What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2026-04-08 compared with 2025-03-31 · 347 added, 353 removed, 503 unchanged (58% of the section changed)

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Report of Independent Registered Public Accounting Firm (Marcum LLP, New York, USA, PCAOB ID # 688 )

Report of Independent Registered Public Accounting Firm (CBIZ CPAs L.P., New York, USA.

PCAOB ID # 199 )

Consolidated Balance Sheets as of December 31, 2025, and 2024

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of SmartKem, Inc.

and Subsidiaries (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2024 , and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheet of SmartKem, Inc.

and Subsidiaries (the “Company”) as of December 31, 2024, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

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These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Marcum LLP

We have served as the Company’s auditor since 2023.

We served as the Company’s auditor from 2023 to 2025

March 31, 2025

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

SmartKem, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of SmartKem, Inc.

and Subsidiaries (the “Company”) as of December 31, 2025, the related consolidated statements of operations and comprehensive loss, stockholders’ (deficit) equity, and cash flows for the year ended December 31, 2025, and the related notes (collectively referred to as the “financial statements”).

In our opinion, based on our audit, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2025, and the results of its operations and its cash flows for the year ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses, and needs to raise additional funds to meet its obligations and sustain its operations.

These conditions raise substantial doubt about the Company's ability to continue as a going concern.

Management's plans in regard to these matters are also described in Note 2.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

/s/ CBIZ CPAS P.C.

CBIZ CPAs P.C.

We have served as the Company’s auditor since 2023 (such date takes into account the acquisition of the attest business of Marcum LLP by CBIZ CPAs P.C.

effective November 1, 2024).

April 7, 2026

SMARTKEM, INC.

AND SUBSIDIARIES

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Other assets, non-current

Liabilities and stockholders’ equity

Liabilities and stockholders’ (deficit) / equity

Current liabilities

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Lease liabilities, current

Other current liabilities

Notes payable, net

Deferred revenue

Total current liabilities

Lease liabilities, non-current

Warrant liability

Total liabilities

Commitments and contingencies (Note 7)

Stockholders’ equity:

Contingencies (Note 7)

Stockholders’ (deficit) / equity:

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 0 and 856 shares issued and outstanding, at December 31, 2025 and December 31, 2024, respectively

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Accumulated deficit

Total stockholders' equity

Total liabilities and stockholders’ equity

Total stockholders' (deficit) / equity

Total liabilities and stockholders’ (deficit) / equity

The accompanying notes are an integral part of these consolidated financial statements.

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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)

Interest, net

Total non-operating income / (expense)

Loss before income taxes

Income tax expense

Income tax refund / (expense)

Preferred stock deemed dividends

Net loss attributed to common stockholders

Weighted average shares outstanding - basic and diluted

Basic and diluted net loss per common share attributed to common stockholders

Common share data:

Basic net loss per common share

Weighted average shares outstanding - basic

Diluted net loss per common share

Weighted average shares outstanding - diluted

Dividends per common share

Other comprehensive loss:

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Stock-based compensation expense

Issuance of stock awards

Issuance of common stock to vendor

Exchange of Preferred stock into common stock warrants

Deemed dividend on extinguishment of Preferred stock

Cashless exercise of warrants into common stock

Fair value of warrants reclassified from liability to equity

Issuance of common stock and warrants, net of issuance costs

Deemed dividend on general release and amendment of Preferred stock

Conversion of Preferred stock into common stock

Exercise of warrants into common stock

Fair value of warrants issued related to note payable

Foreign currency translation adjustment

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Stock-based compensation expense

Issuance of stock awards

Issuance of common stock to vendor

Issuance of preferred stock, net of issuance costs

Exchange of Preferred stock into common stock warrants

Deemed dividend on extinguishment of Preferred stock

Cashless exercise of warrants into common stock

Fair value of warrants reclassified from liability to equity

Issuance of common stock and warrants, net of issuance costs

Deemed dividend on general release and amendment of Preferred stock

Conversion of preferred stock into common stock

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Right-of-use asset amortization

Gain/(loss) on foreign currency transactions

Transaction costs allocable to warrants

(Loss) / gain on foreign currency transactions

Change in fair value of the warrant liability

Debt discount amortization

Change in operating assets and liabilities:

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Lease liabilities

Income tax payable

Other current liabilities

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Cash flow from financing activities:

Proceeds from the issuance of preferred stock in private placement

Proceeds from the issuance of warrants in private placement

Proceeds from the issuance of common stock and warrants in private placement

Proceeds from the issuance of common stock and warrants in public offering

Proceeds from the issuance of common stock and warrants in public placement

Payment of issuance costs

Proceeds from the issuance of debt

Proceeds from the exercise of warrants

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Supplemental disclosure of cash and non-cash investing and financing activities

Issuance of common shares for consulting services

Initial classification of fair value of warrants

Right-of-use asset and lease liability additions

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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.

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, and provide prototyping services at the Centre for Process Innovation in Sedgefield, 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.

During the first quarter of 2026, Smartkem was involved in a number of financing transaction.

These included the transfer of our patent portfolio to a third party.

The company still owns its process and formulation intellectual property as codified in 40 trade secrets.

As previously disclosed the company is continuing to conduct a review of its strategy.

In particular it is evaluating its display prototyping activities, its materials formulation activities and the possibility of adding new materials to its portfolio.

The consolidated entity presented is referred to herein as “SmartKem”, “we”, “us”, “our”, or the “Company”, as the context requires and unless otherwise noted.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Certain Risk and Uncertainties

The Company’s activities are subject to significant risks and uncertainties including the risk of failure to secure additional funding to properly execute the Company’s business plan.

The Company is subject to risks that are common to companies in the growth stage, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology, and compliance with regulatory requirements.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN:

Basis for Presentation

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As of December 31, 2025, we have incurred recurring losses including net losses of $ 10.5 million and $ 10.3 million for the years ended December 31, 2025, and 2024, respectively.

Our working capital deficit is $ 4.4 million as of December 31, 2025.

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.

In December 2024, the Company raised $ 7.7 million through an offering of common stock and warrants.

Net proceeds after related expenses were $ 6.5 million.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company expects that its cash and cash equivalents of $ 0.4 million as of December 31, 2025, will not be sufficient to fund its operating expenses and capital expenditure requirements for the 12 months from the issuance of these financial statements and that the Company will require additional capital funding to continue its operations and research development activity thereafter.

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All intercompany balances and transactions have been eliminated on consolidation, including unrealized gains and losses on transactions between the companies.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Comprehensive loss

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The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

The most significant estimates in the Company’s consolidated financial statements relates to the fair value of share options and the fair value of warrant liability.

The most significant estimates in the Company’s consolidated financial statements relates to the fair value of stock-based compensation expense and for the valuation allowance of deferred taxes.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates.

Certain 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 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.

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.

Cash and Cash Equivalents

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An impairment loss is recognized immediately as an operating expense in the consolidated statements of operations.

Reversal of previously recorded impairment losses are prohibited.

As of December 31, 2024, and 2023, Company’s management believed that no revision to the remaining useful lives or impairment of the Company’s long-lived assets was required.

Fair Value of Financial Instruments

ASC 820, Fair Value Measurements , provides guidance on the development and disclosure of fair value measurements.

Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:

Quoted prices in active markets for identical assets or liabilities.

Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.

Unobservable inputs which are supported by little, or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and during the years ended December 31, 2024, and 2023.

The carrying value of the Company’s cash, accounts receivable, other receivables, and accounts payable approximate fair value because of the short-term maturity of these financial instruments.

The accounting treatment of warrants issued is determined pursuant to the guidance provided by ASC 480, Distinguishing Liabilities from Equity , and ASC 815-40, Contracts in Entity's Own Equity , as applicable.

Each feature of a freestanding financial instrument including, without limitation, any rights relating to subsequent dilutive issuance, dividend issuances, equity sales, rights offerings, forced conversions, dividends, and exercise are assessed with determinations made regarding the proper classification in the Company’s consolidated financial statements.

The Company assessed its warrants in accordance with this guidance, under which warrants that do not meet the criteria for equity treatment and must be recorded as liabilities.

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

This liability is subject to re-measurement at each balance sheet date and any change in fair value is recognized in the statements of operations.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Issuance Costs

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

ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A, Expenses of Offering, states that specific incremental costs directly attributable to a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering.

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

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

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

Direct and incremental legal and accounting costs associated with the Company’s issuance of common stock, preferred stock and warrants are deferred and classified as a component of other assets on the consolidated balance sheet until completion of the issuance.

Upon completion of the issuance, deferred offering costs are reclassified from other assets to equity in additional paid-in capital and recorded against the net proceeds received in the issuance.

For the year ended December 31, 2023, we recorded $ 1.5 million of offering costs of which $ 1.3 million were recorded in additional paid-in capital and $ 0.2 million were recorded as non-operating expenses and for the year ended December 31, 2022, $ 170 thousand of offering costs were recorded in additional paid-in capital.

As of December 31, 2025, and 2024, Company’s management believed that no impairment of the Company’s long-lived assets was required.

Non-retirement Post-employment Benefits

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The Company’s current contracts with customers do not contain significant estimates or judgments.

All of the Company’s revenue contains a single performance obligation that is recognized upon fulfilment of the sales order.

The Company derives its revenues primarily from sales of TRUFLEX® inks and of demonstrator units to customers evaluating organic semiconductor technology.

The transaction price is stated in each customer agreement and is

A portion of the Company’s revenue contains a single performance obligation that is recognized upon fulfilment of the sales order.

The company also recognized a portion of revenue related to the certain agreements over time based on output method.

The Company received cancellation notification from two customers in fourth quarter 2025 and recognized remaining contract liability.

In 2025, the Company recorded $ 147 thousand related to the sale of the of materials to various customers which was recognized at the point of the sale.

The Company also recorded $ 550 thousand related to the recognition of income over the project term related to two project agreements that had been cancelled in 2025.

In 2024, the Company recorded $ 40 thousand related to the sale of the of materials to various customers which was recognized at the point of the sale.

The Company also recorded $ 42 thousand related to the recognition of income over the project term related to a project agreements that had been completed in 2024.

SMARTKEM, INC.

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Notes to Consolidated Financial Statements

allocated to a single performance obligation.

Customer A and B comprised of 60% and 19% of revenue for the year ended December 31, 2025.

No customers comprised over 10% of revenue for the year ended December 31, 2024.

The Company derives its revenues primarily from sales of TRUFLEX® inks and of demonstrator units to customers evaluating organic semiconductor technology.

The transaction price is stated in each customer agreement and is allocated to a single performance obligation.

Revenue is recognized upon shipment of each TRULFEX® ink or demonstrator, at a point in time.

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Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year.

Collaboration Arrangements

The Company entered into several collaboration agreements during 2024.

The business arrangements between the two parties are not accounted for as a Collaborative Arrangement, as defined within the guidance under ASC 808, Collaborative Arrangement , as both parties are not exposed to significant risks and rewards depending on the commercial success of the activity.

It has also determined that other parties are a vendor and not a customer, as defined within the guidance under ASC 606, as the other parties did not primarily contract with SmartKem to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

It was SmartKem that contracted with the other parties to obtain design services from it.

These agreements are accounted for under the guidance of ASC 705, Cost of Sales and Service.

Within ASC 705–20, Accounting for Consideration Received from a Vendor , the section discusses the accounting for consideration received by an entity from a vendor or supplier.

Consideration from a vendor includes cash amounts that an entity receives or expects to receive from a vendor (or from other parties that sell the goods or services to the vendor).

Consideration from a vendor also includes credit or other items (e.g., a coupon or voucher) that the entity can apply against amounts owed to the vendor (or to other parties that sell the goods or services to the vendor).

Consideration from a vendor should be accounted for as a reduction of the purchase price of the goods or services acquired from the vendor unless the consideration from the vendor is one of the following, a) in exchange for a distinct good or service;

b) a reimbursement of costs incurred by the entity to sell the vendor’s products;

or c) consideration for sales incentives offered to customers by manufacturers.

Contract Liability

As of December 31, 2024, the Company has recognized contract liabilities of $ 0.5 million, primarily related to advance payments received from collaboration agreements for services to be performed in future periods.

These contract liabilities are expected to be recognized as revenue within the next 12 months.

The Company has recognized contract liabilities, primarily related to advance payments received from collaboration agreements for services to be performed in future periods.

These contract liabilities are expected to be recognized as revenue within the next 12 month.

The Company’s balance on January 1, 2024 was $ 360 thousand.

During 2024, the Company added $ 128 thousand related to new advanced deposits collected, offset by a release of $ 42 thousand for the recognition of revenue related to the completion of the performance obligation contracts and foreign currency translations of $ 4 thousand.

The Company’s balance as of December 31, 2024 was $ 450 thousand.

During 2025, the Company added $ 3 thousand related to new advanced deposits collected, offset by a release of $ 391 thousand for the recognition of revenue related to the completion of the performance obligation contracts and foreign currency translations of $ 46 thousand.

The Company’s balance as of December 31, 2025 was $ 108 thousand.

Research and Development Expenses

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Other Operating Income

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

relief for small and medium-sized enterprises, which is a government tax incentive designed to reward innovative companies for investing in research and development.

The Company’s other operating income includes government grants received for qualifying research and development projects, and research and development tax credits related to the United Kingdom’s Research and Development tax relief for small and medium-sized enterprises, which is a government tax incentive designed to reward innovative companies for investing in research and development.

Such incentives are recorded as other income when it is probable the amounts are collectible and can be reasonably estimated.

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A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, is recognized as other operating income in the period in which it is receivable.

For the year ended December 31, 2024 and 2023, the Company recorded grant income and research & development tax credits of $ 1.0 million and $ 0.8 million, respectively, which are recorded as other operating income in the accompanying consolidated statements of operations.

As of December 31, 2024 and 2023, the Company had receivables related to research & development tax credits for payments not yet received of $ 0.5 million and $ 0.6 million, respectively and receivables related to a government grants of $ 62 thousand as of December 31, 2024 and $ 160 thousand as of December 31, 2023.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the year ended December 31, 2025 and 2024, the Company recorded grant income and research & development tax credits of $ 1.0 million for both years, which are recorded as other operating income in the accompanying consolidated statements of operations.

As of December 31, 2025 and 2024, the Company had receivables related to research & development tax credits for payments not yet received of $ 0.5 million for both years.

Share-based compensation

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Due to the Exchange, all options outstanding immediately prior to the event with a performance obligation requirement became vested and exercisable..

Non-cash stock-based compensation expense for the year ended December 31, 2024 and 2023 were $ 0.9 million and $ 0.7 million, respectively (see also Note 9).

The estimated fair value of stock options at the grant date is determined using the Black-Scholes pricing model.

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Functional Currency and Operations

Prior to the Exchange, SmartKem Limited’s (“the predecessor’s”) functional currency was the British Pound Sterling (“GBP”), and the consolidated financial statements were presented in United States dollars (“USD”).

The predecessor’s functional currency was the respective local currency of the primary economic environment in which an entity’s operations are conducted.

The predecessor translated the consolidated financial statements into the presentation currency using exchange rates in effect on the balance sheet date for assets and liabilities and average exchanges rates for the period for statement of operations accounts, with the difference recognized in accumulated other comprehensive loss.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company’s functional currency is USD.

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Should the Company change its determination, based on the evidence available as to the amount of its deferred tax assets that can be realized, the valuation allowance will be adjusted with a corresponding impact to the provision for income taxes in the period in which such determination is made and which may be material.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2025, and 2024, there were no material uncertain tax positions.

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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.

SMARTKEM, INC.

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Notes to Consolidated Financial Statements

with reported net operating losses, all common stock options and warrants are generally deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.

The following potentially dilutive securities were excluded from the computation of earnings per share as of December 31, 2025 and 2024 because their effects would be anti-dilutive:

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Stock options

Recent Accounting Pronouncements

In November 2023, the 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 CODM.

The pronouncement is effective for annual filings for the year ended December 31, 2024.

The adoption of this guidance did not have a material impact in the consolidated financial statements of the Company.

See Note 14 – Segment Reporting for further information.

In December 2023, the FASB issued Accounting Standards Update (ASU) No.

2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures which will require companies to make additional income tax disclosures.

The pronouncement is effective for annual filings for the year ended December 31, 2025.

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.

Recently Issued Accounting Pronouncement

On November 2024, the FASB issued Accounting Standards Update (ASU) No.

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The Company is currently assessing the potential impacts of adoption on its consolidated financial statements and related disclosures.

In July 2025, the FASB issued ASU 2025-05, Financial Instruments - Credit Losses, which provides a practical expedient for estimating expected credit losses for current accounts receivable and current contract assets that arise from transactions accounted for under Topic 606, Revenue from Contracts with Customers.

ASU 2025-05 is effective for annual periods beginning after December 15, 2025 and interim periods within those annual reporting periods and should be applied prospectively, with early adoption permitted.

The Company is assessing the impact of adopting this standard.

In December 2025, the FASB issued ASU 2025-12, Codification Improvements, which clarifies various topics in the Accounting Standards Codification to improve consistency and address technical corrections.

Key improvements include clarifying the calculation of diluted earnings per share (EPS) when a loss from continuing operations exists.

The amendments in this update are effective for the Company beginning January 1, 2027, with early adoption permitted.

The Company is assessing the impact of adopting this standard.

In December 2025, the FASB issued ASU 2025-11, Interim Reporting (Topic 270):

Narrow Scope Improvements.

This update clarifies the applicability of interim reporting guidance and the form and content of interim financial statements.

It also establishes a disclosure principle requiring an entity to disclose material events and changes occurring since the end of the last annual reporting period.

ASU 2025-11 is effective for the Company for interim periods within annual reporting periods beginning after December 15, 2027, with early adoption permitted.

The Company is assessing the impact of adopting this standard.

In December 2025, the FASB issued ASU 2025-10, Government Grants (Topic 832):

Accounting for Government Grants Received by Business Entities.

This update establishes authoritative guidance for the recognition, measurement, presentation, and disclosure of government grants received by business entities.

ASU 2025-10 is effective for the Company for interim periods within annual reporting periods beginning after December 15, 2028, with early adoption permitted.

The Company is assessing the impact of adopting this standard.

The Organization for Economic Co-operation and Development (“OECD”) reached an agreement among various countries to implement a minimum 15% tax rate on certain multinational enterprises, commonly referred to as Pillar Two.

Many countries continue to announce changes in their tax laws and regulations based on Pillar Two Proposals.

We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes available.

Given the numerous proposed changes in law and uncertainty regarding such proposed changes, the impact cannot be determined at this time.

As the Company is U.S.

headquartered and subject to the controlled foreign corporation regime in the United States, we expect the impact would be minimal.

We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes

SMARTKEM, INC.

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Notes to Consolidated Financial Statements

Given the numerous proposed changes in law and uncertainty regarding such proposed changes, the impact cannot be determined at this time.

Recently Adopted accounting Pronouncements

In December 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 Company adopted ASU 2023-09 on a prospective basis for the year ended December 31, 2025.

PREPAID EXPENSES AND OTHER CURRENT ASSETS:

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(in thousands)

Advances and retainers

Prepaid insurance

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Prepaid facility costs

VAT receivable

Prepaid software licenses

Prepaid professional service fees

VAT receivable

Tax Receivable

Other receivable and other prepaid expenses

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Depreciation expense was $ 0.2 million and $ 0.3 million for the year ended December 31, 2025 and 2024, respectively, and is classified as research and development expense.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

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Payroll liabilities

Accrued expenses – audit & accounting fees

Accrued expenses – technical fees

Accrued expenses – other

Accrued expenses – audit & accounting fees

Total accounts payable and accrued expenses

The Company has operating leases consisting of office space, lab space, and equipment with remaining lease terms of 1 to 3 years , subject to certain renewal options as applicable.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company has operating leases consisting of office space, lab space, and equipment with remaining lease terms of less than 3 years , subject to certain renewal options as applicable.

The Company evaluates the nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes the right of use asset and lease liability based on the present value of future minimum lease payments over the expected lease term.

The Company’s leases do not generally contain an implicit interest rate and therefore the Company uses the incremental borrowing rate it would expect to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value of its lease payments.

On May 22, 2025, the Company renewed its lease for research & development, engineering, testing and corporate offices in Manchester, England.

The renewed lease term expires in 2028 with an option for the Company to end the lease in 2027.

On July 14, 2025, the Company entered into a sublease agreement for its office in Taoyuan City, Taiwan.

The lease term expires in 2028 and can be terminated with 60 days ’ notice.

The Company is not the lessor in any lease agreement, and no related party transactions for lease arrangements have occurred.

The table below presents certain information related to the lease costs for the Company’s operating leases for the periods ended:

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Short-term lease cost

Variable lease cost

Total lease cost

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Total lease cost

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Right of use lease assets and lease liabilities for our operating leases were recorded in the consolidated balance sheets as follows:

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The Company had no right of use lease assets or lease liabilities classified financing leases as of December 31, 2025 and 2024.

The table below presents certain information related to the cash flows for the Company’s operating leases for the periods ended:

Year Ended December 31,

(in thousands)

Operating cash outflows from operating leases

Supplemental non-cash amounts of operating lease liabilities arising from obtaining right of use assets

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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:

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Total net lease liabilities

NOTES PAYABLE:

Notes payable consist of the following:

December 31, 2025

(in thousands)

Notes Payable, Current

Total Notes Payable

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Senior Secured Loan

On October 31, 2025, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain purchasers (the “Purchasers”), pursuant to which the Company issued and sold to the Purchasers in a private placement:

(i) Senior Secured Notes (the “Notes”) in the aggregate principal amount of $ 1,100,000 and (ii) warrants (the “Note Warrants”) exercisable for up to an aggregate of 400,000 shares of the Company’s common stock, at an exercise price of $ 2.75 per share for an aggregate purchase price of $ 1,000,000 .

The Notes mature on April 30, 2026 and do not bear interest prior to an event of default.

If an event of default occurs, interest will accrue at an interest rate equal to the lesser of 10 % of the accrued principal amount due and owing under the Notes per annum or the maximum rate permitted under applicable law.

The Notes are not convertible into shares of the Company’s common stock.

In connection with the issuance of the Notes, on October 31, 2025, the Company and its subsidiaries entered into a security agreement with The Hewlett Fund LP, as collateral agent (the “Security Agreement”).

Pursuant to the Security Agreement, each of the Company and its subsidiaries granted the collateral agent a security interest in substantially all of their assets for the benefit of the Purchasers.

The Note Warrants have an exercise price of $ 2.75 per share.

The Note Warrants are exercisable upon issuance and will expire five (5) years from the date of issuance.

The Note Warrants are exercisable in whole or in part in cash.

If at the time of exercise more than six months after the issuance date there is no effective registration statement registering, or the prospectus contained therein is not available for the resale or other disposition of the shares of common stock underlying the Note Warrants, then the Note Warrants may also be exercised, in whole or in part, at such time by means of a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the Note Warrants.

A holder of the Note Warrants will not have the right to exercise any portion of its Note Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99 % (or, at the election of the holder prior to issuance of the Warrants, 9.99 %) of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise.

A holder may increase or decrease the beneficial ownership limitation up to 9.99 %, provided, however, that any increase in the beneficial ownership limitation shall not be effective until 61 days following notice of such change to us.

In the event of certain fundamental transactions, the holder of the Note Warrants will have the right to receive the Black Scholes Value of its Notes Warrants calculated pursuant to a formula set forth in the Note Warrants.

The securities described above were sold to the Purchasers without registration under the Securities Act or state securities laws in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.

As of March 18, 2026 the Notes are no longer outstanding.

Please see Note 15 for additional information.

COMMITMENTS AND CONTINGENCIES:

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In the opinion of management, any potential liabilities resulting from such claims would not have a material effect on the consolidated financial statements.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

STOCKHOLDERS’ EQUITY:

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These rights, preferences, and privileges could include dividend rights, conversion rights, voting rights, redemption rights, liquidation preferences, sinking fund terms, and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock.

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 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-1 Preferred Stock with a stated value of $ 1,000 per share (the “Series A-1 Certificate of Designation”).

On January 29, 2024, the Company filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitation with the Secretary of the State of Delaware designating 11,100 shares of Series A-1 Preferred Stock, and on December 20, 2024, the Company filed a Second Amended and Restated Certificate of Designation of Preferences, Rights and Limitation with the Secretary of the State of

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Delaware designating 11,100 shares 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 Second Amended and Restated Series A-1 Certificate of Designation:

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.

Voting Rights

The shares of Series A-1 Preferred Stock have no voting rights, except to the extent required by the Delaware General Corporation Law.

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 $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement (a) alter or change the powers, preferences or rights given to the Series A-1 Preferred Stock, (b) alter or amend the Amended and Restated Certificate of Incorporation (the “Charter”), the Series A-1 Certificate of Designation or the or the bylaws of the Company (the “Bylaws”) in such a manner so as to materially adversely affect any rights given to the Series A-1 Preferred Stock, (c) increase the number of authorized shares of Series A-1 Preferred Stock, (d) issue any Series A-1 Preferred Stock except pursuant to the Purchase Agreement, or (e) enter into any agreement to do any of the foregoing.

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, pari passu with holders of the common stock, out of the assets available for distribution to stockholders of the Company an amount equal to the amount that would otherwise be payable to them if all of the shares of Series A-1 Preferred Stock had converted into shares of common stock immediately prior to such Liquidation.

The Series A-1 Preferred Stock is convertible into common stock at a conversion price of $ 4.34 .

Conversion at the Option of the Holder

From and after the earlier of (i) the date on which the registration statement covering the resale or other disposition of the additional shares of common stock that are issuable as a result of the Second Amended and Restated Certificate of Designation of the Series A-1 Preferred Stock is declared effective by the SEC (the “Effective Date”) and (ii) the six-month anniversary of December 20, 2024, the Series A-1 Preferred Stock is convertible at the then-effective Series A-1 Conversion Price at the option of the holder at any time and from time to time.

Mandatory Conversion

All outstanding shares of Series A-1 Preferred Stock shall automatically be converted into shares of common stock upon the earlier of (i) the Effective Date and (ii) the date and time, or upon the occurrence of an event, specified by vote or written consent of the holders of a majority of the then outstanding

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

shares of the Series A-1 Preferred Stock which must include AIGH for so long as AIGH is holding at least $ 1,500,000 in aggregate Stated Value of Series A-1 Preferred Stock (a “Mandatory Conversion”).

In the case of a Mandatory Conversion, the holders of Series A-1 Preferred Stock shall receive (i) shares of shares in an amount that would not cause such holder to exceed its Beneficial Ownership Limitation (as defined below) (after giving effect to the Mandatory Conversion of shares of Series A-1 Preferred Stock held by the other holders), and (ii) Class C Warrants exercisable for the remaining shares which the holder would otherwise be entitled to receive.

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 4.99 % (or 9.99 % at the election of the holder) of the outstanding common stock.

However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99 % upon notice to us, provided that any increase in this limitation will not be effective until 61 days after such notice from the holder to us and such increase or decrease will apply only to the holder providing such notice.

Preemptive Rights

No holders of Series A-1 Preferred Stock will, as holders of Series A-1 Preferred Stock, have any preemptive rights to purchase or subscribe for common stock or any of our other securities.

The shares of Series A-1 Preferred Stock are not redeemable by the Company.

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 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-2 Preferred Stock with a stated value of $ 1,000 per share (the “Series A-2 Certificate of Designation”).

Pursuant to the terms of the Series A -2 Certificate of Designation, on May 30, 2024, the trading day immediately prior to the listing of the common stock on the Nasdaq Capital Market, the 2,411 then outstanding shares of Series A-2 Preferred Stock automatically converted into an aggregate of 275,576 shares of common stock.

The Company filed a Certificate of Elimination with respect to the Series A-2 Certificate of Designation, pursuant to which, effective June 18, 2024, all matters set forth in the Series A-2 Certificate of Designation were eliminated from the Company’s Amended and Restated Certificate of Incorporation.

Series A-1 and A-2 Preferred Stock and Class A and Class B Warrant Issuances and related Amendments

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) 9,229 shares of Series A-1 Convertible Preferred Stock at a price of $ 1,000 per share (the “Series A-1 Preferred Stock”), (ii) 2,950 shares of the Company’s

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Series A-2 Convertible Preferred Stock at a price of $ 1,000 per share (“Series A-2 Preferred Stock” and together with the Series A-1 Preferred Stock, the “Preferred Stock”), (iii) Class A Warrants to purchase up to an aggregate of 1,391,927 shares of common stock (the “Class A Warrant”), and (iv) Class B Warrants to purchase up to an aggregate of 798,396 shares of common stock (the “Class B Warrant” and together with the Class A Warrant, the “Warrants”) for aggregate gross proceeds of $ 12.2 million (the “June 2023 PIPE”).

In addition, 34,286 Class B Warrants were issued in lieu of cash payments for consulting services related to the offering.

The fair value of the service provided was $ 59 thousand.

On June 22, 2023, in a second closing of the June 2023 PIPE, the Company sold an aggregate of (i) 1,870.36596 Series A-1 Preferred Stock, (ii) 100 shares of Series A-2 Preferred Stock, and (iii) Class A Warrants to purchase up to an aggregate of 225,190 shares of common stock pursuant to the Purchase Agreement for aggregate gross proceeds of $ 2.0 million.

In addition, 8,572 Class B Warrants were issued in lieu of cash payments for consulting services related to the offering.

The fair value of the service provided was $ 15 thousand.

Each Class A Warrant has an exercise price of $ 8.75 and each Class B Warrant has an exercise price of $ 0.35 , both subject to adjustments in accordance with the terms of the Warrants.

The Warrants expire five years from the issuance date.

There were an additional 127,551 warrants issued related to a placement agent fee.

The fair value of this fee is $ 31 thousand.

The Company 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 not 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.

The Company received net proceeds after expenses of $ 12.7 million.

Of the net proceeds, the Company initially allocated an estimated fair value of $ 1.8 million to the derivative instrument liability related to the Warrants.

The Company also expensed $ 0.2 million of issuance costs that were allocated to the warrant liability.

January 2024 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, 90 % of its Series A-1 Preferred Stock (the “Conversion Commitment”) into shares of common stock or Class C Warrants (each a “Class C Warrant”) covering the shares of common stock that would have been issued to such Holder but for the Beneficial Ownership Limitation (the “Exchange”).

The Class C Warrants have an exercise price of $ 0.0001 , were exercisable upon issuance and will expire when exercised in full.

Under the Consent Agreement, the Company issued (i) 412,293 shares of common stock and (ii) Class C Warrants to purchase up to 726,344 shares of common stock upon the conversion or exchange of an aggregate of 9,963 shares of Series A-1 Preferred Stock.

1,106 shares of Series A-1 Preferred Stock remained outstanding after giving effect to the transactions contemplated by the Consent Agreement.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 to (i) make certain adjustments to reflect the Company’s one -for-thirty-five (1:35) reverse stock split effected on September 21, 2023, (ii) remove all voting rights, except as required by applicable law, (iii) increase the stated value of the Series A-1 Preferred Stock to $ 10,000 from $ 1,000 , and (iv) adjust the conversion price of the Series A-1 Preferred Stock to $ 87.50 as a result of the increase in stated value.

The Company credited additional paid in capital $ 7.1 million for deemed dividends as a result of (i) the exchange of Series A-1 Preferred Shares for Series C Warrants, based on the fair value of the Series C Warrants in excess of the carrying value of the preferred shares and (ii) the amendment of Series A-1 Preferred Stock accounted for as an extinguishment, based on the fair value of the Series A-1 Preferred Stock immediately before and after the amendments.

The Company estimated the fair value of the deemed dividend related to the exchange of Series A-1 Preferred Stock for Series C Warrants as part of the fair value model utilized to value all the securities issued in the transaction with the stock price input estimated as of the January 26, 2024, transaction date.

The Company estimated the fair value of the deemed dividend related to the amendment of preferred stock using an option pricing model based on the following assumptions:

(1) dividend yield of 19.99 %, (2) expected volatility of 50.0 %, (3) risk-free interest rate of 4.15 %, and (4) expected life of 10.0 years.

December 2024 Consent and Amendment Agreement and Hewlett Release

On December 17, 2024, the Company entered into a Consent and Amendment Agreement (the “December 2024 Consent and Amendment Agreement”) with certain holders of securities issued in the Company’s June 2023 PIPE pursuant to which, among other things, such holders agreed to (i) amend certain of the terms of the Purchase Agreement, dated June 14, 2023 and (ii) amend and restate certain of the provisions of the Company’s Series A-1 Preferred Stock effective immediately prior to the closing of the December 2024 Registered Direct Financing and Concurrent Private Placement discussed further below (the “Effective Time”).

In the December 2024 Consent and Amendment Agreement, the such holders agreed to further amend and restate the Amended and Restated Series A-1 Certificate of Designation to, among other things:

(i) remove the obligation of the Company to pay dividends on shares of the Series A-1 Preferred Stock in certain circumstances;

(ii) remove the provisions of the Amended and Restated Series A-1 Certificate of Designation that required the Company to obtain the consent of the holders of a majority of the outstanding shares of Series A-1 Preferred Stock to take certain actions, such as the incurrence of certain indebtedness, the granting of liens and the purchase or redemption of outstanding equity securities;

(iii) remove the liquidation preference applicable to the Series A-1 Preferred Stock;

(iv) reduce the conversion price of the Series A-1 Preferred Stock to $ 4.34 ;

(v) prevent the conversion of the Series A-1 Preferred Stock for a period ending on the earlier of (A) the effective date of a resale registration statement covering the additional shares of common stock issuable upon the conversion of the Series A-1 Preferred Stock as a result of the reduction in the conversion price and (B) the six-month anniversary of the Effective Time;

(vi) provide for the automatic conversion of the Series A-1 Preferred Stock into either shares of common stock or the Company’s Class C Warrants at the conversion price upon the earlier of (A) the Effective Date or (B) as determined by the written consent of the holders of at least a majority of the outstanding shares of Series A-1 Preferred Stock which must include AIGH for so long as AIGH holds at least $ 1,500,000 in aggregate Stated Value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement;

and (vii) remove certain price protection provisions which had expired pursuant to their terms.

The Company also entered into a General Release with the Hewlett Fund LP pursuant to which the Hewlett Fund LP agreed on its own behalf and on behalf of certain of its related parties to release the Company and certain of its related parties from any claims, including claims arising out of the transactions contemplated by the Purchase Agreement, effective as of the Effective Time, in exchange for Class C Warrants to purchase 750,000 shares of common stock.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company credited additional paid in capital $ 2.0 million for deemed dividends as a result of (i) the amendment of Series A-1 Preferred Stock accounted for as an extinguishment, based on the fair value of the Series A-1 Preferred Stock immediately before and after the amendments and (ii) the issuance of Class C Warrants to purchase 750,000 shares of common stock.

The Company estimated the fair value immediately prior to the amendment of preferred stock using an option pricing model based on the following assumptions:

(1) dividend yield of 19.99 %, (2) expected volatility of 50.0 %, (3) risk-free interest rate of 4.15 %, and (4) expected life of 10.0 years.

As of December 31, 2024, there were an aggregate of 856 shares of Series A-1 Preferred Stock outstanding.

Pursuant to the terms of the Series A-2 Certificate of Designation, on May 30, 2024, the trading day immediately prior to the listing of the common stock on the Nasdaq Capital Market, the 2,411 then outstanding shares of Series A-2 Preferred Stock automatically converted into an aggregate of 275,576 shares of common stock.

Pursuant to the terms of the Series A-1 Certificate of Designation, on May 7, 2025, the remaining 856 outstanding shares of Series A-1 Preferred Stock automatically converted into an aggregate of 690,788 shares of common stock and pre-funded Class C Warrants to purchase 1,282,412 shares of common stock.

The Company filed a Certificate of Elimination with respect to the Series A-1 Certificate of Designation, pursuant to which, effective May 7, 2025, all matters set forth in the Series A-1 Certificate of Designation were eliminated from the Company’s Amended and Restated Certificate of Incorporation.

As of December 31, 2025, there were no shares of Series A-1 Preferred Stock outstanding.

Voting Rights

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The Company’s common stock has been trading on the Nasdaq Stock Market LLC under the symbol “SMTK” since May 31, 2024.

December 2024 Registered Direct Financing and Concurrent Private Placement

On December 18, 2024, the Company entered into a securities purchase agreement with certain institutional investors pursuant to which the Company agreed to issue and sell:

(i) in a registered direct public offering 1,449,997 shares of common stock;

and (ii) in a concurrent private placement Class D Common Stock Purchase Warrants (the “Class D Warrants”) to purchase up to 1,449,997 shares of common stock.

The purchase price for each share of common stock sold in the Public Offering was $ 3.00 .

Concurrently, the Company entered into a securities purchase agreement with certain institutional investors pursuant to which the Company agreed to issue and sell in a private placement:

(i) 169,784 shares of common stock;

(ii) Pre-funded Warrants to purchase up to 930,215 shares of common stock;

and (iii) Class D Warrants to purchase up to 1,099,999 shares of common stock.

The purchase price for each share of common stock sold in the Private Placement was $ 3.00 .

The purchase price for each Pre-funded Warrant sold in the Private Placement was $ 2.9999 .

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Pre-funded Warrants

The Pre-funded Warrants may be exercised at any time until all of the Pre-funded Warrants are exercised in full.

Each Pre-funded Warrant is exercisable for one share of common stock at an exercise price of $ 0.0001 per share of common stock.

Class D Warrants

The Class D Warrants have an exercise price of $ 3.00 per share of common stock.

The Class D Warrants were exercisable upon issuance and will expire on December 31, 2025.

If at the time of exercise more than six months after the issuance date there is no effective registration statement registering, or the prospectus contained therein is not available for the resale or other disposition of the shares of common stock underlying the Class D Warrants, then the Class D Warrants may be exercised, in whole or in part, at such time by means of a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the Class D Warrant.

The Company issued an additional 127,499 warrants to the placement agent.

The Company received gross proceeds of $ 7.7 million, before deducting offering expenses payable by the Company.

Common Stock Issued to Vendors for Services

On March 7, 2024, the Company issued 50,000 shares of common stock, as payment for consulting services.

On May 2, 2024, the Company issued 50,000 shares of common stock, as payment for consulting services.

On September 10, 2024, the Company issued 30,000 shares of common stock, as payment for consulting services.

During the twelve months ended December 31, 2025, 490,000 shares of our common stock were issued to a vendor in consideration for services provided.

SMARTKEM, INC.

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$ 0.35 - $ 70.00

( 2,549,996 )

Warrants outstanding at December 31, 2025

$ 0.35 - $ 70.00

During the year ended December 31, 2025, 160 Class B Warrants were exercised at an exercise price of $ 0.35 .

During the year ended December 31, 2025, 400,000 Note Warrants were issued at an exercise price of $ 2.75 .

On December 31, 2025, 2,549,996 Class D Warrants expired.

The company accounted for Note Warrants issued by first considering the criteria under ASC 480 for liability classification, then evaluating the indexation requirements and the scope exception in ASC 815-10 and finally assessing additional equity considerations under ASC 815-40-25 to determine if the warrants should be classified as equity.

The Company determined that the Note Warrants associated the Notes qualified for equity classification.

Since the Note Warrants are deemed to be classified as equity, the proceeds received are allocated between the Notes and the Note Warrants using the relative fair value method.

The fair value of the Note Warrants is calculated using a Black-Scholes calculation using the following inputs:

Expected term (years)

Risk-free interest rate

Expected volatility

Expected dividend yield

A summary of the Company’s pre-funded warrants to purchase common stock activity is as follows:

Pre-funded warrants outstanding at January 1, 2025

( 2,068,663 )

Pre-funded warrants outstanding at December 31, 2025

The Company’s pre-funded warrants have no expiration date and may be exercised at any time until all of the pre-funded warrants are exercised in full.

August 2024 Shelf Registration Statement

On August 18, 2024, the Company filed a universal shelf registration statement on Form S-3 (the “August 2024 Shelf Registration Statement”) with the SEC, pursuant to which the Company may offer, issue and sell any combination of shares of the Company’s common stock, shares of the Company’s preferred stock, debt securities, subscription rights, warrants, and units consisting of any combination of the other types of securities registered under such August 2024 Shelf Registration Statement in an aggregate amount of up to $ 100 million, in each case, to the public in one or more registered offerings.

The August 2024 Shelf Registration Statement was declared effective on August 22, 2024.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

During the year ended December 31, 2025, 1,282,412 Class C Warrants were issued at an exercise price of $ 0.0001 .

During the year ended December 31, 2025, 2,068,663 prefunded warrants were exercised at an exercise price of $ 0.0001 .

SHARE-BASED COMPENSATION:

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or 3) such number of shares of the Company’s common stock as the administrator may determine.

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 issuance under the 2021

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Plan from 125,045 shares to 743,106 shares.

At the 2023 Annual Meeting, the Company’s stockholders approved an amendment (the “2023 Plan Amendment”) to the Company’s 2021 Plan, increasing the number of the shares of common stock reserved for issuance under the 2021 Plan from 125,045 shares to 743,106 shares.

The Company’s Board of Directors (the “Board”) had previously approved the 2023 Plan Amendment, subject to stockholder approval.

At the 2025 Annual Meeting, the Company’s stockholders approved an amendment (the “2025 Plan Amendment”) to the Company’s 2021 Plan, (i) increasing the number of the shares of common stock, reserved for issuance thereunder from 843,692 shares to 1,643,692 shares, and (ii) setting the “evergreen” share amount to 4 % of the outstanding shares of common stock.

The Company’s Board of Directors had previously approved the 2025 Plan Amendment, subject to stockholder approval.

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.

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As a result, if factors change and management uses different assumptions, the share-based compensation expense could be materially different for future awards.

For Year Ended

December 31, 2024

Expected term (years)

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The contractual term is 10 years , and the expected option term is lower.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table reflects share activity under the share option plans for the year ended December 31, 2025:

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Options outstanding at January 1, 2025

Cancelled/Forfeited

Options outstanding at December 31, 2025

Options exercisable at December 31, 2025

The weighted average grant-date fair value of the stock options granted during the years ended December 31, 2025 and 2024 was approximately $ 1.07 and $ 3.35 per share, respectively.

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of our common stock at the end of the year for those options that had exercise prices lower than the fair value of our common stock.

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General and administration

As of December 31, 2024, there was $ 1.7 million of compensation cost related to non-vested stock option awards not yet recognized that will be recognized on a straight-line basis through the end of the vesting periods in June 2027.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.

As of December 31, 2025, there was $ 1.8 million of compensation cost related to non-vested stock option awards not yet recognized that will be recognized on a straight-line basis through the end of the vesting periods in September 2028.

The amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.

INCOME TAXES:

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Loss before income taxes

A reconciliation of the statutory income tax rate to the Company’s effective tax rate consists of the following:

For the Years Ended December 31,

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company adopted ASU 2023-09 "Income Taxes (Topic 740):

Improvements To Income Tax Disclosures" on a prospective basis beginning with the year ended December 31, 2025.

The following table presents required disclosure pursuant to ASU 2023-09 and reconciles the U.S.

federal statutory tax amount and rate to our actual global effective amount and rate for the year ended December 31, 2025:

For the year ended December 31, 2025

(in thousands)

federal statutory tax rate

State and local income taxes, net of federal income tax effect (1)

Foreign tax effects

United Kingdom

Statutory tax rate difference between United Kingdom and the United States

Changes in valuation allowances

Nondeductible research expense

Effect of changes in tax laws or rates enacted in the current period

Effect of cross-border tax laws

Changes in valuation allowances

Nontaxable or nondeductible items

Stock compensation

Changes in unrecognized tax benefits

Other adjustments

Provision for income taxes and effective tax rate

(1) During the year ended December 31, 2025, state taxes in California made up the majority of tax effects in this category.

The following table presents the required disclosures prior to the adoption of ASU 2023-09 and reconciles the U.S.

federal statutory income tax rate to the actual global effective income tax rate for the year ended December 31, 2024:

For the year ended December 31,

(in thousands)

Taxes at domestic rate

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Effective tax rate

The components of income tax provision/(benefit) are as follows:

Total Current

Total Deferred

SMARTKEM, INC.

1 unchanged sentence

Notes to Consolidated Financial Statements

The components of income tax provision/(benefit) are as follows:

Total Current

Total Deferred

Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.

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The Company has no uncertain tax positions, or penalties and interest accrued, that if recognized would reduce net operating loss carry-forwards or affect tax expense.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company files tax returns as prescribed by the tax laws in the Unites States and United Kingdom in which they operate.

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As of December 31, 2025 and December 31, 2024, the Company had no accrued interest and penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company adopted ASU 2023-09 on a prospective basis for the year ended December 31, 2025 and has included the following table as a result of adoption, which presents income taxes paid (net of refunds received) for the year ended December 31, 2025:

For the year ended December 31,

(in thousands)

State subtotal

United Kingdom

Foreign subtotal

Total cash paid for income taxes (net of refunds)

The Company had $ 1 thousand of income taxes paid for the year ended December 31, 2024, prior to the adoption of ASU 2023-09.

On July 4, 2025, the One Big Beautiful Bill Act was enacted, introducing significant changes to U.S.

federal tax law, including modifications to corporate tax rates, deductions, and tax credit provisions.

As of December 31, 2025, the Company completed its analysis and determined that no material adjustments resulted from the new legislation.

DEFINED CONTRIBUTION PENSION:

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As of December 31, 2024, there was $ 16 thousand owed to the pension scheme.

FAIR VALUE MEASUREMENTS:

The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value for the year ended December 31, 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 December 31, 2024

As disclosed in Note 8 of the Company’s consolidated financial statements, the Company allocated part of the proceeds of private placement of the Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock to warrant liability issued in connection with the transaction.

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

These models use inputs such as the underlying price of the shares issued at the measurement date, expected volatility, risk free interest rate and expected life of the instrument.

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

Accordingly, we 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 stock warrants at May 30, 2024 and December 31, 2023 was determined by using option pricing models assuming the following:

Expected term (years)

Risk-free interest rate

Expected volatility

Expected dividend yield

SMARTKEM, INC.

1 unchanged sentence

Notes to Consolidated Financial Statements

Additionally, the Company had determined that the warrant liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the option pricing models against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820.

There are six inputs:

closing price of SmartKem stock on the day of evaluation;

the exercise price of the warrants;

the remaining term of the warrants;

the volatility of the Company’s stock over that term;

annual rate of dividends;

and the risk-free rate of return.

Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements.

The annual rate of dividends is based on the Company’s historical practice of not granting dividends.

The closing price of SmartKem stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10).

The risk-free rate of return is a Level 2 input as defined in ASC 820-10, while the historical volatility is a Level 3 input as defined in ASC 820.

Since the lowest level input is a Level 3, the Company determined the warrant liability is most appropriately classified within Level 3 of the fair value hierarchy.

There were no assets or liabilities measured at fair value as of December 31, 2024.

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.

Quoted Prices

Significant Other

Warrant liability

Total liabilities

RELATED PARTY TRANSACTIONS:

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We manage our business activities on a consolidated basis and operate as a single operating segment.

Semiconductor materials.

Our revenue is mostly generated from R&D grants and R&D tax credits.

Our income is mostly generated from R&D grants and R&D tax credits.

The accounting policies of the semiconductor materials are the same as those described in Note 2 – Summary of Significant Accounting Policies.

Our CODM is our Chief Executive Officer and President, Ian Jenks.

The CODM uses Net income, as reported on our Consolidated Statements of Comprehensive Income, in evaluating performance of the Semiconductor materials segment and determining how to allocate resources of the Company as a whole and making decisions on perspective joint development and collaboration agreements.

The CODM does not review assets in evaluating the results of the Semiconductor materials segment, and therefore, such information is not presented.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table provides the net losses of the Semiconductor materials segment:

The CODM uses net income, as reported on our Consolidated Statements of Comprehensive Income, in evaluating performance of the segment and determining how to allocate resources of the Company as a whole and making decisions on perspective joint development and collaboration agreements.

The CODM does not review assets in evaluating the results of the segment, and therefore, such information is not presented.

The following table provides the net losses of the segment:

Year Ended December 31,

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Loss before income taxes

Income tax expense

Income tax refund

SUBSEQUENT EVENTS:

1 unchanged sentence

After giving effect to the increase, the total number of shares of common stock that may be issued under the 2021 Plan is 1,916,714 .

Consultant Shares

On January 1, 2025, 10,000 shares of our common stock were issued to a vendor in consideration for services to be provided.

On February 3, 2025, 10,000 shares of our common stock were issued to a vendor in consideration for services to be provided.

On March 3, 2025, 10,000 shares of our common stock were issued to a vendor in consideration for services to be provided.

New CPIIS Framework Agreement

On March 28, 2025 we executed a two-month extension of the Framework Agreement with CPIIS commencing on April 1, 2025.

New CPIIS License of Office Space Agreement

On March 28, 2025, we executed a twelve-month agreement for the lease of office space at CPIIS commencing on April 1, 2025.

Warrant Exercises

Since December 31, 2025 1,930,524 shares of the Company’s common stock were issued upon the exercise of 1,930,977 Pre-Funded Warrants and Class C Warrants.

January 2026 Registered Direct Offering

On January 30, 2026, the Company entered into a securities purchase agreement (the “January 2026 RDO Purchase Agreement”) with an institutional investor, pursuant to which the Company agreed to sell to such investor 677,129 shares (the “Shares”) of the Company’s common stock, par value $ 0.0001 per share (the “Common Stock”) at a

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

purchase price of $ 0.50 per share and 683,871 pre-funded warrants (the “January 2026 Pre-Funded Warrant”) to purchase 683,871 shares of Common Stock at a purchase price of $ 0.4999 per January 2026 Pre-Funded Warrant and an exercise price of $ 0.0001 per share (the “January 2026 Offering”).

The Shares were offered by the Company pursuant to its shelf registration statement on Form S-3 (File No.

333-281608), which was declared effective by the Securities and Exchange Commission on August 22, 2024 and a related base prospectus and prospectus supplement thereunder.

The gross proceeds from the January 2026 Offering were $ 680,500 , prior to deducting offering expenses payable by the Company.

The Company intends to use the net proceeds from the Offering for working capital and general corporate purposes.

Debt Conversion Agreement

On February 5, 2026, the Company entered into a debt conversion agreement (the “Debt Conversion Agreement”) with SmartKem Limited, a wholly owned subsidiary of the Company, and a creditor (the “Creditor”), pursuant to which the Company agreed to issue to the Creditor (i) 385,130 shares of Common Stock, at an ascribed price of $ 2.75 per share and (ii) pre-funded warrants (the “February 2026 Pre-Funded Warrant”) to purchase 348,260 shares of Common Stock in satisfaction of approximately $ 2,016,821 owed to the Creditor by SmartKem Limited.

The February 2026 Pre-Funded Warrants are immediately exercisable at an exercise price of $ 0.0001 per share and may be exercised at any time until the February 2026 Pre-Funded Warrants are exercised in full.

Nasdaq Listing Deficiencies

On February 12, 2026, the Listing Qualifications Department of Nasdaq notified the Company that, based upon the Company’s continued non-compliance with the Equity Rule, the Staff had determined to delist the Company’s securities from Nasdaq unless the Company timely requests a hearing before the Nasdaq Hearings Panel (the “Panel”).

The Company timely requested a hearing, which stayed the delisting and suspension of the Company’s securities pending the decision of the Hearings Panel.

There can be no assurance that the Company will be able to evidence compliance with the Equity Rule or other applicable requirements for continued listing on The Nasdaq Capital Market prior to the hearing or that the Panel will grant the Company a further extension period in accordance with the Nasdaq Listing Rules.

On March 5, 2026, the Company received an additional letter (the “Bid Price Deficiency Letter”) from the Listing Qualifications Department of Nasdaq indicating that the Company is not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Rule”) for continued listing on the Nasdaq Capital Market.

Based on the closing bid price of the Company’s common stock between January 21, 2026, and March 4, 2026, the Company no longer meets the minimum bid price requirement.

The Bid Price Deficiency Letter has no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Capital Market.

Senior Secured Note Financing

On March 18, 2026, the Company entered into a Securities Purchase Agreement (the "March 2026 Purchase Agreement") with certain accredited investors (each the “Note Buyer”, collectively the "Note Buyers"), pursuant to which the Company agreed to issue and sell to the Note Buyers senior secured promissory notes (the "March 2026 Notes") in the aggregate original principal amount of $ 3,750,000 for an aggregate purchase price of $ 2,625,000 , reflecting an original issue discount of approximately 30 %.

The March 2026 Notes do not bear interest unless an Event of Default has occurred, in which case interest accrues at a rate of 14 % per annum.

The March 2026 Notes mature on the six-month anniversary of the original issuance date, subject to extension at the option of each Note Buyer in the event that an Event of Default has occurred.

In addition, if the Company or any of its subsidiaries consummates a subsequent placement of securities, each Note Buyer may elect to exchange all or any portion of the then outstanding principal amount of its March 2026 Note into the securities being issued in such subsequent placement, with the aggregate amount of such securities valued at 120 % of the exchanged principal amount.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In connection with the March 2026 Purchase Agreement, the Company and its subsidiaries entered into a Security and Pledge Agreement (the "March 2026 Security Agreement," and together with the March 2026 Purchase Agreement, the March 2026 Notes, and the March 2026 Guaranties (as defined below), the "March 2026 Transaction Documents") in favor of the collateral agent (the "Collateral Agent") for the benefit of the Note Buyers.

Pursuant to the March 2026 Security Agreement, the Grantors granted to the Collateral Agent a first priority perfected security interest in all existing and future assets of the Company and its direct and indirect subsidiaries, including a pledge of all of the capital stock of each subsidiary, as security for the Company's obligations under the March 2026 Transaction Documents.

In connection with the March 2026 Security Agreement, the Company and its subsidiaries also entered into an Intellectual Property Security Agreement (the "IP Security Agreement"), pursuant to which the Grantors granted to the Collateral Agent a continuing security interest in certain of their intellectual property, as additional collateral security for the obligations under the March 2026 Transaction Documents.

In addition, each subsidiary of the Company executed and delivered Guaranties (the "Guaranties") in favor of the Collateral Agent, for the benefit of the Buyers, pursuant to which each such subsidiary unconditionally and irrevocably guaranteed the payment and performance of all of the Company's obligations under the March 2026 Purchase Agreement, the March 2026 Notes, and the other March 2026 Transaction Documents.

As discussed below, on March 30, 2026 all Note Buyers elected to exchange all of the then outstanding principal into securities issued in a private placement of preferred stock and warrants.

Notes Payable

On March 18, 2026, the Company entered into Settlement Agreements and Releases (collectively, the "Settlement Agreements") with the Purchasers of the Notes issued by the Company on October 31, 2025, pursuant to a Securities Purchase Agreement dated June 14, 2023 (as amended, the "Prior Purchase Agreement").

The Settlement Agreements were entered into to resolve certain claims alleged by the Purchasers against the Company in connection with the Notes, which claims the Company denied.

Pursuant to the Settlement Agreements, the Company agreed to (i) repay each Purchaser the outstanding principal amount of its respective Note in full within two ( 2 ) business days following the effective date of the Settlement Agreements, and (ii) pay to the Holders an aggregate cash settlement payment of $ 300,000 by wire transfer of immediately available funds.

In addition, pursuant to the Settlement Agreements, the Company agreed to assign, transfer, and convey to SmartKem IP LLC, a Delaware limited liability company, certain of the Company's right, title, and interest in and to certain patents and patent applications, together with all continuations, continuations-in-part, divisionals, reissues, reexaminations, extensions, foreign counterparts, and all rights to sue for past, present, and future infringement thereof.

In furtherance thereof, the Company and its subsidiary, SmartKem Ltd, a corporation organized under English law (the "Assignor"), entered into an Intellectual Property Assignment Agreement (the "IP Assignment Agreement") with SmartKem IP LLC (the "Assignee"), pursuant to which the Assignor irrevocably conveyed, transferred, and assigned to the Assignee certain of the Assignor's right, title, and interest in and to certain patents, patent applications, and related intellectual property rights, together with all royalties, fees, income, and proceeds related thereto, and all claims and causes of action with respect thereto.

In connection with the Settlement Agreements, the Company and the Holders entered into Waiver and Termination Agreements (the "Waiver and Termination Agreements") with respect to the Prior Purchase Agreement.

Pursuant to the Waiver and Termination Agreements, the Holders agreed to (i) waive compliance with the Lower Priced Issuance provision set forth in Section 4.12(c) of the Prior Purchase Agreement with respect to the sale of securities pursuant to the Prior Purchase Agreement, (ii) amend Section 4.12(c) of the Prior Purchase Agreement to reset the price threshold thereunder to the lowest price per share at which securities are sold in the contemplated registered direct and private placement offering by the Company, and (iii) subject to the Company's payment of the settlement payment and completion of the patent assignment contemplated by the Settlement Agreements, terminate the Variable Rate Transaction provision set forth in Section 4.12(b) of the Prior Purchase Agreement.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 2026 Registered Direct Offering

On March 20, 2026, the Company entered into a securities purchase agreement (the “March 2026 RDO Purchase Agreement”) with certain institutional investors, pursuant to which the Company agreed to sell to such investors 11,365,350 Shares of the Company’s Common Stock at a purchase price of $ 0.2303 per share (the “March 2026 Offering”).

The Shares were offered by the Company pursuant to its shelf registration statement on Form S-3 (File No.

333-281608), which was declared effective by the Securities and Exchange Commission on August 22, 2024 and a related base prospectus and prospectus supplement thereunder.

The gross proceeds from the March 2026 Offering were $ 2,617,440 , prior to deducting offering expenses payable by the Company.

The Company intends to use the net proceeds from the Offering for working capital and general corporate purposes.

Preferred Stock Offering and Warrants

On March 30, 2026, the Company entered into a securities purchase agreement (the “Preferred Stock Purchase Agreement” with certain institutional investors (collectively, the "Buyers"), including certain Note Buyers pursuant to which the Company agreed to issue and sell to the Buyers in a private placement (the “Private Placement”) (i) 11,411.5 shares of the Company's newly designated Series A Convertible Preferred Stock, par value $ 0.0001 per share, with a stated value of $ 1,000 per share, convertible into shares of Common Stock at an initial conversion price of $ 0.5812 per share, subject to adjustment as set forth in the certificate of designations and (ii) warrants to purchase up to 23,251,960 shares of Common Stock at an initial exercise price of $ 0.5812 per share, subject to adjustment.

The purchase price under the Preferred Stock Purchase Agreement was satisfied in cash and by exchange of $ 2,625,000 March 2026 Notes.

The gross proceeds from the Private Placement were $ 4,629,200 , prior to deducting offering expenses payable by the Company.

The Company intends to use the net proceeds from the Offering for working capital and general corporate purposes.

Equity Line of Credit

On March 30, 2026, the Company entered into a common stock purchase agreement (the "ELOC Purchase Agreement") with an equity line investor (the “ELOC Investor”), pursuant to which the Company has the right, but not the obligation, to sell to the ELOC Investor, and the ELOC Investor is obligated to purchase, up to the lesser of (a) $ 500,000,000 and (b) 19.99 % of the Company's outstanding shares of Common Stock as of the date of the ELOC Purchase Agreement, which number of shares shall be reduced, on a share-for-share basis, by the number of shares of Common Stock issued or issuable pursuant to any transaction or series of transactions that may be aggregated with the transactions contemplated by the ELOC Purchase Agreement under applicable rules of the Trading Market (as defined under the ELOC Purchase Agreement), (unless stockholder approval is obtained or applicable sales qualify as "at market" under applicable rules of The Nasdaq Stock Market LLC), from time to time during the period commencing on the effective date of a registration statement registering the resale of shares issuable under the ELOC Purchase Agreement and ending upon termination of the ELOC Purchase Agreement.

Sales of Common Stock to the Investor under the ELOC Purchase Agreement, if any, will be made by the Company at its sole discretion from time to time by delivering purchase notices to the Investor (each, a "VWAP Purchase").

The purchase price per share for each VWAP Purchase will be equal to 90 % of the lesser of (i) the lowest sale price of the Common Stock on the applicable purchase date and (ii) the volume weighted average price of the Common Stock during the applicable purchase period.

The ELOC Investor's aggregate committed obligation under any single VWAP Purchase shall not exceed $ 5,000,000 .

The ELOC Purchase Agreement prohibits the Company from issuing shares to the ELOC Investor to the extent such shares, when aggregated with all other shares of Common Stock then beneficially owned by the Investor and its affiliates, would cause the ELOC Investor's beneficial ownership to exceed 4.99 % of the outstanding shares of Common Stock.

Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

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-K

Item 8. Financial Statements and Supplementary Data