SMTK 10-K & 10-Q changes, risk factors and insider trading

An investment in our securities is highly speculative and involves a high degree of risk. We face a variety of risks that may affect our operations or financial results and many of those risks are driven by factors that we cannot control or predict. You should carefully consider the risks described below together with all of the other information in this Report, including our consolidated financial statements and the related notes and the information described in the section entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our other filings with the SEC. If any of the risks described below occur, our business, financial condition, results of operations and prospects could be materially adversely affected. In that case, the market price of our common stock would likely decline, and investors could lose all or a part of their investment. Only those investors who can bear the risk of loss of their entire investment should consider an investment in our securities. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations.

Summary of Risk Factors

We have a history of losses, anticipate continued operating losses in the future, and may not be able to achieve or maintain profitability. If we cannot achieve or maintain profitability, stockholders could lose all or part of their investment.

Since our inception, we have generated substantial net losses as we have devoted our resources to the development of our technology, and our business model has not been proven. As of December 31, 2024, we had an accumulated deficit of $114.6 million. For the years ended December 31, 2024 and December 31, 2023 our total comprehensive loss was $9.9 million and $9.6 million, respectively. We expect our operating losses to continue for the foreseeable future as we continue to invest in our infrastructure and research and development of our technologies. These efforts may be more costly than we expect, and we may not be able to generate revenue to offset our increased operating expenses. If we are unable to generate substantial revenue, we may never become profitable or be able to maintain any future profitability. If this were to occur, our stockholders could lose all or part of their investment.

If MicroLED technology is not widely adopted by display manufacturers, our business would be harmed.

A significant share of our growth is dependent on the adoption by display manufacturers of MicroLED technology. To date, MicroLED technology has not achieved widespread adoption because of the complexity and high cost of manufacturing MicroLED displays using existing materials, device architecture and processes. Given the high cost of manufacturing (resulting in approximately $100,000 sales price for a large high-definition display screen), it is unlikely that MicroLED technology will be adopted for use in consumer products unless significant efficiencies and fundamental process changes in the manufacturing of MicroLED displays occur. For example, in 2024 Apple Inc. abandoned a project to manufacture its own MicroLED displays for its Apple Watch products. While we believe our technology, including its use in chip-first architectures, has the potential to make manufacturing of MicroLED displays more efficient and cheaper, our technology has not been utilized commercially and there can be no assurance that our technology will reduce the cost and improve the efficiency of manufacturing MicroLEDs to the point where display manufacturers can profitably price MicroLED displays for mass market consumption. In addition, even if our technology achieves its goals, there may be technical delays in implementing our technology that could affect the willingness of display manufacturers to manufacture MicroLEDs at commercial scale or could affect the timing and extent of such manufacturing.

It is also possible that, despite the advantages of MicroLED displays, other technologies that, while not having all of benefits of MicroLEDs, are less expensive or easier to manufacture, will emerge and be adopted by display manufacturers for similar applications.

If the market for MicroLED technology does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed.

We rely on access to third-party facilities for prototyping and commercial process development and expect to enter into arrangements with third parties to fabricate our products at commercial scale. The loss of access to a third-party facility, or our inability to enter into agreements with third-party fabricators could have a material adverse effect on our business development.

We do not have our own prototyping or fabrication facilities, and we rely on CPI for access to its facility for fabrication of prototypes and demonstration products. We also rely on access to ITRI’s facilities for the development of commercial processes for the future commercial manufacturing of our products. The current agreement with CPIIS expires on March 31, 2025, but has been extended as described below. CPIIS is in the process of reviewing the operation of the clean room facility used by Smartkem and is seeking to reduce the facility’s operating costs by, among other things, consolidating its clean rooms and seeking to pass more of its operating costs to users including us. On March 28, 2025, we entered into an agreement with CPIIS pursuant to which the term of the current CPIIS agreement was extended until May 31, 2025. We intend to use the extension period to complete negotiations with CPIIS regarding a longer-term agreement. Under the terms of the extension, we have agreed to an increase in our share of the costs of the CPI facility and to increased minimum usage obligations during the extension period. We expect that any longer-term agreement with CPIIS will require us to bear additional costs. If we are unable to reach a new agreement with CPIIS on terms that are satisfactory to us, we intend to find an alternative facility. We believe that there are adequate alternative sites available at which we could conduct our prototyping operations. In the event that we decide to move our prototyping operation to an alternative facility, we believe that the move would take between two and nine months, depending on equipment availability and any required facility modifications, during which time we would incur additional costs to prepare the new facility and install any necessary equipment. In such event, we intend to schedule our prototyping activities to minimize any disruption to those operations and would use ITRI’s prototyping line as an interim facility for such work.

If we are unable to obtain access to another prototyping facility on similar terms to our arrangements with CPI, our business would be materially and adversely affected. We have approximately 11 employees located at CPI. Even if we are able to locate a suitable replacement facility on acceptable terms, we cannot assure investors that the key employees at CPI would accept positions at a new facility, particularly if it is located remotely from the CPI facility. Even if we locate a suitable replacement facility, it is possible that our ability to engage in product development, prototyping of demonstration products and process improvement activities may be significantly delayed as a result of the relocation of those functions.

If we lost access to ITRI’s fabrication facility, our ability to co-develop commercial scale manufacturing processes could also be significantly delayed until such time as we found a suitable replacement facility and completed the transfer of technology and know-how from ITRI to another fabricator. Accordingly, the loss of access to ITRI’s facility could delay our commercialization efforts.

We expect to enter into arrangements with third-party fabricators to produce products for customer demonstration and for commercial product sale, other than for our formulated materials. The third-party fabricators are often located in Asia but could also be in the United States. No assurance can be given that we will be able to negotiate agreements with third-party fabricators on terms that are acceptable to us. Third-party fabricators may not have the ability to provide us with access to adequate capacity for our needs and our customers’ needs. We will also have less control over delivery schedules and overall support compared to competitors who have commercial fabrication operations. If the fabricators we use are unable or unwilling to manufacture our products in our required volumes, or at specified times, we may have to identify and qualify acceptable additional or alternative fabricators. This qualification process could typically take three to six months, and we may not find sufficient capacity in a timely manner or at an acceptable cost to satisfy our production requirements. Some companies that supply products to our customers are similarly dependent on a limited number of suppliers. These other companies’ products may represent important components of the displays into which our products are designed. If these companies are unable to produce the volumes demanded by our customers, our customers may be forced to slow down or halt production on the equipment for which our products are designed, which could materially impact our order levels and our results of operations.

The transfer of our technology and manufacturing know-how to a third-party commercial manufacturer may result in unanticipated costs and delays that could have a material and adverse effect our business, financial condition and results of operations.

We do not have the ability to produce our flexible transistors at commercial scale. We have engaged ITRI, a third-party foundry service in Taiwan, to assist us in developing a commercial manufacturing process for our products with the ultimate goal of enabling one or more third parties to manufacture our products at commercial scale for customers that do not have their own facilities. While we believe that display products utilizing our proprietary OTFTs can be made using existing commercial processes, we expect that transferring our technology and manufacturing know-how to a third-party manufacturer will be a time-intensive and costly process. We may also be required to adapt our manufacturing processes to enable our display products to be made at commercial scale. Any contract manufacturer will be required to manufacture products to our customers’ specifications. We may be required to expend significant management and financial resources to enable contract manufacturers to meet those specifications. In addition, any contract manufacturer may not be able to manufacture products meeting the required specifications at the cost, in the volume or on the schedule that we expect. As a result, we may be subject to unanticipated costs and delays that could have a material adverse effect on our business, financial condition and results of operations

Because we will depend on third-party fabricators to manufacture products for us, we will be susceptible to manufacturing delays and pricing fluctuations that could prevent us from shipping customer orders on time, if at all, or on a cost-effective basis, which may result in the loss of sales, income and customers.

We expect to rely on third-party fabricators to manufacture products containing our proprietary inks for certain of our future customers. Our reliance on these third-party fabricators reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs, product supply and timing. Any manufacturing disruption by these third-party fabricators could severely impair our ability to fulfill orders. Our reliance on third-party fabricators also creates the potential for infringement or misappropriation of our intellectual property. If we are unable to manage our relationships with third-party fabricators effectively, or if our third-party fabricators experience delays or disruptions for any reason, increased manufacturing lead-times, capacity constraints or quality control problems in their fabrication operations, or if they otherwise fail to meet our future requirements for timely delivery, our ability to ship products to our customers would be severely impaired, and our business and results of operations would be seriously harmed.

To compete effectively, we must protect our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We hold numerous patents and have a number of pending patent applications. However, our portfolio of patents evolves as new patents are issued and older patents expire, and the expiration of patents could have a negative effect on our ability to prevent competitors from duplicating certain or all of our products.

We might not succeed in obtaining patents from any of our pending applications. Even if we are awarded patents, they may not provide any meaningful protection or commercial advantage to us, as they may not be of sufficient scope or strength or may not be issued in all countries where our products can be sold. In addition, our competitors may be able to design around our patents.

In connection with our preparation of our financial statements for the second quarter of 2023, a material weakness in our internal control over financial reporting was identified relating to the complex financial reporting and accounting associated with our private placement that closed in June of 2023. a non-cash item. None of our filed financial statements were impacted. Management implemented measures designed to ensure that the control deficiency contributing to the material weakness was remediated, such that the controls are designed, implemented, and operating effectively. The remediation actions included the enhancement of control activity evidence, improvement of management review controls, and recording of the fair value of the warrant liability.

In connection with the preparation of our 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 were impacted. Management implemented measures designed to ensure that the control deficiency contributing to the material weakness was remediated, such that the controls are designed, implemented, and operating effectively. The remediation actions included the implementation of an additional step in the valuation process used to work with external consultants to review all equity-related activity and events that may have occurred since the prior fair value calculations were performed. Additionally, the Company’s move to Nasdaq has facilitated a change in its approach to the stock price input used in its fair value models. Rather than using a calculated stock price in these models, the Company now uses the quoted stock price thereby reducing subjectivity and judgment in the fair value models and equity-based compensation calculations.

We are an “emerging growth company” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this Report and our periodic reports and proxy statements, and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as a smaller reporting company, we are only required to provide two years of audited financial statements and two years of selected financial data in this Report. We could be an emerging growth company until the fifth anniversary of the first sale of our common stock pursuant to a registration statement occurs, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of June 30 of any year or if we have total annual gross revenue of $1.235 billion or more during any fiscal year, in which cases we would no longer be an emerging growth company as of the following December 31, or if we issue more than $1.0 billion in nonconvertible debt during any three-year period, in which case we would no longer be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this Report and our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We are seeking to change the world of electronics with a new class of transistor developed using our proprietary advanced semiconductor materials that we believe has the potential to revolutionize the display industry. Our TRUFLEX® semiconductor polymers enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost, high-performance displays. Our semiconductor platform can be used in a range of display technologies including MicroLED, miniLED and AMOLED, as well as in applications in advanced chip packaging, sensors, and logic.

We design and develop our materials at our research and development facility in Manchester, UK and provide prototyping services at the Centre for Process Innovation (“CPI”) in Sedgefield, UK. We also operate a field application office in Hsinchu, Taiwan, close to our collaboration partner, The Industrial Technology Research Institute of Taiwan (“ITRI”), where we demonstrate the scalability of our technology using ITRI’s equipment. With our collaboration partners, we are developing a commercial-scale production process and EDA tools for our materials to demonstrate the commercial viability of manufacturing a new generation of displays using our materials. We have an extensive IP portfolio including 138 granted patents across 17 patent families, 17 pending patents and 40 codified trade secrets.

Transaction Costs. Costs for equity contracts that are classified as a liability.

Research and development expenses, which represented 44.3% and 51.3% of our total operating expenses for the twelve months ended December 31, 2024 and 2023, respectively, decreased by $0.5 million to $5.1 million for the year ended December 31, 2024, compared to $5.6 million for the same period of 2023. The decrease in research and development expenses was mainly due to lower personnel costs resulting from a reduction in force effected in September 2023, as well as lower technical research and development costs, including consulting, testing and lab supplies. We expect that our research and development expense will increase in 2025 as a result of an expected increase in the cost of our prototyping activities. See “Item 1. Business – CPI Agreement” for additional information.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to either early adopt or delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

We are seeking to change the world of electronics with a new class of transistor developed using our proprietary advanced semiconductor materials that we believe has the potential to revolutionize the display industry. Our TRUFLEX® semiconductor polymers enable low-temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost, high-performance displays. Our semiconductor platform can be used in a range of display technologies, including MicroLED, liquid crystal display (“LCD”), and AMOLED, as well as in applications in advanced computer and artificial intelligence chip packaging, sensors, and logic.

We design and develop our materials at our research and development facility in Manchester, UK. We also operate a field application office in Hsinchu, Taiwan, in close proximity to our collaboration partner, The Industrial Technology Research Institute of Taiwan. Together with our collaboration partners, we are developing a commercial-scale production process and Electronic Design Automation ("EDA") tools for our materials to demonstrate the commercial viability of manufacturing a new generation of displays using our materials.

Other operating income

Operating expenses

Our expected cash payments over the next twelve months include (a) $3.4 million to satisfy accounts payable and accrued expenses, (b) $0.3 million to satisfy the lease liabilities and (c) $0.1 million to satisfy a loan related to the financing of our D&O insurance policy. Additional expected cash payments beyond the next twelve months include $0.2 million of lease liabilities.