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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-15 · 74 added, 53 removed, 54 unchanged (70% of the section changed)

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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 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.

Statements in this Quarterly Report on Form 10-Q (this “Report”) that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.

These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements, including the risks discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “10-K”) in Item 1A under “Risk Factors” and the risks detailed from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”).

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Company Overview

We are seeking to reshape the world of electronics with our proprietary organic semiconductor platform that we believe has the potential to affect the form and function of the next generation of low-cost displays and sensors.

Our patented TRUFLEX® inks are solution deposited at a low temperature, on low-cost substrates to make organic thin-film transistor ( OTFT) circuits.

Our organic semiconductor platform can be used in a number of applications including mini- and micro-LED displays, AMOLED displays, AR and VR headsets, fingerprint sensors and integrated logic circuits.

We have a research and development facility in Manchester, UK, and manufacture product protypes for prospective customers using our semiconductor manufacturing processes housed at the Centre for Process Innovation (CPI) at Sedgefield, UK.

We have an extensive IP portfolio including over 125 issued patents across 19 patent families.

Since our inception in 2009, we have devoted substantial amounts of our 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.

We are seeking to reshape the world of electronics with our disruptive organic thin-film transistors (OTFTs) that have the potential to drive the next generation of displays.

Our patented TRUFLEX® semiconductor and dielectric inks, or liquid electronic polymers, are used to make a new type of transistor that could potentially revolutionize the display industry.

Our inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing models.

Our electronic polymer platform can be used in a number of display technologies including microLED, miniLED and AMOLED displays for next generation televisions, laptops, augmented reality (AR) and virtual reality (VR) headsets, smartwatches, and smartphones.

We develop our materials at its research and development facility in Manchester, UK, our semiconductor manufacturing processes at the Centre for Process Innovation (CPI) at Sedgefield, UK and retain a field application office in Taiwan.

We have an extensive IP portfolio including 125 granted patents across 19 patent families and 40 codified trade secrets.

Since our inception in 2009, we have devoted substantial resources to the research and development of materials and production processes for the manufacture of organic thin film transistors and the enhancement of our intellectual property.

Our loss before income taxes was $2.0 million and $2.8 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023, our accumulated deficit was $88.6 million.

Our loss before income taxes was $2.0 million and $3.7 million for the three months ended June 30, 2023 and 2022, and $4.1 million and $6.5 million for the six months ended June 30, 2023 and 2022, respectively.

As of June 30, 2023, our accumulated deficit was $90.6 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 months ended March 31, 2023

Three months ended March 31, 2023 compared with three months ended March 31, 2022

Results of Operations for the three and six months ended June 30, 2023

Three months ended June 30, 2023 compared with three months ended June 30, 2022

Revenue and Cost of revenue

Revenues were $16 thousand in the three months ended March 31, 2023, compared with $30 thousand in the same period of 2022.

Revenue in the first quarter of 2023 and 2022 resulted from the sale of organic thin-film transistor ( OTFT) backplanes and TRUFLEX® materials for customer assessment and development purposes.

Cost of revenue was $16 thousand in the three months ended March 31, 2023, compared with $23 thousand in the same period of 2022.

Cost of revenue resulted from the sale of the OTFT backplanes and materials described above.

Revenues were $8.0 thousand in the three months ended June 30, 2023, compared with $4.0 thousand in the same period of 2022.

Cost of revenue was $6.0 thousand in the three months ended June 30, 2023, compared with $2.0 thousand in the same period of 2022.

Both revenues and related cost of revenue for the three months ended June 30, 2023 and 2022 are a result of sales of organic thin-film transistor ( OTFT) backplanes and TRUFLEX® materials for customer assessment and development purposes.

Other operating income

Other operating income was $269 thousand in the three months ended March 31, 2023, compared to $284 thousand in the same period of 2022, a decrease of $15 thousand, or 5.3%.

The decrease resulted primarily from an increase of $53 thousand recorded for a research grant, offset by a decrease of $68 thousand in research and development tax credits compared to the prior period of 2022.

Other operating income was $0.2 million in the three months ended June 30, 2023, compared to $0.3 million in the same period of 2022.

The primary source of the income is related to a research grant and research and development tax credits.

Operating expenses

Operating expenses were $2.8 million for the three months ended March 31, 2023, compared to $2.7 million in the same period of 2022, an increase of $0.1 million, or 4.6%.

Operating expenses were $2.5 million for the three months ended June 30, 2023, compared to $2.7 million in the same period of 2022, a decrease of $0.2 million.

Research and development expenses are incurred for the development of TRUFLEX® inks to make OTFT circuits and consists primarily of payroll and technical development costs.

The research and development expenses represents 45% and 54% of the total operating expenses for the three months ended March 31, 2023 and 2022, respectively.

For the three months ended March 31, 2023 research and development expenses decreased to $1.3 million from $1.5 million in the prior year period.

The decrease of $0.2 million is primarily due to the reduction of personnel and a reduction in professional service fees.

Selling, general and administrative expenses consist primarily of payroll, and professional services such as accounting, legal services and investor relations , These expenses represent 51% and 46% of our total operating expenses for the three months ended March 31, 2023 and 2022, respectively.

Selling, general and administrative expenses of $1.4 million for the quarter, increased by $0.2 million from the prior year period, primarily as a result of increased investor relations expenses.

Losses on foreign currency transactions related to operating expense were $0.1 million for the three months ended March 31, 2023.

The research and development expenses represent 49.5% and 49.5% of the total operating expenses for the three months ended June 30, 2023 and 2022, respectively.

For the three months ended June 30, 2023 research and development expenses remained constant for the quarter for each respective year.

Selling, general and administrative expenses consist primarily of payroll and professional services such as accounting, legal services and investor relations .

These expenses represent 52.2% and 50.5% of our total operating expenses for the three months ended June 30, 2023 and 2022, respectively.

Selling, general and administrative expenses of $1.3 million for the quarter, decrease by $0.0 million from the prior year period, primarily as a result of decreases in investor relations expenses.

Non-Operating income/(expense)

Gains on foreign currency transactions related to intercompany loans were $0.5 million for the three months ended March 31, 2023 compared to the losses of $0.4 million for the three months ended March 31, 2022.

Issuance costs of $0.2 million allocated to the warrant liability were expensed in full during the three months ended June 30, 2023.

The majority of costs were legal, placement and consulting fees specifically related to the private placement transaction.

Gains on foreign currency transactions related to intercompany loans were $0.5 million for the three months ended June 30, 2023 compared to the losses of $1.3 million for the three months ended June 30, 2022.

The increase of $1.8 million is related to favorable changes in the exchange rates.

Six months ended June 30, 2023 compared with six months ended June 30, 2022

Revenue and Cost of revenue

Revenues were $24.0 thousand in the six months ended June 30, 2023, compared with $34.0 thousand in the same period of 2022.

Cost of revenue was $22.0 thousand in the six months ended June 30, 2023, compared with $25.0 thousand in the same period of 2022.

Both revenues and related cost of revenue for the six months ended June 30, 2023 and 2022 are a result of sales of organic thin-film transistor ( OTFT) backplanes and TRUFLEX® materials for customer assessment and development purposes.

Other operating income

Other operating income was $0.4 million and $0.6 million the six months ended June 30, 2023 and 2022.

The primary source of the income is related to a research grant and research and development tax credits.

Operating expenses

Operating expenses for the six months ended June 30, 2023 were $5.4 million compared to $5.4 million in the same period of 2022.

Research and development expenses are incurred for the development of TRUFLEX® inks to make OTFT circuits and consists primarily of payroll and technical development costs.

Research and development expenses were $2.5 million and $2.8 million for the six months ended June 30, 2023 and 2022.

The decrease of $0.3 million is primarily due to the reduction of personnel and professional service fee expenses.

The research and development expenses represents 47.3% and 51.8% of total operating expenses for the six months ended June 30, 2023 and 2022, respectively.

Selling, general and administrative expenses consist primarily of payroll and professional services such as accounting, legal services and investor relations , These expenses represent 51.4% and 48.2% of our total operating expenses for the six months ended June 30, 2023 and 2022, respectively.

Selling, general and administrative expenses were $2.8 million for the six months ended June 30, 2023, as compared to $2.6 million for the six months ended June 30, 2022 an increase $0.1 million of primarily due to the result of increase in personnel expense related to bonus accruals.

Losses on foreign currency transactions related to operating expense were $0.1 million for the six months ended June 30, 2023.

Non-Operating income/(expense)

Issuance costs of $0.2 million allocated to the warrant liability were expensed in full during the six months ended June 30, 2023.

The majority of costs were legal, placement and consulting fees specifically related to the private placement transaction.

Gains on foreign currency transactions related to intercompany loans were $1.0 million for the six months ended June 30, 2023 compared to the losses of $1.6 million for the six months ended June 30, 2022.

The increase of $2.6 million is related to the favorable changes in the exchange rates.

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To date, we have funded our liquidity and capital requirements primarily with proceeds from the private sale of our equity and debt securities and borrowing against our research and development credits.

As of March 31, 2023, our cash and cash equivalents were $1.7 million compared with $4.2 million as of December 31, 2022.

The decrease of $2.5 million is all related the cash used in operating activities.

We believe that our existing cash as of March 31, 2023 will be sufficient to fund our operations through the end of May 2023 if we continue to spend to our forecast, and that we will require additional capital funding to continue our operations and research and development activity thereafter.

Our future results are subject to substantial risks and uncertainties.

We have operated at a loss for our entire history and anticipate that losses will continue over the coming year.

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.

Our future liquidity and working capital requirements will depend on many factors including our ability to generate revenue from product sales, the timing and extent of spending to support our sales and marketing, product development and research and development efforts, our entry into one or more material agreements containing significant performance obligations and our needs for working capital to support our business operations.

Until such time, if ever, as we can generate sufficient cash through 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.

We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all.

Our condensed consolidated financial statements as of March 31, 2023 have been prepared under the assumption that we will continue as a going concern for the next twelve months.

We expect to incur significant expenses and operating losses for the foreseeable future.

These factors raise substantial doubt about our ability to continue as a going concern.

Because our business does not generate positive cash flow from operating activities, we will need to obtain substantial additional capital in order to support our development efforts and fully commercialize our technology.

We believe we will be able to raise additional capital in the event it is in our best interest to do so.

Management’s plans are to finance the 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.

To the extent additional capital is not available when needed or on acceptable terms, we may be forced to abandon some or all of our development and commercialization efforts, which would have a material adverse effect on the prospects of the business.

Further, our assumptions relating to our cash requirements may differ materially from our actual requirements because of a number of factors, including significant unforeseen delays, changes in timing, scope, focus and direction of our development efforts and costs related to commercialization.

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 interim condensed consolidated financial statements as of March 31, 2023 have been prepared assuming that the Company will continue as a going concern.

Accordingly, the interim condensed 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.

As of June 30, 2023, our cash and cash equivalents were $13.8 million compared with $4.2 million as of December 31, 2022.

The increase of $9.5 million is due to net proceeds of $12.7 million received related to the June 2023 PIPE financing and was offset by cash usage of $3.1 million related to operating activities.

We believe that our existing cash as of June 30, 2023 will be sufficient to fund our operations through for the next twelve months if we continue to spend to our forecast, and that we may require additional capital funding to continue our operations and research and development activity thereafter.

The Company’s capital commitments over the next twelve months include (a) $1.5 million to satisfy accounts payable and accrued expenses and (b) $0.2 million to satisfy the lease liabilities.

Additional capital commitments beyond the next twelve months include $0.1 million of lease liabilities.

Critical Accounting Estimates

During the three months ended March 31, 2023, there were no material changes to critical accounting estimates as reported in the 10-K, which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023 and may also be found on the Company’s website (www.smartkem.com).

Application of Critical Accounting Policies

Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim reporting.

During the three months ended March 31, 2023, there were no material changes to our critical accounting policies as reported in our 10-K.

The Company allocated part of the proceeds of private placement of the Company’s preferred A-1 and A-2 shares to warrant liability issued in connection with the transaction.

The valuations of the warrants were determined using option pricing models.

These models use inputs such as the underlying price of the shares

issued at the measurement date, volatility, risk free interest rate and expected life of the instrument.

The Company has classified the warrants as a long-term liability due to certain provisions relating to the holders’ ability to exercise the warrants beyond twelve months of the reporting date and has accounted for them as derivative instruments in accordance with ASC 815, adjusting the fair value at the end of each reporting period.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim reporting.

Other than the accounting for the valuation of warrant liability, during the three and six months ended June 30, 2023, there were no material changes to our critical accounting policies as reported in the 10-K.

A description of certain accounting policies that may have a significant impact on amounts reported in the financial statements is disclosed in Note 3 to the audited consolidated financial statements contained in the 10-K.

Warrant Liability

The Company accounts for warrants in accordance with the guidance contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging, under which warrants that do not meet the criteria for equity treatment and must be recorded as liabilities.

Accordingly, the Company will classify those warrants as liabilities at their fair value and adjusts the warrants to fair value in respect of each reporting period.

The valuation of the warrant liability was determined using an option pricing model.

This model uses inputs such as the underlying price of the shares issued at the measurement date, expected volatility, risk free interest rate and expected life of the instrument.

Since our common stock was not publicly traded until February 2022 there has been insufficient volatility data available.

Accordingly, we have used an expected volatility based on historical common stock volatility of our peers.

In addition, the Company used the probability of uplisting as an input in the model to determine the fair value of the warrant liability.

The Company will adjust the fair value of the warranty liability at the end of each reporting period.

Issuance Costs

The Company assessed the issuance cost in connection with the issuance of an equity offering.

ASC 340-10-S99-1 states that specific incremental costs directly attributable to a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering.

Analogizing to that guidance, specific incremental costs directly attributable to the issuance of an equity contract to be classified in equity should generally be recorded as a reduction in equity.

However, issuance costs for equity contracts that are classified as a liability should be expensed immediately.

The issuance costs are allocated to the equity and liability components of the underlying transaction on a basis of the allocated fair value of the gross proceeds in the overall transactions

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis