What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-14 compared with 2022-08-22 · 168 added, 151 removed, 440 unchanged (42% of the section changed)

4 unchanged sentences

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

September 30,

Current assets:

14 unchanged sentences

Stockholders’ Equity:

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 26,949,282 and 25,554,309 shares issued and outstanding , at June 30, 2022 and December 31, 2021, respectively

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 26,949,282 and 25,554,309 shares issued and outstanding , at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

8 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue

7 unchanged sentences

Non-operating (expense)/income

(Loss)/Gain on foreign currency transactions

Loss on foreign currency transactions

Interest expense

3 unchanged sentences

Income tax expense

Other comprehensive loss:

Foreign currency translation

Other comprehensive (loss)/gain:

Foreign currency translation gain

Total comprehensive loss

5 unchanged sentences

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Three and Six Months Ended June 30,

For the Three and Nine Months Ended September 30 2022

(in thousands, except share data)

3 unchanged sentences

Balance at January 1, 2022

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 and warrants in private placement

Issuance costs related to common stock and warrants in private placement

Issuance of common stock in private placement (note 13)

Issuance costs related to common stock in private placement

Foreign currency translation adjustment

1 unchanged sentence

Stock-based compensation expense

Issuance costs related to common stock in private placement

Issuance of common shares to vendor

1 unchanged sentence

Balance at June 30, 2022

Stock-based compensation expense

Foreign currency translation adjustment

Balance at September 30, 2022

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

SMARTKEM, INC.

AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

For the Three and Nine Months Ended September 30 2021

(in thousands, except share data)

Comprehensive

2 unchanged sentences

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

1 unchanged sentence

Stock-based compensation expense

Issuance costs related to common stock in private placement

Issuance of common shares to vendor

1 unchanged sentence

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

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

3 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

24 unchanged sentences

Net change in cash

Cash, beginning of period

Cash, end of period

Cash and cash equivalents, beginning of period

Cash and cash equivalents, end of period

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

12 unchanged sentences

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.

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, United Kingdom (“UK”).

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

Restatement of previously filed financial statements

The Company has determined that it made an error in the presentation and accounting of its consolidated statement of cash flows in the Company’s annual and interim consolidated financial statements during 2021 and 2022.

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 $ 412 thousand for the six months ended June 30, 2021, respectively.

The errors 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 June 30, 2021 and had no impact on the Company’s consolidated balance sheet, statements of operations and comprehensive loss and statements of stockholders’ equity as of and for the three- and six-month periods ended June 30, 2021.

The changes are presented below (in thousands):

For the Six Months Ended

Net cash used in operating activities as previously reported

Adjustment for (Loss)/Gain on foreign currency transactions

Net cash used in operating activities as restated

Effect of exchange rate changes on cash as previously reported

Adjustment for (Gain)/Loss on foreign currency transactions

Effect of exchange rate changes on cash as restated

Basis for Presentation

Basis of 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 of America (“U.S.

2 unchanged sentences

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to 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.

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;

4 unchanged sentences

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 $ 3.7 million and $ 6.5 million for the three and six months ended June 30, 2022, respectively.

As of June 30, 2022 we had an accumulated deficit of $ 81.5 million.

The Company’s cash as of June 30, 2022 was $ 7.8 million.

Since inception, we have incurred recurring losses including net losses of $ 4.0 million and $ 10.4 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2022 we had an accumulated deficit of $ 85.5 million.

The Company’s cash as of September 30, 2022 was $ 6.3 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 June 30, 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.

Management believes that the Company’s existing cash as of September 30, 2022 will be sufficient to fund the operations of the Company through to April 2023 and that the Company will require additional capital funding to continue its operations and research and development activity thereafter.

There can be no assurance, however, that such financing will be available by April 2023, if at all, or on acceptable terms and conditions.

The precise amount and timing of the funding needs cannot be determined

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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 including potential joint collaborations, 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.

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

If the Company is unable to obtain additional financing in sufficient amounts or on acceptable terms, manage working capital, or secure variation to the normal payment terms and conditions for purchase of services, 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 for additional financing, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations by April 2023 or 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.

2 unchanged sentences

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

Pursuant to the Exchange Agreement all of the equity interests in SmartKem Limited, except certain deferred shares which had no economic or voting rights (the “Deferred Shares”) and which were purchased by Parasol for an aggregate purchase price of $ 1.40 , were exchanged for shares of Parasol common stock, par value

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

$ 0.0001 per share (“common stock”), and SmartKem Limited became a wholly owned subsidiary of Parasol (the “Exchange”).

As a result of the Exchange, Parasol acquired the business of SmartKem Limited, and continues as the existing business operations of SmartKem Limited as a public reporting company under the name SmartKem, Inc.

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.

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

4 unchanged sentences

Reported shares and earnings per share available to holders of the Company’s common stock, prior to the Exchange, have been retroactively restated as shares reflecting the exchange ratios established in the Exchange.

At the closing of the Exchange (the “Closing”), each SmartKem Limited ordinary share issued and outstanding immediately prior to the Closing (other than the Deferred Shares) was exchanged for 0.0111907 of a share of the Company’s common stock and each SmartKem Limited A ordinary share issued and outstanding immediately prior to the Closing was exchanged for 0.0676668 of a share of the Company’s common stock, with the maximum number of shares of our common stock issuable to the former holders of SmartKem Limited’s ordinary shares and A ordinary shares equal to 12,725,000 .

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

to the Closing was exchanged for 0.0676668 of a share of the Company’s common stock, with the maximum number of shares of our common stock issuable to the former holders of SmartKem Limited’s ordinary shares and A ordinary shares equal to 12,725,000 .

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.

11 unchanged sentences

was dissolved on May 13, 2021.

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

Comprehensive Loss

1 unchanged sentence

Management’s Use of Estimates

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

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

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

4 unchanged sentences

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

As of June 30, 2022 and December 31, 2021, the Company did no t have any cash equivalents.

As of September 30, 2022 and December 31, 2021, the Company did no t have any cash equivalents.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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, 2022 and December 31, 2021.

There was no allowance for doubtful accounts recorded as of September 30, 2022 and December 31, 2021.

Impairment of Long-Lived Assets

5 unchanged sentences

Reversal of previously recorded impairment losses are prohibited.

As of June 30, 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, 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.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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.

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 June 30, 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.

4 unchanged sentences

In order to achieve that core principle, the Company applies the following five step approach:

(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.

(1) identify the contract with a customer, (2) identify the

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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

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

8 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, 2022 and 2021, the Company recorded grant income and research & development tax credits of $ 294 thousand and $ 256 thousand, respectively, and $ 578 thousand and $ 688 thousand for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, and December 31, 2021, the Company had receivables related to research & development tax credits for payments not yet received of $ 1,505 thousand and $ 1,070 thousand, respectively.

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

For the three months ended September 30, 2022 and 2021, the Company recorded grant income and research & development tax credits of $ 273 thousand and $ 446 thousand, respectively, and $ 851 thousand and $ 1,126 thousand for the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, and December 31, 2021, the Company had receivables related to research & development tax credits for payments not yet received of $ 738 thousand and $ 1,070 thousand, respectively.

Share-based Compensation

12 unchanged sentences

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

From the date of the Exchange forward, the Company’s functional currency is the U.S.

dollar (“USD”).

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

From the date of the Exchange forward, the Company’s functional currency is the USD.

The functional currency of the Company’s foreign operation is the respective local currency.

5 unchanged sentences

Transaction gains and losses are included in net loss.

Foreign exchange losses, primarily driven by foreign exchange revaluation of our dollar borrowings held by non-dollar group undertakings, were $ 1,284 thousand and $ 1,638 thousand for the three- and six-month periods ended June 30, 2022, respectively.

Foreign exchange gains were $ 57 thousand and foreign exchanges losses were $ 412 thousand for the three-and six-month periods ended June 30, 2021, respectively.

Foreign exchange losses, primarily driven by foreign exchange revaluation of our dollar borrowings held by non-dollar group undertakings, were $ 1,493 thousand and $ 3,131 thousand for the three- and nine-month periods ended September 30, 2022, respectively.

Foreign exchange gains were $ 386 thousand and foreign exchanges losses were $ 799 thousand for the three-and nine-month periods ended September 30, 2021, respectively.

Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach.

2 unchanged sentences

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.

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

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, 2022 and December 31, 2021, there were no accruals for uncertain tax positions.

As of September 30, 2022 and December 31, 2021, 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, 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, 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.

Offering Costs

1 unchanged sentence

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 six months ended June 30, 2022 and 2021 respectively, $ 170 thousand and $ 2,454 thousand of offering costs were recorded in additional paid-in capital.

No offering costs were deferred as of both June 30, 2022 and December 31, 2021.

For the nine months ended September 30, 2022 and 2021 respectively, $ 170 thousand and $ 2,454 thousand of offering costs were recorded in additional paid-in capital.

No offering costs were deferred as of both September 30, 2022 and December 31, 2021.

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

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, 2022, which became exercisable on April 24, 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

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

virtually assured.

The Company has 2,168,000 pre-funded common stock warrants outstanding as of September 30, 2022, which became exercisable on April 24, 2021 based on terms and conditions of the agreements.

The Company included these pre-funded common stock warrants in basic and diluted earnings per share when all conditions were met on April 24, 2021.

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 Adopted

10 unchanged sentences

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.

Under the new guidance, the Company is required to

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

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.

13 unchanged sentences

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

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

PREPAID EXPENSES AND OTHER CURRENT ASSETS:

Prepaid expenses and other current assets consist of the following:

September 30,

Prepaid service charges and property taxes

7 unchanged sentences

Total prepaid expenses and other current assets

As of June 30, 2022 and December 31, 2021, there was $ 191 thousand and $ 217 thousand respectively, of non-current prepaid insurance related to directors’ and officers’ liability insurance that was included in the amounts above.

As of September 30, 2022 and December 31, 2021, there was $ 178 thousand and $ 217 thousand respectively, of non-current prepaid insurance related to directors’ and officers’ liability insurance that was included in the amounts above.

As of September 30, 2022, prepaid consulting fees includes amounts paid for a one-year internet advertising campaign (note 9).

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

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 $ 51 thousand and $ 47 thousand for the three months ended June 30, 2022 and 2021, respectively, and $ 105 thousand and $ 95 thousand for the six months ended June 30, 2022 and 2021, respectively and is classified as research and development expense.

Depreciation expense was $ 46 thousand and $ 52 thousand for the three months ended September 30, 2022 and 2021, respectively, and $ 151 thousand and $ 147 thousand for the nine months ended September 30, 2022 and 2021, 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

7 unchanged sentences

Total accounts payable and accrued expenses

SMARTKEM, INC.

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Notes to Interim Condensed Consolidated Financial Statements

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

1 unchanged sentence

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

There was no sublease rental income for the three and six months ended June 30, 2022 and 2021.

In July 2022, the Company entered into a lease for office accommodation in Hsinchu City Taiwan.

The lease term expires in 2025.

There was no sublease rental income for the three and nine months ended September 30, 2022 and 2021.

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

SMARTKEM, INC.

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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 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

3 unchanged sentences

The total lease 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

2 unchanged sentences

Right of use lease assets and lease liabilities for our operating leases were recorded in the unaudited condensed 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 June 30, 2022 and December 31, 2021.

The Company had no right of use lease assets and lease liabilities for financing leases as of September 30, 2022 and December 31, 2021.

SMARTKEM, INC.

2 unchanged sentences

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

For the Six Months Ended June 30,

For the 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 Six Months Ended June 30,

For the Nine Months Ended September 30,

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

Weighted average discount rate – operating leases

Undiscounted operating lease liabilities as of June 30, 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, 2022, 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

11 unchanged sentences

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

For six months ended June 30, 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 six months ended June 30, 2021, was $ 19 thousand.

There were no notes payable outstanding during the six months ended June 30, 2022 and no associated interest expense during the period.

For nine months ended September 30, 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 September 30, 2021, was $ 19 thousand.

There were no notes payable outstanding during the nine months ended September 30, 2022 and no associated interest expense during the period.

SMARTKEM, INC.

5 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 June 30, 2022, totaled $ 1,087 thousand and primarily consists of purchase commitments in the normal course of business for research & development services, communications infrastructure and administrative services.

Capital expenditure commitments and unconditional purchase obligations contracted for but not yet incurred as of September 30, 2022, totaled $ 770 thousand and primarily consists of purchase commitments in the normal course of business for research & development services, communications infrastructure and administrative services.

STOCKHOLDERS’ EQUITY:

8 unchanged sentences

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

Common shares issued to vendor for services

On May 27, 2022, the Company issued 22,473 shares of common stock as payment for investor relations services.

Common Stock Issued to Vendors for Services

On February 28, 2022 and on May 27, 2022, the Company issued 12,500 and 22,473 shares of common stock, respectively, as payment for investor relations services.

On June 29, 2022, the Company issued 360,000 shares of common stock as payment for a one-year internet advertising contract.

2 unchanged sentences

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 restrictions thereof.

These rights, preferences, and privileges could include dividend

These rights, preferences, and privileges could include dividend rights, conversion rights, voting rights, redemption rights, liquidation preferences, sinking fund terms, and the

SMARTKEM, INC.

1 unchanged sentence

Notes to Interim Condensed Consolidated Financial Statements

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.

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.

Common Stock Warrants

1 unchanged sentence

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

During the six months ended June 30, 2022 and 2021, respectively, no warrants issued to vendors for financial advisory services were exercised.

During the nine months ended September 30, 2022 and 2021, respectively, 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 six months ended June 30, 2021.

There were no warrants issued during the three and six months ended June 30, 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 and nine months ended September 30, 2022.

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

1 unchanged sentence

Forfeited or Expired

Warrants outstanding at June 30, 2022

Warrants outstanding at September 30, 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 and six months ended June 30, 2022, no warrants issued to investors were exercised.

During the three and nine months ended September 30, 2022, 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 June 30, 2022

Pre-funded warrants outstanding at September 30, 2022

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 volatility based on historical volatility of publicly traded peer companies.

The Company did not issue any warrants in the six months ended June 30, 2022.

The Company did no t issue any warrants in the nine months ended September 30, 2022.

SMARTKEM, INC.

15 unchanged sentences

These options were fully vested on the grant date.

No options were awarded during the three and six months ended June 30, 2022.

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 the three months ended September 30, 2022 were valued using the Black-Scholes option pricing model with the following assumptions:

Three Months Ended

September 30, 2022

Expected term (years)

Risk-free interest rate

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.

From February 2022, the Company’s common shares are publicly traded and where an active market exists, 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.

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

The risk-free interest rate assumption is based on observed interest rates for the appropriate term of the Company’s options on a grant date.

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

SMARTKEM, INC.

1 unchanged sentence

Notes to Interim Condensed Consolidated Financial Statements

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, 2022:

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

The risk-free interest rate assumption is based on observed interest rates for the appropriate term of the Company’s options on a grant date.

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 nine months ended September 30, 2022:

Fair Value at

1 unchanged sentence

Options outstanding at January 1, 2022

Options outstanding at June 30, 2022

Options exercisable at June 30, 2022

Vested and expected to vest after June 30, 2022

As of June 30, 2022, there were 708,624 exercisable options outstanding.

Options outstanding at September 30, 2022

Options exercisable at September 30, 2022

Vested and expected to vest after September 30, 2022

As of September 30, 2022, there were 887,888 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 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, 2022 was $ 1,122 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, 2022 was $ 1,470 thousand and will be recognized on a straight-line basis through the end of the vesting periods in July 2026.

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 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 (benefit)/expense

Rent and property tax expense

Sales and marketing

1 unchanged sentence

Other selling, general, and administrative expenses

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

DEFINED CONTRIBUTION PENSION:

3 unchanged sentences

Pension cost is included in the unaudited interim 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, 2022 and December 31, 2021 there were no amounts owed to the pension scheme.

As of September 30, 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 $ 29 thousand and $ 18 thousand, for the three months ended June 30, 2022 and 2021, respectively, and $ 47 thousand and $ 25 thousand, for the six months ended June 30, 2022 and 2021 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 $ 37 thousand and $ 18 thousand, for the three months ended September 30, 2022 and 2021, respectively, and $ 84 thousand and $ 43 thousand, for the nine months ended September 30, 2022 and 2021 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 both June 30, 2022 and December 31, 2021, there was $ 18 thousand 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.

As of September 30, 2022 and December 31, 2021, there was $ 27 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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

SUBSEQUENT EVENTS:

During July 2022, the Company issued a further 225,700 EMI options, 150,000 ISO options and 92,300 NQSO options to employees and directors under the 2021 plan.

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

The Company has evaluated subsequent events through to 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, 2022.

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