What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-08-13 compared with 2021-05-17 · 192 added, 129 removed, 553 unchanged (37% of the section changed)

18 unchanged sentences

Stockholders’ Equity:

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 25,437,000 and 13,627,887 shares issued and outstanding , at March 31, 2021 and December 31, 2020 , respectively*

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 25,462,000 and 13,627,887 shares issued and outstanding , at June 30, 2021 and December 31, 2020, respectively*

Additional paid-in capital

12 unchanged sentences

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Cost of revenue

8 unchanged sentences

( 1,055,642 )

( 11,337,684 )

( 2,493,107 )

Non-operating Income (Expense)

Loss on foreign currency transactions

Gain (loss) on foreign currency transactions

Interest expense

5 unchanged sentences

( 5,469,825 )

Total non-operating expense

Total non-operating income (expense)

( 18,585,145 )

2 unchanged sentences

( 1,054,267 )

( 11,767,215 )

( 21,078,252 )

Income tax expense

3 unchanged sentences

( 21,078,252 )

( 2,400,900 )

( 1,054,267 )

( 11,767,215 )

( 21,078,252 )

Other comprehensive loss:

3 unchanged sentences

( 1,076,133 )

( 11,734,565 )

( 21,639,605 )

Basic & dilutive net loss per common share

19 unchanged sentences

( 54,836,932 )

Foreign currency translation adjustment

( 1,054,267 )

Balance at June 30, 2020

( 1,756,981 )

( 55,891,199 )

Comprehensive

Stockholders’

Equity (Deficit)

Balance at January 1, 2021

17 unchanged sentences

( 67,312,430 )

Stock-based compensation expense

Issuance of common shares to vendor

Foreign currency translation adjustment

( 2,400,900 )

Balance at June 30, 2021

( 1,447,191 )

( 69,713,330 )

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

2 unchanged sentences

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

23 unchanged sentences

Repayment of Credit Facility Loan Payable

Proceeds from the issuance of common stock

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

10 unchanged sentences

Cash paid for interest

Right of use asset and lease liability additions

Issuance of common shares for consulting services

Conversion of debt and accrued interest into common shares

7 unchanged sentences

(“SmartKem” or the “Company”) a Delaware corporation, formerly known as Parasol Investments Corporation (“Parasol”), was formed on May 13, 2020 and is the successor, as discussed below, of SmartKem Limited, which was formed under the Laws of England and Wales.

The Company was founded as a “shell” company registered under the Exchange Act, with no specific business plan or purpose until it began operating the business of SmartKem Limited following the closing of the exchange.

On February 23, 2021 Parasol entered into a Securities Exchange Agreement (“the Exchange Agreement”), with SmartKem Limited.

16 unchanged sentences

Notes to Condensed Consolidated Financial Statements

SmartKem is a supplier of high-performance organic semiconductor inks for the manufacture of printed thin film transistors.

The Company’s primary business is the development of materials and processes used to make organic thin-film transistors (OTFTs) for the manufacture of flexible electronics.

The Company’s TRUFLEX semiconductor technology deposits organic ink on a substrate at a temperature as low as 80 ° C, enabling manufactures to use a range of low-cost flexible plastic substrates using existing industry standard equipment and infrastructure.

The Company’s transistor stacks are flexible, bendable, wearable and lightweight and can be used in a number of different applications, including bendable smart-phone displays, curved automotive displays, e-paper displays, wearables, fingerprint sensors and printed biosensors.

SmartKem, Inc.

is a pioneer in the manufacture of Application Specific Organic Materials for organic thin-film transistor (OTFT) backplanes that power the next generation of flexible electronics, displays, sensors and logic.

SmartKem’s unique TRUFLEX® technology allows inks to be deposited at a low temperature on low-cost substrates, resulting in transistor stacks that are flexible, bendable, wearable, and lightweight.

These can be used in a number of next generation display technologies including bendable smartphone displays, curved automotive displays, full color e-paper displays, wearables, fingerprint sensors, printed biosensors and logic.

The Company’s commercial success depends in part on the ability to obtain and maintain intellectual property protection for the inks, processes and know-how comprising its TRUFLEX® technology, to operate without infringing the proprietary rights of others, and to prevent others from infringing on its proprietary rights.

4 unchanged sentences

The accompanying condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company has financed its activities principally from the issuance of ordinary and preferred equity securities.

The Company has financed its activities principally from the issuance of its equity securities.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic (the “Pandemic”).

3 unchanged sentences

Because the severity, magnitude and duration of the Pandemic and its economic consequences are highly uncertain, rapidly changing and difficult to predict, the ultimate impact of the Pandemic on the Company’s business, financial condition and results of operations is currently unknown.

The additional costs incurred by the Company related to COVID-19 for three months ended March 31, 2021 were deemed to be immaterial to the financial statements.

The additional costs incurred by the Company related to COVID-19 for three and six months ended June 30, 2021 were deemed to be immaterial to the financial statements.

The Company anticipates there may be additional costs relating to the Pandemic incurred in the upcoming months that will be attributable to fiscal year 2021 and thereafter.

1 unchanged sentence

The Company has incurred substantial and negative cash flows from operations in every fiscal period since inception.

For three months ended March 31, 2021, the Company incurred a net loss of $ 9.4 million and used $ 3.7 million in cash to fund operations for three months ended March 31, 2021 and had an accumulated deficit of $ 67.3 million as of March 31, 2021.

The Company’s cash as of March 31, 2021 is $ 19.2 million.

Management believes that the existing cash at March 31, 2021 will be sufficient to fund operations for at least the next twelve months following the issuance of these unaudited condensed consolidated financial statements.

For three and six months ended June 30, 2021, the Company incurred a net loss of $ 2.4 million and $ 11.8 million, respectively, and used $ 6.4 million in cash to fund operations for the six months ended June 30, 2021 and had an accumulated deficit of $ 69.7 million as of June 30, 2021.

The Company’s cash as of June 30, 2021 was $ 16.4 million.

Management believes that the existing cash at June 30, 2021 will be sufficient to fund operations for at least the next twelve months following the issuance of these unaudited condensed consolidated financial statements.

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

13 unchanged sentences

Basis of Consolidation

The condensed consolidated financial statements include the accounts of SmartKem Inc and its wholly-owned subsidiaries, SmartKem Delaware, Inc.

The condensed consolidated financial statements include the accounts of SmartKem, Inc.

and its wholly-owned subsidiaries, SmartKem Delaware, Inc.

and SmartKem Limited.

1 unchanged sentence

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

The dissolution of the Company's wholly-owned subsidiary, SmartKem Delaware Inc., was authorized by the Board of Directors and Stockholders on April 28, 2021.

SmartKem Delaware, Inc.

was dissolved on May 13, 2021.

Comprehensive loss

1 unchanged sentence

Management’s Use of Estimates

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S.

The preparation of condensed consolidated financial statements in conformity U.S.

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 financial statements, and the reported amounts of revenues and expenses during the reporting period.

4 unchanged sentences

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

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

The Company 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

SMARTKEM, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology, and compliance with regulatory requirements.

The Company has access under a framework agreement to equipment which is used in the manufacturing of demonstrator products employing the Company’s inks.

4 unchanged sentences

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents.

As of March 31, 2021 and December 31, 2020, the Company does no t have any cash equivalents.

As of June 30, 2021 and December 31, 2020, the Company did no t have any cash equivalents.

Accounts Receivable

5 unchanged sentences

If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances for doubtful accounts would be required.

There was no allowance for doubtful accounts recorded as of March 31, 2021 and December 31, 2020.

There was no allowance for doubtful accounts recorded as of June 30, 2021 and December 31, 2020.

Concentrations of Credit Risk

11 unchanged sentences

Management continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable.

When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows in measuring whether the long-lived asset should be written down to fair value.

Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate.

If the carrying amount is greater than the undiscounted cash flows, the carrying amount of the asset is reduced

When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate

SMARTKEM, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

to the asset’s fair value.

of the related undiscounted cash flows in measuring whether the long-lived asset should be written down to fair value.

Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate.

If the carrying amount is greater than the undiscounted cash flows, the carrying amount of the asset is reduced to the asset’s fair value.

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

Reversal of previously recorded impairment losses are prohibited.

As of March 31, 2021, and December 31, 2020, Company’s management believed that no revision to the remaining useful lives or impairment of the Company’s long-lived assets was required.

As of June 30, 2021 and December 31, 2020, Company’s management believed that no revision to the remaining useful lives or impairment of the Company’s long-lived assets was required.

Derivative Asset for Embedded Conversion Features

14 unchanged sentences

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.

SMARTKEM, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and for three months ended March 31, 2021 and 2020.

Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and for three and six months ended June 30, 2021 and 2020.

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

8 unchanged sentences

The Company determined that all outstanding warrants meet the criteria to be classified as equity.

Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease obligation on the unaudited condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020.

The Company has elected not to present short-term leases as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that the Company is reasonably certain to exercise.

5 unchanged sentences

(1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contact and (5) recognize revenue when a performance obligation is satisfied.

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.

SMARTKEM, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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 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 retractor, at a point in time.

Revenue is recognized upon shipment of each demonstrator, at a point in time.

The Company does not have any significant financing components as payment is received at or shortly after the point of sale.

10 unchanged sentences

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

For the three months ended March 31, 2021 and 2020, the Company recorded grant income and research & development tax credits of $ 432,523 and $ 191,877 , respectively, which are displayed as other operating income in the consolidated statements of operations.

As of March 31, 2021, and December 31, 2020, the Company had receivables related to research & development tax credits for payments not yet received of $ 1,238,049 and $ 981,568 , respectively.

For the three months ended June 30, 2021 and 2020, the Company recorded grant income and research & development tax credits of $ 255,648 and $ 186,119 , respectively, and $ 688,171 and $ 377,996 for the six months ended June 30, 2021 and 2020, respectively which are recorded as other operating income in the accompanying condensed consolidated statements of operations.

As of June 30, 2021, and December 31, 2020, the Company had receivables related to research & development tax credits for payments not yet received of $ 1,490,253 and $ 981,568 , respectively.

Share-based compensation

6 unchanged sentences

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

The Black-Scholes option pricing model requires inputs such as the fair value of common stock on date of grant, expected term, expected volatility, dividend yield, and risk-free interest rate.

The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

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

The Company records forfeitures when they occur.

The Black-Scholes option pricing model requires inputs such as the fair value of common stock on date of grant, expected

SMARTKEM, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

term, expected volatility, dividend yield, and risk-free interest rate.

The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

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

The Company records forfeitures when they occur.

Functional Currency and Operations

16 unchanged sentences

The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.

As of March 31, 2021 and December 31, 2020, there were no accruals for uncertain tax positions.

As of June 30, 2021 and December 31, 2020, there were no accruals for uncertain tax positions.

Contingent Liabilities

2 unchanged sentences

The Company is a party to certain litigation and disputes arising in the normal course of business.

As of March 31, 2021, the Company does not expect that such matters will have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

Offering Costs

Direct and incremental legal and accounting costs associated with the Company’s issuance of common 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 and

As of June 30, 2021, the Company does not expect that such matters will have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

SMARTKEM, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

recorded against the net proceeds received in the issuance.

Offering Costs

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

The deferred offering costs incurred as of December 31, 2020 were immaterial and no offering costs were capitalized.

For the three months ended March 31, 2021 $ 2,454,324 of offering costs were recorded in additional paid-in capital.

For the six months ended June 30, 2021 $ 2,454,324 of offering costs were recorded in additional paid-in capital.

Segment Information

8 unchanged sentences

Accordingly, loss per share for all periods was calculated based on the number of shares retroactively adjusted for the exchange ratio determined in the reverse recapitalization (see also note 1).

The Company has 2,168,000 pre-funded common stock warrants outstanding as of June 30, 2021, which became exercisable on April 23, 2021 based on terms and conditions of the agreements.

As the pre-funded common stock warrants are exercisable for $ 0.01 , these shares are considered outstanding common shares and included in computation of basic and diluted Earnings Per Share as the exercise of the pre-funded common stock warrants is virtually assured.

The Company included these pre-funded common stock warrants in basic and diluted earnings per share when all conditions were met on April 23, 2021.

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they would be anti-dilutive:

3 unchanged sentences

Credit Losses (Topic 326) , which requires measurement and recognition of expected losses for financial assets held.

The new standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new-forward looking approach, based on expected losses.

The new standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new-

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

forward looking approach, based on expected losses.

The estimate of expected credit losses will require organizations to incorporate considerations of historical information, current conditions and reasonable and supportable forecasts.

3 unchanged sentences

Management is currently evaluating the impact of these changes on the Financial Statements.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

PREPAID EXPENSES AND OTHER CURRENT ASSETS:

3 unchanged sentences

Prepaid administrative expenses

Prepaid consulting fees

VAT receivable

1 unchanged sentence

Total prepaid expenses and other current assets

As of March 31, 2021 and December 31, 2020, there was $ 252,656 and $ 0 , respectively, of non-current prepaid insurance related to directors & officers liability that was included in the amounts above.

As of June 30, 2021 and December 31, 2020, there was $ 239,531 and $ 0 , respectively, of non-current prepaid insurance related to directors’ and officers’ liability insurance that was included in the amounts above.

PROPERTY, PLANT AND EQUIPMENT:

4 unchanged sentences

Accumulated depreciation

( 1,014,063 )

Property, plant and equipment, net

Depreciation expense was $ 47,805 and $ 50,155 for three months ended March 31, 2021 and 2020, respectively and is classified as research and development expense.

Depreciation expense was $ 47,383 and $ 48,339 for three months ended June 30, 2021 and 2020, respectively, and $ 95,188 and $ 98,494 for the six months ended June 30, 2021 and 2020, respectively, and is classified as research and development expense.

SMARTKEM, INC.

14 unchanged sentences

The Company has operating leases consisting of office space, lab space, and equipment with remaining lease terms of 1 to 2 years , subject to certain renewal options as applicable.

There was no sublease rental income for three months ended March 31, 2021 and 2020.

There was no sublease rental income for three and six months ended June 30, 2021 and 2020.

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 and finance leases for the periods ended:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Operating lease cost

2 unchanged sentences

Total lease cost

For the three months ended March 31, 2021, and 2020, total lease cost of $ 13,245 and $ 17,308 was recorded as selling, general and administrative in the statements of operations and other comprehensive loss, respectively.

For the three months ended March 31, 2021, and 2020, total lease cost of $ 69,783 and $ 80,200 was recorded as research and development in the statements of operations and other comprehensive loss, respectively.

For the three months ended June 30, 2021 and 2020, total lease cost of $ 8,912 and $ 8,929 , respectively, $ 16,091 and $ 20,606 for the six months ended June 30, 2021 and 2020, respectively, was recorded as selling, general and administrative in the statements of operations and other comprehensive loss.

For the three months ended June 30, 2021 and 2020, total lease cost of $ 119,554 and $ 107,360 , respectively, and $ 206,592 and $ 205,038 for the six months ended June 30, 2021 and 2020, respectively, was recorded as research and development in the statements of operations and other comprehensive loss.

SMARTKEM, INC.

8 unchanged sentences

Operating lease liability, net of current portion

Total lease cost

The Company had no right of use lease assets and lease liabilities for financing leases as of March 31, 2021 and December 31, 2020.

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

Total lease liabilities

The Company had no right of use lease assets and lease liabilities for financing leases as of June 30, 2021 and December 31, 2020.

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

Six Months Ended June 30,

Operating cash outflows from operating leases

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

Undiscounted operating lease liabilities as of March 31, 2021, by year and in the aggregate, having non-cancelable lease terms in excess of one year were as follows:

Undiscounted operating lease liabilities as of June 30, 2021, by year and in the aggregate, having non-cancelable lease terms in excess of one year were as follows:

Total undiscounted lease payments

7 unchanged sentences

Notes (as defined below), 2018 Octopus Investment Limited Notes (as defined below), and the 2019 Octopus, EF, and Other Notes (as defined below) in the aggregate principal amount of $ 11,795,998 were converted into 8,159,977 of common shares (at the discounted price of $ 1.45 per share), and the related unpaid and accrued interest totaling $ 1,062,725 were also converted into 735,148 of A Ordinary common shares of the Company (at the discounted price of $ 1.45 per share).

The Company recognized a loss on conversion of $ 5,469,825 for the three months ended March 31, 2020 related to the conversion of notes measured as the difference in carrying value of debt and accrued interest and the fair value of shares converted on the conversion date.

As a result of the conversion, the Company also recognized the unamortized debt discount related to the beneficial conversion feature of $ 6,767,178 as interest expense for the three months ended March 31, 2020.

For the three months ended March 31, 2020, the Company incurred an effective interest rate of 13.5 % relating to convertible notes.

There were no convertible notes outstanding during the three months ended March 31, 2021.

The interest expense recognized based on the debt’s stated interest rate for the three months ended March 31, 2021 and 2020, was zero and $ 42,784 , respectively, relating to convertible notes.

Additional interest expense related to the amortization of debt issuance cost was zero and $ 24,810 for the three months ended March 31, 2021 and 2020, respectively, for convertible notes.

The Company recognized a loss on conversion of $ 5,469,825 for the six months ended June 30, 2020 related to the conversion of notes measured as the difference in carrying value of debt and accrued interest and the fair value of shares converted on the conversion date.

As a result of the conversion, the Company also recognized the unamortized debt discount related to the beneficial conversion feature of $ 6,767,178 as interest expense for the six months ended June 30, 2020.

For the six months ended June 30, 2020, the Company incurred an effective interest rate of 13.5 % relating to convertible notes.

There were no convertible notes outstanding during the three months ended June 30, 2020 and the three and six months ended June 30, 2021.

There was interest expense recognized based on the debt’s stated interest for the six months ended June 30, 2021 and 2020 of zero and $ 42,784 , respectively, relating to convertible notes.

Additional interest expense related to the amortization of debt issuance cost was zero and $ 24,810 for the six months ended June 30, 2021 and 2020, respectively, for convertible notes.

There was no interest expense or amortization of debt issuance cost recognized relating to convertible notes for the three months ended June 30, 2021 and 2020,

Loss on the conversion of notes is included on the consolidated statements of operations and other comprehensive loss as loss on conversion of convertible notes payable.

The amount displayed in the statements of operations and other comprehensive loss is inclusive of the loss on notes in the amount of $ 9,343,697 , loss on accrued interest in the amount of $ 1,046,085 and offset by the gain on the extinguishment of derivative liability in the amount of $ 4,919,957 (Note 8).

2018 BASF Venture Capital and Entrepreneurs Fund L.P.

On April 18, 2018, the Company entered into a convertible note agreement (the “2018 BASF Venture Capital and Entrepreneurs Fund L.P.

Notes”), with BASF Venture Capital (“BASF”) and Entrepreneurs Fund L.P.

(“EF”) with an

The amount displayed in the statements of operations and other comprehensive loss for the three months ended June 30, 2020 is inclusive of the loss on notes in the amount of $ 9,343,697 , loss on accrued interest in the amount of $ 1,046,085 and offset by the gain on the extinguishment of derivative liability in the amount of $ 4,919,957 (Note 8).

SMARTKEM, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

aggregate principal of $ 5,861,848 .

2018 BASF Venture Capital and Entrepreneurs Fund L.P.

On April 18, 2018, the Company entered into a convertible note agreement (the “2018 BASF Venture Capital and Entrepreneurs Fund L.P.

Notes”), with BASF Venture Capital (“BASF”) and Entrepreneurs Fund L.P.

(“EF”) with an aggregate principal of $ 5,861,848 .

The 2018 BASF/EF Convertible Note was issued in three separate tranches on April 18, 2018, July 20, 2018 , and December 28, 2018 .

18 unchanged sentences

The issuance of convertible notes with a beneficial redemption feature resulted in a debt discount of $ 2,608,351 .

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Notes Payable

3 unchanged sentences

The Company’s research and development tax credit is to be utilized as collateral.

The Lender is to be paid immediately following payment of research and development tax credit from the United

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Kingdom’s HM Revenue and Customs.

The Lender is to be paid immediately following payment of research and development tax credit from the United Kingdom’s HM Revenue and Customs.

The final repayment is due six months from the agreement date, if the loan and any interest has not been repaid in full prior to this date.

1 unchanged sentence

The interest accrues daily and compounds monthly on the monthly anniversary of the draw down date of the loan.

For three months ended March 31, 2021, the Company incurred an effective interest rate of 26.20 % relating to notes payable.

There were no notes payable outstanding during for the three months ended March 31, 2020.

The interest expense recognized based on the debt’s effective interest rate for three months ended March 31, 2021 and 2020, was $ 18,697 and zero , respectively, relating to notes payable.

For six months ended June 30, 2021, the Company incurred an effective interest rate of 26.20 % relating to notes payable.

There were no notes payable outstanding during for the six months ended June 30, 2020.

The interest expense recognized based on the debt’s effective interest rate for six months ended June 30, 2021 and 2020, was $ 18,697 and zero , respectively, relating to notes payable.

There were no notes payable outstanding during the three months ended June 30, 2021 and 2020, and no associated interest expense during the period.

The Company repaid the note payable in full on March 2, 2021.

There were no notes payable outstanding during the three months ended March 31, 2020 and as of March 31, 2020.

There were no notes payable outstanding as of June 30, 2021 and December 31, 2020.

DERIVATIVE ASSET:

The company recorded a derivative asset related to the convertible notes outstanding during the three months ended March 31, 2020.

The Company measured the derivative asset on a recurring basis using significant unobservable inputs (Level 3) for three months ended March 31, 2020.

The company recorded a derivative asset related to the convertible notes outstanding during the six months ended June 30, 2020.

The Company measured the derivative asset on a recurring basis using significant unobservable inputs (Level 3) for six months ended June 30, 2020.

The Embedded Conversion Features are separately measured at fair value, with changes in fair value recognized in current operations.

The original values of the Embedded Conversion Features were recorded as a derivative asset with the offset as a debt premium to the Convertible Notes which is being amortized over the term of the Convertible Notes.

During the three months ended March 31, 2020, all outstanding convertible notes were converted into equity.

During the six months ended June 30, 2020, all outstanding convertible notes were converted into equity.

The derivative asset was marked to market on the date of conversion and derecognized at conversion.

The change in fair value of derivative asset included in earnings was $ 6,282,381 for the three months ended March 31, 2020.

The change in fair value of derivative asset included in earnings was $ 6,282,381 for the six months ended June 30, 2020.

The gain on extinguishment of derivative asset upon conversion is $ 4,919,957 and is recorded as an offset within the loss on conversion of convertible notes payable on the consolidated statements of operations and comprehensive loss.

There were no convertible notes outstanding during the three months ended March 31, 2021, and no associated derivative asset during the period.

There were no convertible notes outstanding during the three and six months ended June 30, 2021, and no associated derivative asset during the period.

COMMITMENTS AND CONTINGENCIES:

2 unchanged sentences

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

STOCKHOLDERS’ EQUITY:

3 unchanged sentences

The holders of one-third of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The Company has never paid any cash dividends to shareholders and do not anticipate paying any cash dividends to shareholders in the foreseeable future.

10 unchanged sentences

The common stock warrants are exercisable at a per share price of $ 2.00 until they expire on February 23, 2026.

During the three months ended March 31, 2021, no warrants issued to vendors for financial advisory services were exercised.

During the three months ended June 30, 2021, no warrants issued to vendors for financial advisory services were exercised.

The grant date fair value for these warrants of $ 0.91 per warrant for a total fair value of $ 896,197 , was determined using the Black-Scholes options valuation model.

The Company recorded the warrants at fair value, as both an increase and decrease in additional paid-in capital during the three months ended March 31, 2021.

The Company recorded the warrants at fair value, as both an increase and decrease in additional paid-in capital during the six months ended June 30, 2021.

There were no warrants issued during the three months ended June 30, 2021.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

1 unchanged sentence

Forfeited or Expired

Warrants outstanding at March 31, 2021

On February 23, 2021, a total of 2,168,000 pre-funded common stock warrants were issued to investors with an exercise price of $ 0.01 per share for total proceeds to the Company of $ 4,314,320 during the three months ended March 31, 2021.

During the three months ended March 31, 2021, no warrants issued to investors were exercised.

Warrants outstanding at June 30, 2021

During the three and six months ended June 30, 2021, no warrants issued to investors were exercised.

The grant date fair value for these warrants of $ 1.99 is based on the stock price at issuance date of $ 2.00 less the exercise price of $ 0.01 .

The pre-funded common stock warrants have no expiration date and terminate upon exercise.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

1 unchanged sentence

Forfeited or Expired

Pre-funded warrants outstanding at March 31, 2021

Pre-funded warrants outstanding at June 30, 2021

The grant date fair value of common stock warrants is determined using the Black Scholes option-pricing model.

The Company is a private company and estimates its expected stock volatility based on historical volatility of publicly traded peer companies.

The following assumptions were used during the three months ended March 31, 2021:

Three Months Ended

March 31, 2021

The following assumptions were used during the six months ended June 30, 2021:

Six Months Ended

June 30, 2021

Expected term (years)

2 unchanged sentences

Expected dividend yield

There were no common stock warrants issued during the three months ended March 31, 2020.

There were no common stock warrants issued during the six months ended June 30, 2020.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SHARE-BASED COMPENSATION:

Prior to the reverse merger and recapitalization transaction discussed in Note 1, SmartKem Limited had stock option plans.

Prior to the Exchange discussed in Note 1, SmartKem Limited had stock option plans.

SmartKem Limited had issued Enterprise Management Incentive options (“EMI Options”) and non-tax-advantaged options ( “Unapproved Options”) to eligible employees, officers, non-employee directors and other individual service providers as a means for them to develop a sense of proprietorship and personal involvement in the development and financial success of SmartKem Limited and to encourage them to devote their best efforts to the business of SmartKem Limited, thereby advancing the interests of SmartKem Limited and its shareholders.

5 unchanged sentences

In the event of a termination of continuous service (other than as a result of a change of control, as defined in the Agreement), unvested share options generally shall terminate and, with regard to vested share options, the exercise period shall be the lesser of the original expiration date or six months from the date continuous service terminates.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The Company has granted these share option awards to employees and consultants.

11 unchanged sentences

These options were fully vested on the grant date.

In addition, the Company issued a further 1,143,976 options during March 2021 for employees and directors.

In addition, the Company issued a further 1,193,976 options during March and April 2021 for employees and directors.

The options vest over a period of four years , have an exercise price of $ 2.00 per share and expire on the ten year anniversary of the grant date.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Determining the appropriate fair value of share-based awards requires the input of subjective assumptions, including the fair value of the Company’s common shares, and for share options, the expected life of the option, and expected share price volatility.

2 unchanged sentences

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

Options granted under the 2021 Plan for three months ended March 31, 2021 were valued using the Black-Scholes option-pricing model with the following assumptions:

Three Months Ended

March 31, 2021

Options granted under the 2021 Plan for six months ended June 30, 2021 were valued using the Black-Scholes option-pricing model with the following assumptions:

Six Months Ended

June 30, 2021

Expected term (years)

4 unchanged sentences

Expected dividend yield

In the absence of a public trading market of the common share, on each grant date, the Company develops an estimate of the fair value of the common share underlying the option grants.

In the absence of a public trading market of the common share, on each grant date, the Company develops an estimate of the fair value of the common shares underlying the option grants.

The Company estimated the fair value of the common shares by referencing arms-length transactions inclusive of the common shares underlying which occurred on or near the valuation date(s).

Once the Company’s common share are publicly traded, the Company will no longer have to estimate the fair value of the common share, rather the value will be determined based on quoted market prices.

Once the Company’s common shares are publicly traded, the Company will no longer have to estimate the fair value of the common share, rather the value will be determined based on quoted market prices.

The Company determined the fair value of common share using methodologies, approaches and assumptions consistent with the AICPA Practice Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation and based in part on input from an independent third-party valuation firm.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The Company estimates its expected volatility by using a combination of historical share price volatilities of similar companies within our industry.

1 unchanged sentence

The expected option term assumption is the contractual term, as the service period is implied under the practical expedient, since the Company does not have sufficient exercise history to estimate expected term of its historical option awards.

The following table reflects share activity under the share option plans for three months ended March 31, 2021:

The following table reflects share activity under the share option plans for six months ended June 30, 2021:

Fair Value at

1 unchanged sentence

( 1,404,813 )

Options outstanding at March 31, 2021

The weighted-average grant-date fair value per share option granted for three months ended March 31, 2021 was $ 1.23 .

As of March 31, 2021, there were 402,586 exercisable options outstanding.

Options outstanding at June 30, 2021

The weighted-average grant-date fair value per share option granted for the six months ended June 30, 2021 was $ 1.22 .

As of June 30, 2021, there were 402,586 exercisable options outstanding.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Stock-based compensation, including stock options and warrants is included in the unaudited condensed consolidated statements of operations as follows:

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Research and development

Selling, general and administrative

Total compensation cost related to non-vested stock option awards not yet recognized as of March 31, 2021 was $ 1,172,043 and will be recognized on a straight-line basis through the end of the vesting periods March 2025.

Total compensation cost related to non-vested stock option awards not yet recognized as of June 30, 2021 was $ 1,147,842 and will be recognized on a straight-line basis through the end of the vesting periods April 2025.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:

Selling, general and administrative expenses are comprised of the following items:

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Salaries and benefits

6 unchanged sentences

The pension cost charge represents contributions payable by the Company to the fund.

Contributions for the three months ended March 31, 2021 and 2020 were $ 31,474 and $ 25,887 , respectively.

For the three months ended March 31, 2021, and 2020, pension cost of $ 8,048 and $ 4,065 was recorded as selling, general and administrative in the statements of operations and other comprehensive loss, respectively.

For the three months ended March 31, 2021, and 2020, pension cost of $ 23,426 and $ 21,822 was recorded as research and development in the statements of operations and other comprehensive loss, respectively.

As of March 31, 2021 and December 31, 2020 there were no amounts owed to the pension scheme.

Contributions for the three months ended June 30, 2021 and 2020 were $ 33,263 and $ 15,377 , respectively, and $ 64,737 and $ 41,264 for the six months ended June 30, 2021 and 2020.

Pension cost is included in the unaudited condensed consolidated statements of operations as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Research and development

Selling, general and administrative

Total pension cost

As of June 30, 2021 and December 31, 2020 there were no amounts owed to the pension scheme.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

RELATED PARTY TRANSACTIONS:

In addition to transactions and balances related share-based compensation to officers and directors, the Company incurred expenses of $ 6,904 and zero , for the three months ended March 31, 2021 and 2020, respectively, due to reimbursement of expenses for members of the Board of Directors.

In addition to transactions and balances related share-based compensation to officers and directors, the Company incurred expenses of $ 18,000 and $ 2,099 , for the three months ended June 30, 2021 and 2020, respectively, and $ 24,904 and $ 2,099 , for the six months ended June 30, 2021 and 2020, respectively, due to reimbursement of expenses and compensation for members of the Board of Directors.

These expenses are recorded in selling, general & administrative in the condensed consolidated statements of operations.

As of March 31, 2021 and December 31, 2020, there was $ 6,904 and zero , respectively, payable to members of the Board of Directors that are recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets.

As of June 30, 2021 and December 31, 2020, there was $ 9,000 and zero , respectively, payable to members of the Board of Directors that are recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets.

During the three and six months ended June 30, 2021, the Company reimbursed an owner for legal fees and other expenses as a result of the Exchange (see Note 1).

The reimbursement of these fees for services resulted in an expense of $ 65,690 for the three and six months ended June 30, 2021.

There was $ 42,222 payable as of June 30, 2021, which is recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets.

The Company obtained consulting services from an individual who is a family member of a Director of the Company.

The consulting services resulted in an expense of $ 21,004 and $ 34,834 for the three and six months ended June 30, 2021.

There was $ 6,910 payable as of June 30, 2021, which is recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets.

SUBSEQUENT EVENTS:

The dissolution of the Company’s wholly-owned subsidiary SmartKem Delaware Inc, was authorized by the Board of Directors and Stockholders on April 28, 2021 .

During August 2021, the Company issued a further 411,150 EMI Options to employees and directors under the 2021 Plan.

The options vest over a period of four years , expire on the tenth anniversary of the grant date and have an exercise price of $ 2.00 per share.

In July 2021, the board approved the issue of 60,000 shares of the Company’s common stock to a vendor in consideration for services to be provided.

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

What changed 10-Q

Item 1. Financial Statements