SmartKem, Inc. 10-Q

Item 1. Financial Statements ​ SMARTKEM, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except number of shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ 2023 ​ 2022 Assets ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 1,700 ​ $ 4,235 Accounts receivable, net ​ 1 ​ 30 Research and development tax credit receivable ​ 1,366 ​ 1,121 Prepaid expenses and other current assets ​ 1,211 ​ 1,056 Total current assets ​ 4,278 ​ 6,442 Property, plant equipment, net ​ 576 ​ 602 Right-of-use assets, net ​ 431 ​ 475 Other assets, non-current ​ 6 ​ 6 Total assets ​ $ 5,291 ​ $ 7,525 ​ ​ ​ ​ ​ ​ ​ Liabilities and stockholders’ equity ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable and accrued expenses ​ $ 1,048 ​ $ 931 Lease liabilities, current ​ 225 ​ 206 Income tax payable ​ ​ 1 ​ ​ 22 Other current liabilities ​ ​ 102 ​ ​ 244 Total current liabilities ​ 1,376 ​ 1,403 Lease liabilities, non-current ​ 188 ​ 239 Total liabilities ​ 1,564 ​ 1,642 ​ ​ ​ ​ ​ ​ ​ Commitments and contingencies (Note 6) ​ — ​ — ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, zero shares issued and outstanding, at March 31, 2023 and December 31, 2022, respectively ​ — ​ — Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 27,087,773 and 26,984,996 shares issued and outstanding , at March 31, 2023 and December 31, 2022, respectively ​ 3 ​ 3 Additional paid-in capital ​ 93,278 ​ 92,930 Accumulated other comprehensive loss ​ ( 939 ) ​ ( 483 ) Accumulated deficit ​ ( 88,615 ) ​ ( 86,567 ) Total stockholders' equity ​ 3,727 ​ 5,883 Total liabilities and stockholders’ equity ​ $ 5,291 ​ $ 7,525 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ ​ 3 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (in thousands, except number of shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ 2023 2022 Revenue ​ $ 16 ​ $ 30 ​ Cost of revenue ​ 16 ​ 23 ​ Gross profit ​ — ​ 7 ​ ​ ​ ​ ​ ​ ​ ​ ​ Other operating income ​ 269 ​ 284 ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ ​ Research and development ​ 1,279 ​ 1,459 ​ Selling, general and administrative ​ 1,433 ​ 1,240 ​ Loss/(gain) on foreign currency transactions ​ 111 ​ — ​ Total operating expenses ​ 2,823 ​ 2,699 ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss from operations ​ ( 2,554 ) ​ ( 2,408 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-operating income/(expense) ​ ​ ​ Gain/(loss) on foreign currency transactions ​ ​ 502 ​ ​ ( 354 ) ​ Interest income ​ 4 ​ — ​ Total non-operating income/(expense) ​ 506 ​ ( 354 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss before income taxes ​ ( 2,048 ) ​ ( 2,762 ) ​ Income tax expense ​ — ​ ​ — ​ Net loss ​ $ ( 2,048 ) ​ $ ( 2,762 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 2,048 ) ​ $ ( 2,762 ) ​ Other comprehensive loss: ​ ​ ​ Foreign currency translation ​ ( 456 ) ​ 156 ​ Total comprehensive loss ​ $ ( 2,504 ) ​ $ ( 2,606 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic & diluted net loss per common share ​ $ ( 0.07 ) ​ $ ( 0.10 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic & diluted weighted average shares outstanding ​ ​ 29,248,150 ​ ​ 28,438,003 ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ ​ ​ 4 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ Common stock ​ Additional ​ other ​ ​ ​ ​ Total ​ ​ $0.0001 par value ​ paid-in ​ comprehensive ​ Accumulated ​ Stockholders' ​ Shares Amount capital income deficit equity Balance at January 1, 2023 26,984,996 ​ $ 3 ​ $ 92,930 ​ $ ( 483 ) ​ $ ( 86,567 ) ​ $ 5,883 Stock-based compensation expense — ​ — ​ 293 ​ — ​ — ​ 293 Issuance of common stock to vendor 102,777 ​ — ​ 55 ​ — ​ — ​ 55 Foreign currency translation adjustment — ​ — ​ — ​ ( 456 ) ​ — ​ ( 456 ) Net loss — ​ — ​ — ​ — ​ ( 2,048 ) ​ ( 2,048 ) Balance at March 31, 2023 27,087,773 ​ $ 3 ​ $ 93,278 ​ $ ( 939 ) ​ $ ( 88,615 ) ​ $ 3,727 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ Common stock ​ Additional ​ other ​ ​ ​ ​ Total ​ ​ $0.0001 par value ​ paid-in ​ comprehensive ​ Accumulated ​ Stockholders' ​ ​ Shares Amount capital income deficit equity Balance at January 1, 2022 ​ 25,554,309 ​ $ 3 ​ $ 89,954 ​ $ ( 1,363 ) ​ $ ( 75,072 ) ​ $ 13,522 Stock-based compensation expense — ​ — ​ 98 ​ — ​ — ​ 98 Issuance of common stock to vendor 12,500 ​ — ​ 43 ​ — ​ — ​ 43 Issuance of common stock in private placement ​ 1,000,000 ​ ​ — ​ ​ 2,000 ​ ​ — ​ ​ — ​ ​ 2,000 Issuance costs related to common stock in private placement ​ — ​ ​ — ​ ​ ( 160 ) ​ ​ — ​ ​ — ​ ​ ( 160 ) Foreign currency translation adjustment — ​ — ​ — ​ 156 ​ — ​ 156 Net loss — ​ — ​ — ​ — ​ ( 2,762 ) ​ ( 2,762 ) Balance at March 31, 2022 26,566,809 ​ $ 3 ​ $ 91,935 ​ $ ( 1,207 ) ​ $ ( 77,834 ) ​ $ 12,897 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ ​ ] ​ 5 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ ​ 2023 2022 Cash flow from operating activities: ​ ​ ​ Net loss ​ $ ( 2,048 ) ​ $ ( 2,762 ) ​ ​ Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ ​ Depreciation ​ ​ 42 ​ ​ 54 ​ ​ Stock option expense ​ ​ 293 ​ ​ 98 ​ ​ Services settled in common stock ​ ​ 55 ​ ​ 43 ​ ​ Right of use asset amortization ​ ​ 56 ​ ​ 63 ​ ​ (Gain)/loss on foreign currency exchange rates ​ ​ ( 391 ) ​ ​ 354 ​ ​ Change in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ 29 ​ ​ ( 30 ) ​ ​ Research & development tax credit receivable ​ ​ ( 211 ) ​ ​ ( 284 ) ​ ​ Prepaids and other assets ​ ​ ( 340 ) ​ ​ ( 471 ) ​ ​ Accounts payable & accrued expenses ​ ​ 293 ​ ​ ( 240 ) ​ ​ Lease liabilities ​ ​ ( 43 ) ​ ​ ( 40 ) ​ ​ Income tax payables ​ ​ ( 22 ) ​ ​ — ​ ​ Other current liabilities ​ ​ ( 146 ) ​ ​ — ​ ​ Net cash used in operating activities ​ ( 2,433 ) ​ ( 3,215 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ ​ ​ Purchases of property, plant and equipment ​ ​ — ​ ​ ( 41 ) ​ ​ Net cash used by investing activities ​ — ​ ( 41 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash flow from financing activities: ​ ​ ​ ​ Proceeds from the issuance of common stock in private placement ​ ​ — ​ ​ 2,000 ​ ​ Payment of issuance costs ​ ​ — ​ ​ ( 160 ) ​ ​ Net cash provided by financing activities ​ — ​ 1,840 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash ​ ​ ( 102 ) ​ ( 163 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net change in cash ​ ( 2,535 ) ​ ( 1,579 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash, beginning of period ​ ​ 4,235 ​ ​ 12,226 ​ ​ Cash, end of period ​ $ 1,700 ​ $ 10,647 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of cash and non-cash investing and financing activities ​ ​ ​ ​ Professional services settled in common stock issuance ​ $ 55 ​ $ 43 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ ​ ​ 6 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 1. GENERAL The unaudited interim condensed consolidated financial statements of SmartKem, Inc. (“SmartKem” or the “Company”) as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and 2022 should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023 and may also be found on the Company’s website (www.smartkem.com). In these notes to the interim condensed consolidated financial statements the terms “us”, “we” or “our” refer to SmartKem and its consolidated subsidiaries. Organization SmartKem, formerly known as Parasol Investments Corporation (“Parasol”), was formed on May 13, 2020, and is the successor 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. Business The Company is seeking to reshape the world of electronics with our proprietary organic semiconductor platform that we believe has the potential to affect the form and function of the next generation of low-cost displays and sensors. The Company’s patented TRUFLEX® inks are solution deposited at a low temperature, on low-cost substrates to make organic thin-film transistor ( OTFT) circuits. SmartKem’s organic semiconductor platform can be used in a number of applications including mini- and micro-LED displays, AMOLED displays, AR and VR headsets, fingerprint sensors and integrated logic circuits. The Company has a research and development facility in Manchester, UK, and manufactures product protypes for prospective customers using its semiconductor manufacturing processes housed at the Centre for Process Innovation (CPI) at Sedgefield, UK. The Company has an extensive IP portfolio including over 125 issued patents across 19 patent families. 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 demonstrate products for potential customers. The loss of this access could significantly impede the Company’s ability to engage in product development and process improvement activities. Alternative providers of similar services exist but would take effort and time to bring into the Company’s operations. Liquidity and 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. We have incurred continuing losses including net losses of $ 2.0 million for the three months ended March 31, 2023. As of March 31, 2023 we had an accumulated deficit of $ 88.6 million. The Company’s cash as of March 31, 2023 was $ 1.7 million. We anticipate operating losses to continue for the foreseeable future due to, among 7 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 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, 2023 will be sufficient to fund the operations of the Company through the end of May 2023 and that the Company will require additional capital funding to continue its operations and research and development activity thereafter. Our future viability is dependent on our ability to raise additional capital to fund our operations. We will need to obtain additional funds to satisfy our operational needs and to fund our sales and marketing efforts, research and development expenditures, and business development activities. Until such time, if ever, as we can generate sufficient cash through revenue, management’s plans are to finance our working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. If we raise additional funds by issuing equity securities, our existing security holders will likely experience dilution. If we borrow money, the incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations. If we enter into a collaboration, strategic alliance or other similar arrangement, we may be forced to give up valuable rights. There can be no assurance however that such financing will be available in sufficient amounts, when and if needed, on acceptable terms or at all. 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 and services, the quality of product development efforts, management of working capital, and continuation of normal payment terms and conditions for purchase of services. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows for operations, then the Company will need to raise additional funding to continue as a going concern. There is substantial doubt that the Company will be able to pay its obligations as they fall due, and this substantial doubt is not alleviated by management plans. The condensed consolidated financial statements as of March 31, 2023 have been prepared assuming that the Company will continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. Basis of Presentation These interim condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim reporting and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. They include the accounts of all wholly owned subsidiaries and all significant inter-company accounts and transactions have been eliminated in consolidation. Amounts are presented in thousands, except number of shares and per share data. The preparation of interim condensed consolidated financial statements requires management to make assumptions and estimates that impact the amounts reported. These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended March 31, 2023 and 2022; however, certain information and footnote disclosures normally included in our audited consolidated financial statements included in our Annual Report on Form 10-K have been condensed or omitted as permitted by GAAP. It is important to note that the Company’s results of operations and cash flows for interim periods are not necessarily indicative of the results of operations and cash flows to be expected for a full fiscal year or any interim period. Significant Accounting Policies There have been no material changes to our significant accounting policies as set forth in Note 3 Summary of Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. 8 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ Recent Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments: Credit Losses (Topic 326) , which requires measurement and recognition of expected losses for financial assets held. The new standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require organizations to incorporate considerations of historical information, current conditions and reasonable and supportable forecasts. 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 filers. However, the standard is not applicable until January 1, 2023, because the company has elected to apply the extended transition period available for emerging growth companies. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies, which is effective prospectively for annual and interim periods beginning after December 15, 2022. The adoption of this guidance did not have a material impact in the interim condensed consolidated financial statements of the Company. 2. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) 2023 ​ 2022 Prepaid service charges and property taxes ​ $ 108 ​ $ 55 ​ Prepaid utilities ​ 96 ​ 51 ​ Prepaid insurance ​ 589 ​ 358 ​ Prepaid administrative expenses ​ 76 ​ 35 ​ Prepaid consulting fees ​ ​ 177 ​ ​ 304 ​ Prepaid technical fees ​ 13 ​ 22 ​ Research grant receivable ​ ​ 61 ​ ​ — ​ VAT receivable ​ ​ 41 ​ ​ 195 ​ Other receivable and other prepaid expenses ​ ​ 50 ​ ​ 36 ​ Total prepaid expenses and other current assets ​ $ 1,211 ​ $ 1,056 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of March 31, 2023 and December 31, 2022, there was $ 160 thousand and $ 169 thousand respectively, of non-current prepaid insurance related to directors’ and officers’ liability insurance that was included in the amounts above. 3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) 2023 ​ 2022 Plant and equipment ​ $ 1,519 ​ $ 1,478 ​ Furniture and fixtures ​ 224 ​ 218 ​ Computer hardware and software ​ 24 ​ 24 ​ ​ ​ 1,767 ​ 1,720 ​ Less: Accumulated depreciation ​ ( 1,191 ) ​ ( 1,118 ) ​ Property, plant and equipment, net ​ $ 576 ​ $ 602 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Depreciation expense was $ 42 thousand and $ 54 thousand for the three months ended March 31, 2023 and March 31, 2022, respectively, and is classified as research and development expense. 9 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) 2023 ​ 2022 Accounts payable ​ $ 456 ​ $ 250 ​ Accrued expenses – lab refurbishments ​ 120 ​ 117 ​ Accrued expenses – technical fees ​ 84 ​ 130 ​ Accrued expenses – audit & accounting fees ​ 156 ​ 128 ​ Accrued expenses – other ​ 40 ​ 95 ​ Payroll and social security liabilities ​ 192 ​ 211 ​ Total accounts payable and accrued expenses ​ $ 1,048 ​ $ 931 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 5. LEASES: 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. There was no sublease rental income for the three months ended March 31, 2023 and 2022. The Company is not the lessor in any lease agreement, and no related party transactions for lease arrangements have occurred. The table below presents certain information related to the lease costs for the Company’s operating leases for the periods ended: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ (in thousands) 2023 2022 Operating lease cost ​ $ 64 ​ $ 63 ​ Short-term lease cost ​ 4 ​ 2 ​ Variable lease cost ​ 45 ​ 54 ​ Total lease cost ​ $ 113 ​ $ 119 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The total lease cost is included in the unaudited condensed consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ (in thousands) 2023 2022 Research and development ​ $ 104 ​ $ 113 ​ Selling, general and administrative ​ 9 ​ 6 ​ Total lease cost ​ $ 113 ​ $ 119 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 10 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ Right of use lease assets and lease liabilities for our operating leases were recorded in the unaudited condensed consolidated balance sheet as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) 2023 2022 Assets ​ ​ ​ Right of use assets - Operating Leases ​ $ 431 ​ $ 475 Total lease assets ​ $ 431 ​ $ 475 ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ Current liabilities: ​ ​ Lease liability, current - Operating Leases ​ $ 225 ​ $ 206 Noncurrent liabilities: ​ ​ ​ Lease liability, non-current - Operating Leases ​ 188 ​ 239 Total lease liabilities ​ $ 413 ​ $ 445 ​ ​ ​ ​ ​ ​ ​ ​ The Company had no right of use lease assets and lease liabilities for financing leases as of March 31, 2023 and December 31, 2022. The table below presents certain information related to the cash flows for the Company’s operating leases for the periods ended: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, (in thousands) 2023 2022 Operating cash outflows from operating leases ​ $ 43 ​ $ 40 Supplemental non-cash amounts of operating lease liabilities arising from obtaining right of use assets ​ — ​ — ​ ​ $ 43 ​ $ 40 ​ ​ ​ ​ ​ ​ ​ ​ The table below presents certain information related to the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases as of the period ended: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ 2023 2022 Weighted average remaining lease term (in years)  – operating leases ​ ​ 2.15 ​ ​ 1.42 Weighted average discount rate – operating leases ​ ​ 7.77 % ​ 6.03 % ​ Undiscounted operating lease liabilities as of March 31, 2023 and December 31, 2022, by year and in the aggregate, having non-cancelable lease terms in excess of one year were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) ​ 2023 2022 2023 ​ $ 188 $ 234 2024 ​ ​ 241 ​ ​ 234 2025 ​ ​ 18 ​ ​ 19 Total undiscounted lease payments ​ ​ 447 ​ ​ 487 Less imputed interest ​ ​ ( 34 ) ​ ​ ( 42 ) Total net lease liabilities ​ $ 413 ​ $ 445 ​ ​ ​ ​ ​ ​ ​ ​ ​ 11 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 6. COMMITMENTS AND CONTINGENCIES Legal proceedings In the normal course of business, the Company may become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material effect on the interim condensed consolidated financial statements. Commitments Capital expenditure commitments and unconditional purchase obligations contracted for but not yet incurred as of March 31, 2023, totaled $ 540 thousand and primarily consists of purchase commitments in the normal course of business for research & development services, communications infrastructure and administrative services. 7. STOCKHOLDERS’ EQUITY Common Stock Voting Rights Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. The Company’s amended and restated certificate of incorporation and the Company’s amended and restated bylaws do not provide for cumulative voting rights. The holders of one-third of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, constitutes a quorum for the transaction of business at all meetings of the stockholders. Dividends The Company has never paid any cash dividends to stockholders and do not anticipate paying any cash dividends to stockholders in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant. 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. Common Stock Issued to Vendors for Services On January 6, 2023, the Company issued 50,000 shares of common stock, as payment for investor relations and other financial consulting services. On February 27, 2023, the Company issued 52,777 shares of common stock as payment for investor relations services. Preferred Stock The Company currently has no shares of preferred stock outstanding. 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 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. 12 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ Common Stock Warrants On February 23, 2021, a total of 985,533 fully vested common stock warrants were issued to a vendor for financial advisory services provided in connection with the sale of the Company’s common stock. 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, 2023 and March 31, 2022, 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. There were no warrants issued during the three months ended March 31, 2023. A summary of the Company’s warrants to purchase common stock activity is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ Weighted- ​ Remaining ​ ​ ​ ​ Average ​ Contractual ​ ​ Number of ​ Exercise ​ Term ​ ​ Shares ​ Price ​ (Years) Warrants outstanding at January 1, 2023 985,533 ​ $ 2.00 3.15 Forfeited — ​ ​ Cancelled — ​ ​ Granted — ​ ​ Warrants outstanding at March 31, 2023 985,533 ​ $ 2.00 2.90 ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 $ 4.3 million. During the three months ended March 31, 2023, no warrants issued to investors were exercised. The grant date fair value for these warrants of $ 1.99 is based on the stock price at issuance date of $ 2.00 less the exercise price of $ 0.01 . The pre-funded common stock warrants have no expiration date and terminate upon exercise. A summary of the Company’s pre-funded warrants to purchase common stock activity is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Average ​ ​ Number of ​ Exercise ​ ​ Shares ​ Price Pre-funded warrants outstanding at January 1, 2023 2,168,000 ​ $ 0.01 Forfeited — ​ ​ Cancelled — ​ ​ Granted — ​ ​ Pre-funded warrants outstanding at March 31, 2023 2,168,000 ​ $ 0.01 ​ ​ ​ ​ ​ ​ ​ 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. 8. SHARE-BASED COMPENSATION: On February 23, 2021, the Company approved the 2021 Equity Incentive Plan (“2021 Plan”), in which a maximum aggregate number of shares of common stock that may be issued under the 2021 Plan is 4,376,571 shares. Subject to the adjustment provisions of the 2021 Plan, the number of shares of the Company’s common stock available for issuance under the 2021 Plan will also include an annual increase on the first day of each fiscal year beginning with 2022 fiscal year and ending on the Company’s 2031 fiscal year in an amount equal to the least of: 1) 2,275,000 shares of the Company’s common stock; 2) four percent ( 4 %) of the outstanding 13 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ shares of the Company’s common stock on the last day of the immediately preceding fiscal year; or 3) such number of shares of the Company’s common stock as the administrator may determine. Determining the appropriate fair value of share-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for share options, the expected life of the option, and expected share price volatility. The Company uses the Black-Scholes option pricing model to value its share option awards. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, the share-based compensation expense could be materially different for future awards. There were no options granted under the 2021 Plan for the three months ended March 31, 2023 or March 31, 2022. Prior to February 2022, in the absence of a public trading market for the common stock, on each grant date, the Company developed an estimate of the fair value of the shares of common stock underlying the option grants. The Company estimated the fair value of the shares of common stock by referencing arms-length transactions inclusive of the shares of common stock underlying which occurred on or near the valuation date(s). The Company determined the fair value of the common stock 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. From February 2022, the Company’s common stock is publicly traded, and the Company no longer has to estimate the fair value of the shares of common stock, rather the value is determined based on quoted market prices. 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 contractual term is 10 years , and the expected option term is lower. The following table reflects share activity under the share option plans for three months ended March 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ Remaining ​ Weighted- ​ Aggregate ​ ​ ​ ​ Average ​ Contractual ​ Average ​ Intrinsic ​ ​ Number of ​ Exercise ​ Term ​ Fair Value at ​ Value (in thousands) ​ Shares ​ Price ​ (Years) ​ Grant Date ​ (in thousands) Options outstanding at January 1,2023 2,829,756 $ 1.81 8.77 $ 0.98273 ​ ​ Exercised ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ Cancelled/Forfeited — — ​ ​ Expired ( 28,036 ) 0.12 ​ ​ Granted — — ​ ​ Options outstanding at March 31, 2023 2,801,720 $ 1.83 7.60 $ 0.97345 ​ ​ Options exercisable at March 31, 2023 ​ 1,252,870 ​ $ 1.61 ​ 6.04 ​ ​ ​ ​ $ 63 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation, including stock options and warrants is included in the unaudited interim condensed consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ (in thousands) ​ 2023 ​ 2022 ​ Research and development ​ $ 70 ​ $ 40 ​ Selling, general and administration ​ ​ 223 ​ ​ 58 ​ Total ​ $ 293 ​ $ 98 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 14 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ Total compensation cost related to non-vested stock option awards not yet recognized as of March 31, 2023 was $ 1.1 million 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. 9. DEFINED CONTRIBUTION PENSION: The Company operates a defined contribution pension scheme for its UK employees. The assets of the scheme are held separately from those of the Company in an independently administered fund. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ (in thousands) ​ 2023 ​ 2022 ​ Research and development ​ $ 22 ​ $ 27 ​ Selling, general and administration ​ ​ 18 ​ ​ 14 ​ Total ​ $ 40 ​ $ 41 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of March 31, 2023 there was a liability of $ 7 thousand owed to the plan, and December 31, 2022 there were no amounts owed to the pension scheme. 10. RELATED PARTY TRANSACTIONS: There were no related party transactions during the three months ended March 31, 2023. 11. SUBSEQUENT EVENTS: There are no subsequent events to report as of the date of this filing. ​ ​ 15 Table of Contents