What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-11-12 compared with 2021-08-13 · 181 added, 218 removed, 527 unchanged (43% of the section changed)

2 unchanged sentences

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except number of shares and per share data)

September 30,

Current assets:

13 unchanged sentences

Stockholders’ Equity:

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*

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 25,541,809 and 13,627,887 shares issued and outstanding , at September 30, 2021 and December 31, 2020, respectively*

Additional paid-in capital

Accumulated other comprehensive loss

( 1,447,191 )

( 1,479,841 )

Accumulated deficit

( 69,713,330 )

( 57,946,115 )

Total Stockholders’ equity

4 unchanged sentences

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended June 30,

Six Months Ended June 30,

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

(in thousands, except number of shares and per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue

6 unchanged sentences

Loss from operations

( 2,459,999 )

( 1,055,642 )

( 11,337,684 )

( 2,493,107 )

Non-operating Income (Expense)

Gain (loss) on foreign currency transactions

Non-operating (Expense)/Income

(Loss)/Gain on foreign currency transactions

Interest expense

( 6,834,772 )

Interest income

Change in fair value of derivative asset

( 6,282,381 )

Loss on conversion of convertible notes payable

( 5,469,825 )

Total non-operating income (expense)

( 18,585,145 )

Total non-operating (expense)/income

Loss before income taxes

( 2,400,900 )

( 1,054,267 )

( 11,767,215 )

( 21,078,252 )

Income tax expense

( 2,400,900 )

( 1,054,267 )

( 11,767,215 )

( 21,078,252 )

( 2,400,900 )

( 1,054,267 )

( 11,767,215 )

( 21,078,252 )

Other comprehensive loss:

1 unchanged sentence

Total comprehensive loss

( 2,385,730 )

( 1,076,133 )

( 11,734,565 )

( 21,639,605 )

Basic & dilutive net loss per common share

Basic & dilutive weighted average shares outstanding

Basic & diluted net loss per common share

Basic & diluted weighted average shares outstanding

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

1 unchanged sentence

AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Three Months Ended September 30,

(in thousands, except share data)

Comprehensive

1 unchanged sentence

Equity (Deficit)

Balance at June 30, 2020

Issuance of common stock

Foreign currency translation adjustment

Balance at September 30, 2020

Comprehensive

Stockholders’

Equity (Deficit)

Balance at June 30, 2021

Stock-based compensation expense

Issuance of common shares to vendor

Stock options exercised

Foreign currency translation adjustment

Balance at September 30, 2021

SMARTKEM, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (Continued)

For the Nine Months Ended September 30,

(in thousands, except share data)

Comprehensive

Stockholders’

Equity (Deficit)

Balance at January 1, 2020

( 1,195,628 )

( 34,812,947 )

( 5,082,435 )

Issuance of common stock

1 unchanged sentence

Foreign currency translation adjustment

( 20,023,985 )

Balance at March 31, 2020

( 1,735,115 )

( 54,836,932 )

Foreign currency translation adjustment

( 1,054,267 )

Balance at June 30, 2020

( 1,756,981 )

( 55,891,199 )

Balance at September 30, 2020

Comprehensive

2 unchanged sentences

Balance at January 1, 2021

( 1,479,841 )

( 57,946,115 )

Issuance of common shares due to exercise of stock-options

6 unchanged sentences

Issuance costs related to common stock and warrants in private placement

( 2,454,324 )

Foreign currency translation adjustment

( 9,366,315 )

Balance at March 31, 2021

( 1,462,361 )

( 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 )

Balance at September 30, 2021

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

1 unchanged sentence

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30,

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

Nine Months Ended September 30,

Cash flows from operating activities:

( 11,767,215 )

( 21,078,252 )

Adjustments to reconcile net loss to net cash used in operating activities:

12 unchanged sentences

Net cash used in operating activities

( 6,440,537 )

( 2,835,358 )

Cash flows from investing activities:

7 unchanged sentences

Payment of issuance costs

( 2,454,324 )

Proceeds from the exercise of stock options

38 unchanged sentences

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.

The Company has established a portfolio relating to its TRUFLEX® technology.

The Company’s portfolio currently includes 124 issued patents, 11 pending patent applications, 25 future national applications, and more than 30 trade secrets.

The patents cover the active semiconductor materials, deposition process and formulations comprising the Company’s TRUFLEX® technology.

is seeking to reshape the world of electronics with a revolutionary semiconductor platform that enables a new generation of displays, sensors and logic.

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

The company’s semiconductor platform can be used in a number of applications including mini-LED displays, AMOLED displays, fingerprint sensors and logic circuits.

SmartKem develops its materials at its research and development facility in Manchester, UK and its semiconductor manufacturing process at the Centre of Process Innovation (CPI) in Sedgefield, UK.

The company has an extensive IP portfolio including approximately 120 issued patents.

Liquidity and Going Concern

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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 and six months ended June 30, 2021 were deemed to be immaterial to the financial statements.

The additional costs incurred by the Company related to COVID-19 for three and nine months ended September 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 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.

For three and nine months ended September 30, 2021, the Company incurred a net loss of $ 2.7 million and $ 14.4 million, respectively, and used $ 8.1 million in cash to fund operations for the nine months ended September 30, 2021 and had an accumulated deficit of $ 72.4 million as of September 30, 2021.

The Company’s cash as of September 30, 2021 was $ 14.7 million.

Management believes that the existing cash at September 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.

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These unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and accounting principles generally accepted in the United States (“U.S.

GAAP”) for interim reporting.

GAAP”) for interim reporting and are presented in thousands, except number of shares and per share data.

Accordingly, certain notes or other information that are normally required by U.S.

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

As of September 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 June 30, 2021 and December 31, 2020.

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

Concentrations of Credit Risk

20 unchanged sentences

Reversal of previously recorded impairment losses are prohibited.

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.

As of September 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

7 unchanged sentences

Estimating fair values of embedded conversion features requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.

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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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 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.

The carrying value of derivative asset is displayed at fair value.

See Note 8 for additional information regarding fair value measurements.

Convertible Notes

5 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 June 30, 2021 and December 31, 2020.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

15 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 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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the three months ended September 30, 2021 and 2020, the Company recorded grant income and research & development tax credits of $ 447 thousand and $ 747 thousand, respectively, and $ 1,135 thousand and $ 1,125 thousand for the nine months ended September 30, 2021 and 2020, respectively which are recorded as other operating income in the accompanying condensed consolidated statements of operations.

As of September 30, 2021, and December 31, 2020, the Company had receivables related to research & development tax credits for payments not yet received of $ 921 thousand and $ 982 thousand, 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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

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.

14 unchanged sentences

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Valuation allowances are

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740.

2 unchanged sentences

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

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

As of September 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 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.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

As of September 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.

Offering Costs

2 unchanged sentences

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

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

For the nine months ended September 30, 2021 $ 2,454 thousand 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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The Company has 2,168,000 pre-funded common stock warrants outstanding as of September 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.

1 unchanged sentence

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

September 30,

Recent Accounting Pronouncements

2 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-

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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-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.

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

In May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).

The amendments in this update affect all entities that issue freestanding written call options (for example warrants) that are classified in equity.

Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange.

The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Topic 260, Earnings Per Share.

The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

Management is currently evaluating the impact of this guidance but does not expect this update to have a material impact on the Company's financial statements.

SMARTKEM, INC.

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Notes to Condensed Consolidated Financial Statements

PREPAID EXPENSES AND OTHER CURRENT ASSETS:

Prepaid expenses and other current assets consist of the following:

September 30,

Prepaid utilities

3 unchanged sentences

VAT receivable

Other receivables

Total prepaid expenses and other current assets

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.

As of September 30, 2021 and December 31, 2020, there was $ 226 thousand 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:

Property, plant and equipment consist of the following:

September 30,

Plant and equipment

2 unchanged sentences

Accumulated depreciation

( 1,014,063 )

Property, plant and equipment, net

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.

Depreciation expense was $ 52 thousand and $ 50 thousand for three months ended September 30, 2021 and 2020, respectively, and $ 147 thousand and $ 148 thousand for the nine months ended September 30, 2021 and 2020, respectively, and is classified as research and development expense.

SMARTKEM, INC.

3 unchanged sentences

Accounts payable and accrued expenses consist of the following:

September 30,

Accounts payable

Accrued expenses – transaction costs

Accrued expenses – lab refurbishments

7 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 and six months ended June 30, 2021 and 2020.

There was no sublease rental income for three and nine months ended September 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,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Operating lease cost

2 unchanged sentences

Total lease cost

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.

The total lease cost is included in the unaudited condensed consolidated statements of operations as follows:

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Research and development

Selling, general and administrative

Total lease cost

SMARTKEM, INC.

2 unchanged sentences

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

September 30,

Operating lease right of use assets

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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 Company had no right of use lease assets and lease liabilities for financing leases as of September 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,

Nine Months Ended September 30,

Operating cash outflows from operating leases

1 unchanged sentence

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 and finance leases as of the period ended:

September 30,

Weighted average remaining lease term (in years) – operating leases

3 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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:

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

September 30,

Total undiscounted lease payments

3 unchanged sentences

Convertible Notes

On January 24, 2020, a Qualified Financing Event (as defined below) occurred when the Company received cumulative investment proceeds in excess of $ 4,600,000 from the sale and issuance of common shares.

On January 24, 2020, a Qualified Financing Event (as defined below) occurred when the Company received cumulative investment proceeds in excess of $ 4,600 thousand from the sale and issuance of common shares.

The fair value of the Company’s common shares were $ 1.807011 per share.

The 2018 BASF Venture Capital and Entrepreneurs Fund L.P.

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 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,

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 $ 11,796 thousand 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 $ 1,063 thousand 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 $ 5,470 thousand for the nine months ended September 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 thousand as interest expense for the nine months ended September 30, 2020.

For the nine months ended September 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 September 30, 2020 and the three and nine months ended September 30, 2021.

There was interest expense recognized based on the debt’s stated interest for the nine months ended September 30, 2021 and 2020 of zero and $ 43 thousand, respectively, relating to convertible notes.

Additional interest expense related to the amortization of debt issuance cost was zero and $ 25 thousand for the nine months ended September 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 September 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 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).

The amount displayed in the statements of operations and other comprehensive loss for the three months ended September 30, 2020 is inclusive of the loss on notes in the amount of $ 9,344 thousand, loss on accrued interest in the amount of $ 1,046 thousand and offset by the gain on the extinguishment of derivative liability in the amount of $ 4,920 thousand (Note 8).

SMARTKEM, INC.

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

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

(“EF”) with an aggregate principal of $ 5,862 thousand.

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

5 unchanged sentences

2018 Octopus Notes

On July 20, 2018 the Company entered into a convertible note agreement (the “2018 Octopus Investment Limited Notes”) with Octopus Investment Limited (“Octopus”) with an aggregate nominal amount of $ 2,621,713 .

The 2018 Octopus Convertible Note was issued in two separate tranches on July 20, 2018 and December 28, 2018 .

4 unchanged sentences

2019 Octopus, EF, and Other Notes

On June 26, 2019 the Company entered into a convertible note agreement (the “2019 Octopus, EF, and Other Notes”) with Octopus, EF, and various private investors with an aggregate nominal amount of $ 3,681,289 .

The 2019 Octopus Convertible Note was issued in two separate tranches on June 26, 2019 and September 23, 2019 .

2 unchanged sentences

Accrued interest was to be calculated on the basis of a 365 -day year for the actual number of days elapsed.

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

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

SMARTKEM, INC.

2 unchanged sentences

Notes Payable

On January 26, 2021, the Company entered into a term loan facility agreement for the amount of $ 737,898 .

On January 26, 2021, the Company entered into a term loan facility agreement for the amount of $ 738 thousand.

The funds were available to be drawn on from the effective date of the agreement through January 27, 2021.

The Company drew down the full loan amount on January 26, 2021.

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 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.

The loan carries a monthly interest rate of 1.25 %.

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

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’s research and development tax credit was to be utilized as collateral.

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

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

The loan carried a monthly interest rate of 1.25 %.

The interest accrued daily and compounded monthly on the monthly anniversary of the draw down date of the loan.

For nine months ended September 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 nine months ended September 30, 2020.

The interest expense recognized based on the debt’s effective interest rate for nine months ended September 30, 2021 and 2020, was $ 19 thousand and zero , respectively, relating to notes payable.

There were no notes payable outstanding during the three months ended September 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 as of June 30, 2021 and December 31, 2020.

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

DERIVATIVE ASSET:

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 company recorded a derivative asset related to the convertible notes outstanding during the nine months ended September 30, 2020.

The Company measured the derivative asset on a recurring basis using significant unobservable inputs (Level 3) for nine months ended September 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 six months ended June 30, 2020, all outstanding convertible notes were converted into equity.

During the nine months ended September 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 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 and six months ended June 30, 2021, and no associated derivative asset during the period.

The change in fair value of derivative asset included in earnings was $ 6,282 thousand for the nine months ended September 30, 2020.

The gain on extinguishment of derivative asset upon conversion is $ 4,920 thousand 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 and nine months ended September 30, 2021, and no associated derivative asset during the period.

COMMITMENTS AND CONTINGENCIES:

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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 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 six months ended June 30, 2021.

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

During the three months ended September 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 thousand, 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 nine months ended September 30, 2021.

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

SMARTKEM, INC.

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Forfeited or Expired

Warrants outstanding at June 30, 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 six months ended June 30, 2021.

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

Warrants outstanding at September 30, 2021

During the three and nine months ended September 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 .

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Forfeited or Expired

Pre-funded warrants outstanding at June 30, 2021

Pre-funded warrants outstanding at September 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 six months ended June 30, 2021:

Six Months Ended

June 30, 2021

The following assumptions were used during the nine months ended September 30, 2021:

Nine Months Ended

September 30, 2021

Expected term (years)

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Expected dividend yield

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

There were no common stock warrants issued during the nine months ended September 30, 2020.

SMARTKEM, INC.

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Options are subject to vesting and, grantees become fully vested and exercisable when there is a liquidity event, such as a change in control or sale or admission (listing as a public company or initial public offering (“IPO”)), and the employee, or consultant, must be providing services to the Company at the time of the event.

As of the date of the reverse merger and recapitalization all outstanding options which had not been exercised were cancelled and the Company issued options under the 2021 Equity Incentive Plan (“2021 Plan”) in consideration for the cancelled options.

On February 23, 2021 the Company approved the 2021 Plan, in which a maximum aggregate number of shares of common stock that may be issued under the 2021 Plan is 2,275,000 shares.

During the nine months ended September 30, 2020, the Company granted 1,828,128 SmartKem Limited share options to employees and consultants.

These options were either exercised or cancelled as a result of the reverse merger and recapitalization.

On February 23, 2021, the Company approved the 2021 Equity Incentive Plan (“2021 Plan”), in which a maximum aggregate number of shares of common stock that may be issued under the 2021 Plan is 2,275,000 shares.

Subject to the adjustment provisions of the 2021 Plan, the number of shares of the Company’s common stock available for issuance under the 2021 Plan will also include an annual increase on the first day of each fiscal year beginning with 2022 fiscal year and ending on the Company’s 2031 fiscal year in an amount equal to the least of:

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

There were no options granted or modified for the three months ended March 31, 2020.

As a result of the reverse merger an aggregate of 402,586 options were issued during February 2021 in consideration for the cancellation of the SmartKem Limited options that were outstanding.

As a result of the reverse merger and recapitalization, an aggregate of 402,586 options were issued during February 2021 under the 2021 Plan in consideration for the cancellation of the SmartKem Limited options that were outstanding.

Of these options, 336,557 had an exercise price of $ 0.001 per share and 66,029 had an exercise price of $ 2.00 per share and all expire on the ten year anniversary of the grant date.

These options were fully vested on the grant date.

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

During the nine months ended 30 September 2021, the Company has issued a further 1,700,326 options for employees, directors and consultants.

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.

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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.

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

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

Nine Months Ended

September 30, 2021

Expected term (years)

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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 six months ended June 30, 2021:

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

Fair Value at

1 unchanged sentence

( 1,424,622 )

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.

Options outstanding at September 30, 2021

The weighted-average grant-date fair value per share option granted for the nine months ended September 30, 2021 was $ 1.14 .

SMARTKEM, INC.

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Notes to Condensed Consolidated Financial Statements

As of September 30, 2021, there were 336,556 exercisable options outstanding.

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 June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Research and development

Selling, general and administrative

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.

Total compensation cost related to non-vested stock option awards not yet recognized as of September 30, 2021 was $ 1,506 thousand and will be recognized on a straight-line basis through the end of the vesting periods in September 2025.

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

1 unchanged sentence

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Salaries and benefits

Rent and property tax expense

Sales and marketing

5 unchanged sentences

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

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,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Research and development

1 unchanged sentence

Total pension cost

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

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

SMARTKEM, INC.

2 unchanged sentences

RELATED PARTY TRANSACTIONS:

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.

In addition to transactions and balances related share-based compensation to officers and directors, the Company incurred expenses of $ 18 thousand and $ 0 , for the three months ended September 30, 2021 and 2020, respectively, and $ 43 thousand and $ 2 thousand, for the nine months ended September 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 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.

As of September 30, 2021 and December 31, 2020, there was $ 18 thousand 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 nine months ended September 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 $ 66 thousand for the nine months ended September 30, 2021.

The expense incurred during the three months ended September 30, 2021 was zero and there was zero payable as of September 30, 2021.

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.

The consulting services resulted in an expense of zero and $ 35 thousand for the three and nine months ended September 30, 2021.

There was zero payable as of September 30, 2021.

SUBSEQUENT EVENTS:

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.

The Company has evaluated subsequent events through the issuance of these financial statements and is not aware of any material items that would require disclosure in the notes to the financial statements or would be required to be recognized as of September 30, 2021.

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