What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-08-23 compared with 2022-08-23 · 355 added, 205 removed, 368 unchanged (60% of the section changed)

4 unchanged sentences

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

September 30,

Current assets:

12 unchanged sentences

Total liabilities

Commitments and contingencies (Note 8)

Stockholders’ Equity:

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 26,566,809 and 25,554,309 shares issued and outstanding , at March 31, 2022 and December 31, 2021, 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

3 unchanged sentences

Total Liabilities and Stockholders’ Equity

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

Please refer to Note 1

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

SMARTKEM, INC.

2 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue

7 unchanged sentences

Non-operating (Expense)/Income

(Loss) on foreign currency transactions

(Loss)/Gain on foreign currency transactions

Interest expense

Total non-operating (expense)

Interest income

Change in fair value of derivative asset

Loss on conversion of convertible notes payable

Total non-operating (expense)/income

Loss before income taxes

5 unchanged sentences

Basic & diluted weighted average shares outstanding

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

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

SMARTKEM, INC.

1 unchanged sentence

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Three Months Ended March 31,

For the Three Months Ended September 30,

(in thousands, except share data)

2 unchanged sentences

Equity (Deficit)

Balance at January 1, 2021

Issuance of common shares due to exercise of stock-options

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

Repurchase of common stock

( 2,307,700 )

Effect of reverse capitalization

Issuance of common shares to vendor

Issuance of common stock and warrants in private placement

Issuance costs related to common stock and warrants in private placement

Stock options exercised

Foreign currency translation adjustment

Balance at March 31, 2021

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

2 unchanged sentences

Balance at January 1, 2020

Issuance of common stock

Conversion of notes and interest

Foreign currency translation adjustment

Balance at September 30, 2020

Comprehensive

Stockholders’

Equity (Deficit)

Balance at January 1, 2021

Issuance of common shares due to exercise of stock-options

Stock-based compensation expense

Repurchase of common stock

( 2,307,700 )

Effect of reverse capitalization

Issuance of common shares to vendor

Issuance of common stock in private placement (note 13)

Issuance costs related to common stock in private placement

Issuance of common stock and warrants in private placement

Issuance costs related to common stock and warrants in private placement

Foreign currency translation adjustment

Balance at March 31, 2022

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

Balance at September 30, 2021

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

SMARTKEM, INC.

2 unchanged sentences

(in thousands)

Three Months Ended March 31,

Nine Months Ended September 30,

Cash flows from operating activities:

18 unchanged sentences

Cash flows from financing activities:

Proceeds from term loan payable

Repayment of term loan payable

Proceeds from Credit Facility Loan Payable

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

Proceeds from the issuance of common stock in private placement

Payment of issuance costs

7 unchanged sentences

Cash paid for interest

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

Right of use asset and lease liability additions

Conversion of debt and accrued interest into common shares

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

BUSINESS AND BASIS OF PREPARATION

SmartKem Inc.

(“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 described below.

SmartKem 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.

Notes to Condensed Consolidated Financial Statements

BUSINESS AND LIQUIDITY

Restatement Of Previously Filed Financial Statements

1 unchanged sentence

The management of the company has assessed its accounting policies as well as the presentation and accounting for the gain and loss on foreign currency and has concluded that it was necessary to restate its previously issued financial statements for the correction of this error related to incorrect classification of gain and loss on foreign currency in effect of exchange rate changes on cash instead of including such non-cash unrealized gains and losses in cash flows from operating activities.

The effect of this error was to overstate net cash used in operating activities and effect of exchange rate changes on cash by $ 354 thousand for the three months ended March 31, 2022 and by $ 470 thousand for the three months ended March 31, 2021, respectively.

The error and the required restatement had no effect on the Company’s cash flows from investing activities, financing activities, net changes in cash or cash and cash equivalents as of March 31, 2022 and March 31, 2021 and had no impact on the Company’s consolidated balance sheet, the statements of operations and comprehensive loss and stockholders’ equity as of and for the three-month periods ended March 31, 2021 and 2022, respectively.

The effect of this error was to overstate net cash used in operating activities and effect of exchange rate changes on cash by $ 799 thousand for the nine months ended September 30, 2021.

The error and the required restatement had no effect on the Company’s cash flows from investing activities, financing activities, net changes in cash or cash and cash equivalents as of September 30, 2021 and had no impact on the Company’s consolidated balance sheet, statements of operations and comprehensive loss and stockholders’ equity as of and for the three- and nine-month periods ended September 30, 2021.

The changes are presented below (in thousands):

For the Three Months Ended

For the Nine Months Ended

September 30,

Net cash used in operating activities as previously reported

4 unchanged sentences

Effect of exchange rate changes on cash as restated

Basis for Presentation

These unaudited interim 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 and are presented in thousands, except number of shares and per

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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

GAAP have been omitted if they substantially duplicate the disclosures contained in the Company’s annual audited consolidated financial statements.

Accordingly, the unaudited interim condensed consolidated financial statements should be read in connection with the Company’s audited financial statements and related notes as of and for the year ended December 31, 2021.

The accompanying interim condensed consolidated financial statements are unaudited;

however, in the opinion of management, they include all normal and recurring adjustments necessary for a fair presentation of the Company’s unaudited interim condensed consolidated financial statements for the periods presented.

Results of operations reported for interim periods are not necessarily indicative of results for the entire year.

Comprehensive loss of all periods presented is comprised primarily of net loss and foreign currency translation adjustments.

Going Concern

The accompanying unaudited interim 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 ordinary course of business.

Since inception, we have incurred recurring losses including net losses of $ 2.8 million for the three months ended March 31, 2022.

As of March 31, 2022 we had an accumulated deficit of $ 77.8 million.

The Company’s cash as of March 31, 2022 was $ 10.6 million.

We anticipate operating losses to continue for the foreseeable future due to, among other things, costs related to research funding, further development of our technology and products and expenses related to the commercialization of our products.

Management believes that the Company’s existing cash as of March 31, 2022 will be sufficient to fund the operations of the Company through to April 2023 and that the Company will require additional capital to continue its operations and research and development activity thereafter.

There can be no assurance, however, that such financing will be available when needed, if at all, or on acceptable terms and conditions.

The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including the market demand for the Company’s products, the quality of product development efforts, management of working capital, and the continuation of normal payment terms and conditions for purchase of services.

In order to address its capital needs, including its planned research and development activities and other expenditures, the Company is assessing options for financing our working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements.

Adequate financing opportunities might not be available to the Company, when and if needed, on acceptable terms or at all.

If the Company is unable to obtain additional financing in sufficient amounts or on acceptable terms, the Company will be forced to delay, reduce or eliminate some or all of its research and development programs and product portfolio expansion, which could adversely affect its operating results or business prospects.

Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

After considering the uncertainties, management consider it is appropriate to continue to adopt the going concern basis in preparing the consolidated financial statements.

The accompanying unaudited interim condensed consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

Organization & Reverse Recapitalization

SmartKem Inc.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

Reverse Recapitalization

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

2 unchanged sentences

Under ASC 805, Business Combinations, SmartKem Limited was deemed the accounting acquirer based on the following predominate factors:

Parasol was created as a “shell” company to effect a business combination and had no operations, the former shareholders of SmartKem Limited own more than a majority of the outstanding voting stock of the Company, the Company’s board of directors and management consists of the former board of directors and management of SmartKem Limited, SmartKem Limited was the largest entity by assets at the time of the Exchange, and the principal operating location of the Company is SmartKem Limited’s premises which are located in Manchester, United Kingdom.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Company, the Company’s board of directors and management consists of the former board of directors and management of SmartKem Limited, SmartKem Limited was the largest entity by assets at the time of the Exchange, and the principal operating location of the Company is SmartKem Limited’s premises which are located in Manchester, United Kingdom.

The Exchange was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with U.S.

6 unchanged sentences

This includes enterprise management incentive options to purchase 124,497,910 SmartKem Limited ordinary shares (the “SmartKem Limited EMI Options”) issued and outstanding immediately prior to the Closing that were accelerated and exercised by the holders thereof for a like number of ordinary shares and exchanged for shares of the Company’s common stock pursuant to the Exchange.

In aggregate 1,127,720,477 SmartKem Limited shares were exchanged for 12,725,000 of the Company’s common stock, an average exchange ratio of 0.011283825 .

In aggregate 1,127,720,477 SmartKem Ltd shares were exchanged for 12,725,000 of the Company’s common stock, an average exchange ratio of 0.011283825 .

Immediately prior to the Closing, an aggregate of 2,500,000 shares of the Company’s common stock owned by the stockholders of Parasol prior to the Exchange were forfeited and cancelled (the “Stock Forfeiture”).

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

SmartKem, Inc.

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

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 its equity securities.

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

The Pandemic has had a widespread and detrimental effect on the global economy and has adversely impacted the Company’s business and results of operations.

The Company has experienced travel bans, states of emergency, quarantines, lockdowns, “shelter in place” orders, business restrictions and shutdowns in the countries where it operates.

The Company’s containment measures have impacted its day-to-day operations and disrupted its business.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

results of operations is currently unknown.

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.

These costs are not expected to be material.

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

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 $ 7.3 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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis for Presentation

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 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.

GAAP have been omitted if they substantially duplicate the disclosures contained in the Company’s annual audited consolidated financial statements.

Accordingly, the unaudited condensed consolidated financial statements should be read in connection with the Company’s audited financial statements and related notes as of and for the year ended December 31, 2020.

The accompanying condensed consolidated financial statements are unaudited;

however, in the opinion of management, they include all normal and recurring adjustments necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements for the periods presented.

Results of operations reported for interim periods are not necessarily indicative of results for the entire year.

Basis of Consolidation

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

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

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

2 unchanged sentences

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

The Company's formerly wholly-owned subsidiary, SmartKem Delaware Inc.

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.

1 unchanged sentence

Comprehensive loss of all periods presented is comprised primarily of net loss and foreign currency translation adjustments.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Management’s Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity 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.

The most significant estimates in the Company’s unaudited interim condensed consolidated financial statements relates to the valuation of common share, fair value of share options, and the valuation allowance of deferred tax assets.

The most significant estimates in the Company’s condensed consolidated financial statements relates to the valuation of common share, fair value of share options, fair value of embedded conversion features in the convertible notes, and the valuation allowance of deferred tax assets.

These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources.

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

Certain Risk and Uncertainties

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

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

If the Company lost access to this fabrication facility, it would materially and adversely affect the Company’s ability to manufacture prototypes and demonstration products for potential customers.

The loss of this access could significantly impede the Company’s ability to engage in product development and process improvement activities.

Alternative providers of similar services exist, but would take effort and time to bring into the Company’s operations.

Cash and Cash Equivalents

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, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021.

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

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable.

Periodically, the Company maintains deposits in financial institutions in excess of government insured limits.

Management believes that the Company is not exposed to significant

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

credit risk as the Company’s deposits are held at financial institutions that management believes to be of high credit quality and the Company has not experienced any losses in these deposits.

Property, Plant and Equipment

Property, plant and equipment is stated at cost, less accumulated depreciation.

Maintenance and repairs are expensed when incurred.

Additions and improvements that extend the economic useful life of the asset are capitalized and depreciated over the remaining useful lives of the assets.

The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts, and any resulting gain or loss is reflected in current earnings.

Depreciation and amortization are provided using the accelerated declining balance method in amounts considered to be sufficient to amortize the cost of the assets to operations over their estimated useful lives.

Property, plant and equipment is depreciated at 25 percent of net book value on an annual basis, resulting in an estimated useful life of approximately 15 years .

Impairment of Long-Lived Assets

5 unchanged sentences

Reversal of previously recorded impairment losses are prohibited.

As of March 31, 2022 and December 31, 2021, 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

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

The Company evaluates convertible notes to determine if those contracts or embedded components of those contracts qualify as derivatives to be accounted for separately.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The result of this accounting treatment is that the fair value of the embedded derivative is recorded as a liability and marked-to-market each balance sheet date, with the change in fair value recorded in the statements of operations as other income or expense.

Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

The fair value of the embedded conversion features are estimated using a Monte Carlo simulation model, in which possible outcomes and their values are simulated repeatedly and randomly.

Under the Monte Carlo method the Company estimated the fair value of the convertible notes conversion feature at the time of issuance and subsequent remeasurement dates, utilizing the with-and without method, where the value of the derivative feature is the difference in values between a note simulated with the embedded conversion feature and the value of the same note simulated without the embedded conversion feature.

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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Convertible Notes

The Company accounts for its convertible notes in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”), which requires the liability and equity components of convertible debt instruments to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate.

Debt discount created by the bifurcation of embedded feature in the convertible notes are reflected as a reduction to the related debt liability.

The discount is amortized to interest expense over the term of the debt using the effective-interest method.

The accounting treatment of warrants issued is determined pursuant to the guidance provided by ASC 480, Distinguishing Liabilities from Equity , and ASC 815, Derivatives and Hedging , as applicable.

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

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, 2022 and December 31, 2021.

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.

10 unchanged sentences

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.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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

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

Notes to Condensed Consolidated Financial Statements

Research and Development Expenses

The Company expenses research and development costs as incurred.

Research and development costs include salaries, employee benefit costs, direct project costs, supplies and other related costs.

Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received.

Patent and Licensing Costs

Patent and licensing costs are expensed as incurred because their realization is uncertain.

These costs are classified as research and development expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.

Other Operating Income

1 unchanged sentence

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, 2022 and 2021, the Company recorded grant income and research & development tax credits of $ 284 thousand and $ 433 thousand, respectively.

As of March 31, 2022, and December 31, 2021, the Company had receivables related to research & development tax credits for payments not yet received of $ 1,324 thousand and $ 1,070 thousand, respectively.

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

10 unchanged sentences

The Company records forfeitures when they occur.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Functional Currency and Operations

6 unchanged sentences

Assets and liabilities of foreign operation denominated in local currencies are translated at the spot rate in effect at the applicable reporting date.

The condensed consolidated statements of operations and comprehensive loss are translated at the weighted average rate of

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

exchange during the applicable period.

The condensed consolidated statements of operations and comprehensive loss are translated at the weighted average rate of exchange during the applicable period.

The resulting unrealized gain/loss is recognized as foreign currency translation as a component of other comprehensive income.

7 unchanged sentences

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

As of March 31, 2022 and December 31, 2021, 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 March 31, 2022, 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.

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

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 condensed consolidated balance sheet until completion of the issuance.

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.

For the three months ended March 31, 2022 and 2021 respectively, $ 160 thousand and $ 2,454 thousand of offering costs were recorded in additional paid-in capital.

No offering costs were deferred as of both March 31, 2022 and December 31, 2021.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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 nine months ended September 30, 2021 $ 2,454 thousand of offering costs were recorded in additional paid-in capital.

Segment Information

2 unchanged sentences

The Company’s CODM has been identified as its Chairman and Chief Executive Officer.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

Basic and Diluted Loss Per Share

2 unchanged sentences

Therefore, the weighted-average shares outstanding used to calculate both basic and diluted loss per share are the same for periods with a net loss.

The loss per share information in these unaudited interim condensed consolidated financial statements is reflected and calculated as if the Company had existed since January 1, 2020.

The loss per share information in these condensed consolidated financial statements is reflected and calculated as if the Company had existed since January 1, 2020.

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 March 31, 2022, which became exercisable on April 23, 2021 based on terms and conditions of the agreements.

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:

Recent Accounting Pronouncements Adopted

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

2021-04, Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity Classified Written Call Options "

("ASU 2021-04"), which introduces a new way for companies to account for warrants either as stock compensation or derivatives.

Under the new guidance, if the modification does not change the instrument's classification as equity, the company accounts for the modification as an exchange of the original instrument for a new instrument.

In general, if the fair value of the "new"

instrument is greater than the fair value of the "original"

instrument, the excess is recognized based on the substance of the transaction, as if the issuer has paid cash.

The effective date of the standard is for interim and annual reporting periods beginning after December 15, 2021 for all entities, and early adoption is permitted.

The Company adopted ASU 2021-04 on January 1, 2022.

As a result of Management’s evaluation, the adoption of ASU 2021-04 did not have a material impact on the consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) ("ASU 2021-10"), which provides guidance on disclosing government assistance.

Under the new guidance, the Company is required to including the disclosure of (1) the types of assistance, (2) an entity's accounting for the assistance, and (3) the effect of the assistance on the entity's financial statements.

The effective date of the standard is for annual periods beginning after December 15, 2021.

The Company adopted ASU 2021-10 on January 1, 2022.

As a result of Management’s evaluation, the adoption of ASU 2021-10 did not have a material on the consolidated financial statements.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

Recent Accounting Pronouncements Not Adopted

September 30,

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No.

4 unchanged sentences

The standards update is effective prospectively for annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted, for U.S.

Securities Exchange filer, excluding entities eligible to be smaller reporting companies.

Securities Exchange filer, excluding entities eligible to be smaller reporting

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

The standards update is effective prospectively for annual and interim periods beginning after December 15, 2022.

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

Reclassifications

Certain amounts in prior periods' interim condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.

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.

PREPAID EXPENSES AND OTHER CURRENT ASSETS:

Prepaid expenses and other current assets consist of the following:

Prepaid service charges and property taxes

September 30,

Prepaid utilities

1 unchanged sentence

Prepaid administrative expenses

Prepaid technical fees

Prepaid consulting fees

VAT receivable

Other Receivable and other prepaid expenses

Total prepaid expenses and other current assets

As of March 31, 2022 and December 31, 2021, there was $ 204 thousand and $ 217 , thousand respectively, of non-current prepaid insurance related to directors’ and officers’ liability insurance that was included in the amounts above.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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

3 unchanged sentences

Property, plant and equipment, net

Depreciation expense was $ 54 thousand and $ 48 thousand for three months ended March 31, 2022 and 2021, respectively, and is classified as research and development expense.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following:

September 30,

Accounts payable

5 unchanged sentences

Credit card liabilities

Payroll and social security liabilities

Payroll liabilities

Total accounts payable and accrued expenses

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

There was no sublease rental income for three months ended March 31, 2022 and 2021.

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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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 March 31,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Operating lease cost

3 unchanged sentences

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

For the Three Months Ended March 31,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Research and development

1 unchanged sentence

Total lease cost

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

5 unchanged sentences

Total lease liabilities

The Company had no right of use lease assets and lease liabilities for financing leases as of March 31, 2022 and December 31, 2021.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

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

For the Three Months Ended March 31,

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:

For the Three Months Ended March 31,

September 30,

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

Weighted average discount rate – operating leases

Undiscounted operating lease liabilities as of March 31, 2022, 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

1 unchanged sentence

Total net lease liabilities

CONVERTIBLE NOTES AND NOTES PAYABLE:

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 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 $ 11,796 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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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 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).

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 $ 5,862 thousand.

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

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

Notes and accrued but unpaid interest were convertible into the common share based on (i) fund raising at a price paid per Senior Share equal to the price paid per Senior Share by the investors on a Fund Raising at a discount to the per share price in the Fund Raising, (ii) sale of the company at a price per Senior Share of $ 16.39 , or (iii) listing of the company on a publicly traded market at a price per Senior Share of $ 16.39 .

The principal amount shall accrue interest at a rate of 8 % per annum, from the Issue Date up until the first anniversary of the Issue Date.

Interest shall accrue on the principal amount at a rate of 15 % per annum from, and including, the first anniversary of the Issue Date up until the notes are (i) converted, cancelled, repaid or redeemed or (ii) the longstop date.

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

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 $ 2,622 thousand.

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

The 2018 Octopus Notes and accrued but unpaid interest were convertible into the common shares based on (i) fund raising at a price paid per Senior Share equal to the price paid per Senior Share by the investors on a Fund Raising at a discount, (ii) sale of the company at a price per Senior Share of $ 15.10 , or (iii) listing of the company on a publicly traded market at a price per Senior Share of $ 15.10 .

The principal amount shall accrue interest at a rate of 8 % per annum, from the Issue Date up until the first anniversary of the Issue Date.

Interest shall accrue on the principal amount at a rate of 12 % per annum from, and including, the first anniversary of the Issue Date up until the notes are (i) converted, cancelled, repaid or redeemed or (ii) the longstop date.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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 thousand.

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

The 2018 Octopus, EF, and Other Notes and accrued but unpaid interest were convertible into the common shares based on (i) fund raising at a price paid per Senior Share equal to the price paid per Senior Share by the investors on a Fund Raising at a discount, (ii) sale of the company at a price per Senior Share of $ 0.001861 , (iii) listing of the company on a publicly traded market at a price per Senior Share of $ 14.61 , or (ii) any date following the first anniversary of the date the of the Instrument at a price per Senior Share of $ 11.19 .

The principal amount shall accrue interest at a rate of 10 % per annum, from the Issue Date up until the notes are (i) converted, cancelled, repaid or redeemed or (ii) the longstop date.

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 thousand.

Notes Payable

7 unchanged sentences

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.

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

The interest expense recognized based on the debt’s effective interest rate for nine months ended March 31, 2021, was $ 19 thousand.

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 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 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 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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

There were no notes payable outstanding during the three months ended March 31, 2022 and no associated interest expense during the period.

Notes to Condensed Consolidated Financial Statements

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:

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.

Capital expenditure commitments and unconditional purchase obligations contracted for but not yet incurred as of March 31, 2022, totaled $ 1,350 thousand and primarily consists of purchase commitments in the normal course of business for research & development services, communications infrastructure and administrative services.

STOCKHOLDERS’ EQUITY:

6 unchanged sentences

Market Information

Quotations on our common stock on the OTC Market Group’s OTCQB® Market quotation system (“OTCQB”) commenced under the ticker symbol “SMTK” in February 2022.

There was no trading of our common stock on the OTCQB or any other over-the-counter market prior to February 2022.

The Company’s common stock is not listed on a national securities exchange, an over-the-counter market or any other exchange.

Therefore, there is no trading market, active or otherwise, for our common stock and the Company’s common stock may never be included for trading on any stock exchange, automated quotation system or any over-the-counter market.

Preferred Stock

The Company currently has no shares of preferred stock outstanding, and the Company has no present plan to issue any shares of preferred stock.

The board of directors has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

restrictions thereof.

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

2 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, 2022, no warrants issued to vendors for financial advisory services were exercised.

During the three months ended September

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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 three months ended March 31, 2021.

There were no warrants issued during the three months ended March 31, 2022.

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.

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, 2022

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 thousand.

During the three months ended March 31, 2022, no warrants issued to investors were exercised.

Warrants outstanding at September 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 thousand during the nine months ended 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 .

3 unchanged sentences

Forfeited or Expired

Pre-funded warrants outstanding at March 31, 2022

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.

There was no public trading market for our shares before February 2022 and the Company estimates its expected stock

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 nine months ended September 30, 2021:

Nine Months Ended

September 30, 2021

Expected term (years)

Risk-free interest rate

Expected volatility

Expected dividend yield

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

volatility based on historical volatility of publicly traded peer companies.

The Company did not issue any warrants in the three months ended March 31, 2022.

Notes to Condensed Consolidated Financial Statements

SHARE-BASED COMPENSATION:

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.

The options generally expired 10 years after the grant date and were subject to vesting conditions and became fully vested and exercisable when there was a liquidity event, such as a change in control, and the employee, or consultant, was providing services to the Company at the time of the event.

As of December 31, 2020, there were 1,810,749 options outstanding.

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.

Options were issued to certain employees and service providers under the investment agreement dated July 15, 2014, which provided for the grant of up to 175,292 options.

On December 14, 2018, the Company entered into a written resolution, which allowed SmartKem Limited to grant up to 458,316 options.

SmartKem Limited adopted a new Investment Agreement (the “Agreement”) dated January 24, 2020, SmartKem Limited, by means of the Agreement, seeks to retain the services of such eligible persons and to provide incentives for such persons to exert maximum efforts for the success of SmartKem Limited.

The Agreement commenced on the January 24, 2020 and the Agreement is administered by Board of Directors.

The maximum aggregate number of shares of common shares which may be issued under all Awards granted to Participants under the Agreement shall be 15 % of SmartKem Limited’s issued capital shares.

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.

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

Outstanding options generally expire 10 years after the grant date.

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.

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.

7 unchanged sentences

These options were fully vested on the grant date.

No options were awarded during the three months ended March 31, 2022.

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.

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 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)

5 years - 6 years

Risk-free interest rate

0.3 % - 1.2 %

Expected volatility

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 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).

From February 2022, the Company’s common shares are publicly traded and 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 Interim 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, 2022:

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

Fair Value at

(in thousands)

Options outstanding at January 1, 2021

Options outstanding at March 31, 2022

Options exercisable at March 31, 2022

Vested and expected to vest after March 31, 2022

As of March 31, 2022, there were 622,549 exercisable options outstanding.

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

For the Three Months Ended March 31,

( 1,424,622 )

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.

AND SUBSIDIARIES

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 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 March 31, 2022 was $ 1,234 thousand and will be recognized on a straight-line basis through the end of the vesting periods in September 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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim 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 September 30,

For the Nine Months Ended September 30,

Salaries and benefits

7 unchanged sentences

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

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

For the Three Months Ended March 31,

Pension 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

1 unchanged sentence

Total pension cost

As of March 31, 2022 and December 31, 2021 there were no amounts owed to the pension scheme.

RELATED PARTY TRANSACTIONS:

In addition to transactions and balances related share-based compensation to officers and directors, the Company incurred expenses of $ 18 thousand and $ 7 thousand, for the three months ended March 31, 2022 and 2021, 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 unaudited interim condensed consolidated statements of operations.

As of March 31, 2022 and December 31, 2021, there was $ 9 thousand and $ 18 thousand, respectively, payable to members of the Board of Directors that are recorded in accounts payable and accrued expenses on the unaudited interim condensed consolidated balance sheets.

Octopus Share Purchase

On January 27, 2022, we sold an aggregate of 1,000,000 shares of our common stock at a purchase price of $ 2.00 per share to Octopus Titan VCT plc and Octopus Investments Nominees Limited in accordance with the Letter Agreement, dated as of February 23, 2021, between the Company and Octopus Titan VCT plc and certain related parties.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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 $ 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 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 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:

In April 2022, the Company renewed its lease for research & development, engineering, testing and corporate offices in Manchester.

The renewed lease term expires in 2025 with an option for the Company to end the lease in 2024.

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/A

Item 1. Financial Statements