period for the prior year. This decrease is primarily related to lower personnel expenses, offset in part by higher technical service costs.
Selling, general and administrative expenses consist primarily of payroll and professional services such as accounting, legal services and investor relations. These expenses represent 54.4% and 48.4% of our total operating expenses for the nine months ended September 30, 2024 and 2023, respectively. Selling, general and administrative expenses increased by $0.8 million for the nine months ended September 30, 2024 compared to the same period for the prior year. This increase was primarily a result of an increase in personnel expenses as well as professional service fees primarily related to the NASDAQ uplisting and business development initiatives.
Non-Operating income/(expense)
We recorded a gain of $0.7 million related to the valuation of the warrant liability for the nine months ended September 30, 2024 compared to a gain of $0.5 million for the same period in 2023. We had transaction costs of $0.2 million related to a private placement financing for the nine months ended September 30, 2023 with no similar costs in the same period of 2024. We recorded a loss on foreign currency transactions of $0.2 million for the nine months ended September 30, 2024 compared to gain of $0.2 million in the same period in 2023.
Liquidity and Capital Resources
As of September 30, 2024, our cash and cash equivalents were $1.8 million compared with $8.8 million as of December 31, 2023. We believe this will not be sufficient to fund our operating expenses and capital expenditure requirements for the 12 months from the issuance of these financial statements and that we will require additional capital funding to continue our operations and research development activity. It is possible this period could be shortened if there are any significant increases in spending or more rapid progress of development programs than anticipated.
Our expected cash payments over the next twelve months include (a) $1.6 million to satisfy accounts payable and accrued expenses and (b) $0.2 million to satisfy the lease liabilities. Additional expected cash payments beyond the next twelve months include $31 thousand of lease liabilities.
Our future viability is dependent on our ability to raise additional capital to fund our operations. We will need to obtain additional funds to satisfy our operational needs and to fund our sales and marketing efforts, research and development expenditures, and business development activities. Until such time, if ever, as we can generate sufficient cash through revenue, management’s plans are to finance our working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. If we raise additional funds by issuing equity securities, our existing security holders will likely experience dilution. If we borrow money, the incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations. If we enter into a collaboration, strategic alliance or other similar arrangement, we may be forced to give up valuable rights. There can be no assurance however that such financing will be available in sufficient amounts, when and if needed, on acceptable terms or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including the market demand for our products and services, the quality of product development efforts, management of working capital, and continuation of normal payment terms and conditions for purchase of services. If we are unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows for operations, then we will need to raise additional funding.
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Cash Flow from Operating Activities
Net cash used in operating activities was $7.0 million for the nine months ended September 30, 2024, compared to $5.6 million for the nine months ended September 30, 2023, an increase of $1.4 million. The increase is related to the payout of bonuses and payments made related to the NASDAQ uplisting and business development initiatives.
Contractual Payment Obligations
Our principal commitments primarily consist of obligations under leases for office space and purchase commitments in the normal course of business for research and development facilities and services, communications infrastructure, and administrative services. We expect to fund these commitments from our cash balances and working capital.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), which require our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.
Fair Value Measurements
GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Our fair value measurements are generally related to a warrant liability and amendments to preferred stock. The models used for these fair value calculations 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 is so thinly traded there is insufficient volatility data available. Accordingly, we have used an expected volatility based on historical common stock volatility of our peers.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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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.
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, 2024, 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 first quarter of 2024 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 Consent, Conversion and Amendment Agreement the Company entered into on January 26, 2024, a non-cash item. None of the Company’s filed financial statements are impacted. The September 30, 2024 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, 2024 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.
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 2024.
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.
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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.
Certain of our partners are and many of our potential customers will be located in Taiwan, which increases the risk that a natural disaster, epidemic, labor strike, war or political unrest could have a material adverse effect on our business, financial condition and results of operations.
Certain of our partners, including The Industrial Technology Research Institute of Taiwan (“ITRI”), are located in Taiwan. In addition, we expect that many of our potential customers will be located in Taiwan, where the bulk of display manufacturing occurs. From time to time, Taiwan has been impacted by significant seismic activity in the area, including earthquakes and related aftershocks, and it is expected that similar events will happen in the future. Because of the relatively small size of Taiwan and the proximity of our partners and future customers to each other, earthquakes, tsunamis, fires, floods, other natural disasters, epidemics such as the COVID-19 outbreak, political unrest, war, labor strikes or work stoppages could simultaneously affect our partners’ production capability, our ability to supply our customers, and our customers’ ability to produce products incorporating our technology. 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.
We identified a material weakness in connection with our internal financial reporting controls. Although we are taking steps to remediate this material weakness, there is no assurance we will be successful in doing so in a timely manner, or at all, and we may identify other material weaknesses.
In connection with the preparation of the financial statements for the first quarter of 2024 a material weakness in our internal control over financial reporting was identified relating to the complex financial reporting and accounting associated with the Consent, Conversion and Amendment Agreement we entered into on January 26, 2024, a non-cash item. None of the Company’s filed financial statements are impacted.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Effective internal control over financial reporting is necessary for us to provide reliable financial reporting. We continue to evaluate steps to remediate the material weakness. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will ultimately have the intended effects.
If we are not able to comply with the requirements of the Sarbanes-Oxley Act or if we are unable to maintain effective internal control over financial reporting, we may not be able to produce timely and accurate financial statements or guarantee that information required to be disclosed by us in the reports that we file with the SEC, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. Any failure of our internal control over financial reporting or disclosure controls and procedures could cause our investors to lose confidence in our publicly reported information, cause the market price of our stock to decline, expose us to sanctions or investigations by the SEC or other regulatory authorities, or impact our results of operations.
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We can give no assurance that the measures we are taking and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
If we fail to meet all applicable Nasdaq Capital Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease and our ability to access the capital markets could be negatively impacted.
Our common stock is listed on The Nasdaq Capital Market. There can be no assurance that we will be able to continue to maintain compliance with the Nasdaq continued listing requirements, and if we are unable to maintain compliance with the continued listing requirements, including the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) and the minimum stockholders’ equity requirement of $2.5 million set forth in Nasdaq Listing Rule 5550(b)(1), our shares may be delisted from Nasdaq, which could reduce the liquidity of our common stock materially and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees, suppliers, customers and business development opportunities. Such a delisting likely would impair your ability to sell or purchase our common stock when you wish to do so. Further, if we were to be delisted from Nasdaq, our common stock may no longer be recognized as a “covered security,” and we would be subject to regulation in each state in which we offer our securities. Thus, delisting from Nasdaq could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly impact the ability of investors to trade our securities and would negatively impact the value and liquidity of our common shares.
Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.
We have recognized recurring losses, and as of September 30, 2024, had an accumulated deficit of $109.8 million. We anticipate operating losses to continue for the foreseeable future due to, among other things, costs related to research funding, further development of our technology and products and expenses related to the commercialization of our products. These efforts may be more costly than we expect, and we may not be able to generate revenue to offset our increased operating expenses. We expect our cash and cash equivalents of $1.8 million as of September 30, 2024 to be insufficient to meet our operating expenses and capital expenditure requirements for at least 12 months from the filing of this 10-Q. Our forecast of the period of time through which our current financial resources will be adequate to support our operations and the costs to support our general and administrative and research and development activities are forward-looking statements and involve risks and uncertainties. Our consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
Our ability to continue as a going concern is dependent on our ability to raise additional working capital through public or private equity or debt financings or other sources, which may include collaborations with third parties. There can be no assurance, however, that such financing will be available, on acceptable terms and conditions, or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including our ability to generate significant revenue, the market demand for our products, the quality of product development efforts including potential joint collaborations, management of working capital, and the continuation of normal payment terms and conditions for purchase of services.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making
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acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or products, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements 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, it may also impact our ability to continue as a going concern. The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 10, 2024, we issued 30,000 shares of common stock to a consultant with a value of $152.4 thousand. Such issuances were exempt from registration under 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Item 6. Exhibits
See Exhibit Index.
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EXHIBIT INDEX
Exhibit No. | Description |
| |
2.1 * | |
| |
3.1 | |
| |
3.2 | |
| |
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 8, 2024
| 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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Exhibit 10.1
Joint Development Agreement (1)SmartKem Limited; and (2) Shanghai Chip Foundation Semiconductor Technology Co., Ltd. |
Dated 26-July 2024 |
Exhibit 10.1
This Agreement is made on 26 July 2024
Between
each a "party" and together referred to as "parties".
Background:
It is agreed as follows:
| 1. | Definitions and interpretation |
| 1.1 | In this Agreement, unless the context otherwise requires, the following definitions shall apply: |
"Affiliate" in relation to a party, any entity that directly or indirectly controls, is controlled by, or is under common control with that party from time to time.
"Agreement" means this agreement (including any schedule or annexure to it and any document in agreed form).
"Background Intellectual Property" any Intellectual Property, other than Foreground Intellectual Property, that is used in connection with the Project. The parties acknowledge and agree that the Smartkem Technology shall be deemed to be the Background Intellectual Property of Smartkem , and Chip foundation Technology shall be deemed to be the Background Intellectual Property of Chip foundation.
"Business Day" means a day other than a Saturday, a Sunday, a public or bank holiday in England.
2
Exhibit 10.1
"Commencement Date" means the date of this Agreement.
"Confidential Information" means all confidential information which is disclosed, or made available, directly or indirectly by one party to the other whether before, on or after the date of this Agreement, and whether orally, in writing, in electronic form or other media, which relates to a party's business including without limitation its products, operations, processes, plans or intentions, developments, trade secrets, know-how, market opportunities, personnel, suppliers and customers of the party disclosing it, any other information which is identified as being of a confidential nature or would appear to a reasonable person to be confidential and all information derived from any of the above together with the existence or provisions of the Agreement and any negotiations relating to it.
"Extended Term" has the meaning set out in clause 8.
"Final Report" means the written report prepared and agreed the parties at the completion of each Project, as more fully described in clause 2.6.
"Foreground Intellectual Property" any Intellectual Property that arises in connection with the performance of the Project, or is obtained or developed by, either party, or a contractor acting on either party's behalf, in the performance of the Project.
"Improvement" means any improvement, enhancement or modification.
"Initial Term" has the meaning set out in clause 8.
"Intellectual Property" means patents, utility models, rights to inventions, copyright and related rights, moral rights, trade marks and service marks, business names and domain names, rights in get-up, goodwill and the right to sue for passing off or unfair competition, rights in designs, database rights, rights to use, and protect the confidentiality of, confidential information (including know-how and trade secrets), semiconductor topography rights, image rights, rights in personality and similar rights, plant variety rights, and all other intellectual property rights, in each case whether registered or unregistered and including all applications and rights to apply for and be granted, renewals or extensions of, and rights to claim priority from, such rights and all similar or equivalent rights or forms of protection which subsist or will subsist now or in the future in any part of the world.
"Losses" means all losses, costs, claims, demands, actions, proceedings, fines, penalties, awards, liabilities, damages, compensation, settlements, expenses and/or professional costs and/or charges."
"Materials" means the
"Owning Party" has the meaning set out in clause 7.7(i).
"OTFT" means organic TFTs.
"Process(es)" means methods of deposition and/or treatment of materials, devices or functional layers, including material deposition, thermal and/or chemical treatment, lateral patterning, (de-)doping, etching, surface treatment, curing, or any combinations of them.
"Project" means the project between SmartKem and Chip foundation to develop Chip-first MicroLED prototype. Which including Active-matrix OTFTs and MIP module (MicroLED in Package), details of which are set out in Schedule 2, which shall be deemed completed as set out in clause 2.6.
"Project Costs" has the meaning set out in clause 3.
"Representatives" means as defined in clause 6.2(a).
"SmartKem Technology" means any Technology belonging to or used by SmartKem in relation to high performance organic semiconductor formulations and TFT interlayer materials which enable low power, robust, flexible, lightweight electronics and that are disclosed to Chip
3
Exhibit 10.1
foundation in connection with the Project, including any Technology belonging to or used by Smartkem which is embodied in or otherwise forms part of the Materials.
" Chipfoundation Technology" means any Technology belonging to or used by Chip foundation in relation to MicroLED chips and mass transfer which enable high performance MicroLED display and that are disclosed to SmartKem in connection with the Project, including any Technology belonging to or used by Chip foundation which is embodied in or otherwise forms part of the Materials.
"Technology" means all inventions, designs, information, know-how, specifications, formulae, data, processes, methods, techniques and other technology.
"Term" means the Initial Term, and any Extended Term.
"TFT" means thin-film transistor.
"MicroLED" means Micro Light Emitting Diode.
"COC1 , COC2” means Chip on Carrier 1 or Chip on Carrier 2 , alias by Chip foundation
| 1.2 | In this Agreement, unless the context otherwise requires: |
| (a) | words in the singular include the plural and vice versa; |
| (b) | a reference to a statute or statutory provision includes: |
| (i) | any subordinate legislation (as defined in section 21(1), Interpretation Act 1978) made under it; and |
| (c) | a reference to: |
| (i) | any party includes its successors in title and permitted assigns; and |
| 2. | The Project |
| 2.2 | Each party shall: |
4
Exhibit 10.1
| (c) | review the capability of each party; |
| (g) | prepare and agree the Final Report. |
| 3. | Project Costs |
| 4. | Ownership of Intellectual Property |
| 4.1 | Background Intellectual Property |
| 4.2 | The parties agree that: |
| 4.3 | Foreground Intellectual Property |
| 4.5 | The Parties agree each Party shall be the sole owner of: |
5
Exhibit 10.1
| 5. | Licences of Intellectual Property |
Each party grants to the other parties the licences set out in Schedule 1 of this Agreement. To the extent a party is permitted to grant sub-licenses under Schedule 1, such party shall ensure the sub-licensee complies at all times with the terms and conditions of this Agreement.
| 6. | Confidentiality |
| 6.2 | Each party may disclose the other party's Confidential Information: |
| (b) | as may be required by law, a court of competent jurisdiction or any governmental or regulatory authority. |
| 6.3 | The obligations contained in this clause 6 shall survive the expiry or termination of this Agreement for any reason, but shall not apply to any Confidential Information which: |
| (a) | is publicly known at the time of disclosure to the receiving party; or |
| (b) | becomes publicly known otherwise than through a breach of this Agreement by the receiving party, its officers, employees, agents or contractors; or |
6
Exhibit 10.1
| (i) | being known to it prior to disclosure; |
| (ii) | having been developed by or for it wholly independently of the other party; or |
| (iii) | having been obtained from a third party without any restriction on disclosure on such third party of which the recipient is aware, having made due enquiry; |
| 7. | Warranties |
| 7.2 | Each party shall: |
| 7.5 | Nothing in this Agreement shall constitute any representation or warranty that: |
| (a) | any patent is valid or relevant to the Project; |
7
Exhibit 10.1
| (i) | the party that owns the Intellectual Property (the "Owning Party") shall, in its absolute discretion, decide what action, if any, to take; |
| (iv) | the Owning Party shall bear the cost of any proceedings and shall be entitled to retain all sums recovered in any action for its own account. |
| 8. | Termination |
8
Exhibit 10.1
liquidator, receiver, administrative receiver, administrator, compulsory manager or other similar officer in respect of the other party or any of its assets; or (iv) the enforcement of any security over any assets of the other party; or any analogous procedure or step is taken in any jurisdiction; or
| (f) | the other party challenges or disputes the validity or ownership of any of the terminating party's Background Intellectual Property or Foreground Intellectual Property; or |
| (g) | the other party is in breach of any of its confidentiality obligations under clause 8; or |
| 8.3 | the parties may terminate this Agreement at any time by mutual written Agreement. |
| 9. | Liability |
Each party agrees during the term of this Agreement and for a period of 3 year following its termination, not to solicit or induce any officer, employee, agent or contractor of the other party or any of its Affiliates involved with the Project to terminate their employment or engagement with the other or its Affiliates (as appropriate).
| 11. | Notices |
Notices sent to Smartkem: [ ]
Notices sent to Chip foundation: [ ]
9
Exhibit 10.1
| 11.3 | A notice shall be deemed to have been served: |
| (a) | at the time of delivery if delivered personally (unless received after 5pm in which case it shall be deemed served on the next Business Day); |
| (b) | 2 Business Days after posting in the case of an address in the United Kingdom and 5 Business Days after posting for any other address; |
| (c) | if sent by email, at the time of transmission. |
| 12. | No partnership or agency |
Nothing in this Agreement is intended to or shall operate to create a partnership or joint venture between the parties, or to authorise either party to act as agent for the other and neither party shall have authority to act in the name of or on behalf of the other, or to enter into any commitment or make any representation or warranty or otherwise bind the other in any way.
| 13. | Assignment and subcontracting |
No party may assign, transfer, charge or otherwise encumber, declare a trust over or deal with in any other manner this Agreement or any right, benefit or interest under it, or subcontract any of its obligations under it, without the prior written consent of the other parties, except to the extent expressly set out in this Agreement.
| 14. | Cumulative remedies |
Save as expressly provided in this Agreement, the rights and remedies provided under this Agreement are in addition to, and not exclusive of, any rights or remedies provided by law.
| 15. | Exclusion of third party rights |
Unless expressly provided in this Agreement, no term of this Agreement is enforceable by any person who is not a party to it whether pursuant to the Contracts (Rights of Third Parties) Act 1999 or otherwise.
| 16. | Severance |
| 17. | Variation |
Except as expressly set out in this Agreement, no purported variation of this Agreement shall be valid unless it is in writing (which excludes email) and signed by or on behalf of each party.
| 18. | Waiver |
No failure or delay by a party to enforce or exercise any right or remedy under this Agreement or by law shall be deemed to be a waiver of that or any other right or remedy, nor shall it operate so as to bar the enforcement or exercise of that or any other right or remedy at any time subsequently. Any waiver of any breach of this Agreement shall not be deemed to be a waiver of any subsequent breach.
10
Exhibit 10.1
| 19. | Entire agreement |
| 19.2 | Nothing in this clause 19 shall limit or exclude any liability for fraud. |
| 20. | Counterparts |
This Agreement may be executed in any number of counterparts and by the parties in separate counterparts, but shall not be effective until each party has executed at least one counterpart. Each counterpart, when executed, shall be an original of this Agreement and all counterparts shall together constitute one instrument.
| 21. | Further assurance |
At its own expense, each party shall, and shall use reasonable endeavours to procure that any necessary third party shall, promptly execute all such documents and do all such other acts as are necessary to give full effect to this Agreement.
| 22. | Publicity |
| 23. | Force Majeure |
Neither party shall be in breach of this Agreement nor liable for delay in performing, or failure to perform, any of its obligations under this Agreement if such delay or failure results from events, circumstances or causes beyond its reasonable control.
| 24. | Governing law and jurisdiction |
This Agreement has been entered into on the date appearing at the head of page 1.
11
Exhibit 10.1
Signed for and on behalf of SmartKem Limited
Signature:/s/ Maosheng Hao
Name:Maosheng Hao
Position:CEO and Chairman
Date:9/6/2024
Signed for and on behalf of
Shanghai Chip Foundation Semiconductor Technology Co., Ltd.
Signature:/s/ Ian Jenks
Name:Ian Jenks
Position:CEO
Date:8/20/2024
12
Exhibit 10.1
SCHEDULE 1
Licences of Intellectual Property
13
Exhibit 10.1
SCHEDULE 2
Project Details
14
Exhibit 10.1
SCHEDULE 3
Project Costs (Financial Matters)
15
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ian Jenks, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of SmartKem, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 8, 2024
| By: | /s/ Ian Jenks |
| Name: | Ian Jenks |
| Title: | Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Barbra C. Keck, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of SmartKem, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 8, 2024
| By: | /s/ Barbra C. Keck |
| Name: | Barbra C. Keck |
| Title: | Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this Quarterly Report of SmartKem, Inc. (the “Company”) on Form 10-Q for the nine months ended September 30, 2024 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, the undersigned, Ian Jenks, Chief Executive Officer of the Company, hereby certifies, to the knowledge of the undersigned, pursuant to 18 U.S.C. Section 1350, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 8, 2024
| | |
| By: | /s/ Ian Jenks |
| Name: | Ian Jenks |
| Title: | Chief Executive Officer |
Exhibit 32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this Quarterly Report of SmartKem, Inc. (the “Company”) on Form 10-Q for the nine months ended September 30, 2024 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, the undersigned, Barbra C. Keck, Chief Financial Officer of the Company, hereby certifies, to the knowledge of the undersigned, pursuant to 18 U.S.C. Section 1350, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 8, 2024
| | |
| By: | /s/ Barbra C. Keck |
| Name: | Barbra C. Keck |
| Title: | Chief Financial Officer |