What changed in this filing

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Item 1. Financial Statements

2023-11-13 compared with 2023-08-14 · 149 added, 112 removed, 425 unchanged (38% of the section changed)

3 unchanged sentences

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

September 30,

Current assets

19 unchanged sentences

Stockholders’ equity:

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 14,149 and zero shares issued and outstanding , at June 30, 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 June 30, 2023 and December 31, 2022, respectively

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 13,879 and zero shares issued and outstanding , at September 30, 2023 and December 31, 2022, respectively

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 876,278 and 771,054 shares issued and outstanding , at September 30, 2023 and December 31, 2022, respectively *

Additional paid-in capital

3 unchanged sentences

Total liabilities and stockholders’ equity

* reflects a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023

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

2 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

3 unchanged sentences

Selling, general and administrative

Loss/(gain) on foreign currency transactions

Loss on foreign currency transactions

Total operating expenses

3 unchanged sentences

Transaction costs allocable to warrants

Change in fair value of the warrant liability

Change in fair value of the warrant liability, net

Interest income

7 unchanged sentences

Basic and diluted weighted average shares outstanding *

* reflects a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023

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

7 unchanged sentences

Stockholders'

income / (loss)

Balance at January 1, 2023

7 unchanged sentences

Balance at June 30, 2023

Stock-based compensation expense

Conversion of Preferred stock into common stock

Exercise of warrants into common stock

Foreign currency translation adjustment

Balance at September 30, 2023

* reflects a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023

SMARTKEM, INC.

Condensed Consolidated Statements of Stockholders’ Equity, continued

(in thousands, except share data)

Preferred Stock

3 unchanged sentences

Stockholders'

income / (loss)

Balance at January 1, 2022

10 unchanged sentences

Balance at June 30, 2022

Stock-based compensation expense

Foreign currency translation adjustment

Balance at September 30, 2022

* reflects a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023

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

2 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flow from operating activities:

5 unchanged sentences

Transaction costs allocable to warrant liability

Change in fair value of the warrant liability

Warrant liability fair value adjustment

Change in operating assets and liabilities:

13 unchanged sentences

Proceeds from the issuance of warrants in private placement

Proceeds from the issuance of common stock in private placement

Payment of issuance costs

Proceeds from the exercise of warrants

Net cash provided by financing activities

10 unchanged sentences

ORGANIZATION, BUSINESS, LIQUIDITY AND BASIS OF PRESENTATION

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.

SmartKem, Inc.

(the “Company”) 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), with no specific business plan or purpose until it began operating the business of SmartKem Limited following the closing of the transactions contemplated by the Securities Exchange Agreement (the “Exchange Agreement”), dated February 21, 2021, with SmartKem Limited.

1 unchanged sentence

The Company is seeking to reshape the world of electronics with its disruptive organic thin-film transistors (OTFTs) that have the potential to drive the next generation of displays.

SmartKem’s patented TRUFLEX® semiconductor and dielectric inks, or liquid electronic polymers, are used to make a new type of transistor that could potentially revolutionize the display industry.

SmartKem’s inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing models.

SmartKem’s patented TRUFLEX® semiconductor and dielectric inks, or electronic polymers, are used to make a new type of transistor that could potentially revolutionize the display industry.

SmartKem’s inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing technologies.

The company’s electronic polymer platform can be used in a number of display technologies including microLED, miniLED and AMOLED displays for next generation televisions, laptops, augmented reality (AR) and virtual reality (VR) headsets, smartwatches and smartphones.

9 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.

We have incurred continuing losses including net losses of $ 4.1 million for the six months ended June 30, 2023.

The Company’s cash as of June 30, 2023 was $ 13.8 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.

The Company has incurred continuing losses including net losses of $ 7.1 million for the nine months ended September 30, 2023.

The Company’s cash as of September 30, 2023 was $ 11.2 million.

The Company anticipates 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.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

In June 2023 the Company raised $ 14.0 million through two closings of a private placement of Preferred Stock and Warrants.

In June 2023 the Company raised $ 14.0 million through two closings of a private placement of Preferred Stock (as defined below) and Warrants (as defined below).

Net proceeds after related expenses were $ 12.7 million, alleviating substantial doubt about the Company's ability to continue as a going concern.

As a result, the Company’s cash balance at June 30, 2023 was $ 13.8 million.

The Company used approximately $ 3.1 million of cash in its operating activities for the six months ended June 30, 2023.

Management believes that the Company’s existing cash as of June 30, 2023 will be sufficient to fund the operations of the Company for the twelve months from the issuance of this financial statement, and that the Company may require additional capital funding to continue its operations and research and development activity thereafter.

The Company used approximately $ 5.6 million of cash in its operating activities for the nine months ended September 30, 2023.

Management believes that the Company’s existing cash as of September 30, 2023 will be sufficient to fund the operations of the Company for the twelve months from the issuance of this financial statement and that the Company may require additional capital funding to continue its operations and research and development activity thereafter.

Basis of Presentation

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

(“SmartKem” or the “Company”) as of June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 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.

The unaudited interim condensed consolidated financial statements of the Company as of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 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 the Company and its consolidated subsidiaries.

These interim condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted 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.

2 unchanged sentences

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 June 30, 2023 and 2022;

however, certain information and footnote disclosures normally included in our audited consolidated financial statements included in our Annual Report 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.

SUMMARY OF SIGNIIFICANT ACCOUNTING POLICIES

Other than the policies listed below, 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.

Reverse Stock Split

All share numbers and per share amounts presented in these financial statements, including these footnotes reflect a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Other than the policies listed below, there have been no material changes to the Company’s 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.

Management’s Use of Estimates

The preparation of consolidated financial statements in conformity with accounting standards generally accepted in the United States of America ("US 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

The preparation of consolidated financial statements in conformity with 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

The most significant estimates in the Company’s consolidated financial statements relates to the valuation of common share, fair value of share options and fair value of warrant liabilities.

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

apparent from other sources.

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 consolidated financial statements, actual results may materially vary from these estimates.

33 unchanged sentences

Prepaid expenses and other current assets consist of the following:

September 30,

(in thousands)

11 unchanged sentences

Property, plant and equipment consist of the following:

September 30,

(in thousands)

4 unchanged sentences

Property, plant and equipment, net

Depreciation expense was $ 0.1 million and $ 0.1 million for the three months ended June 30, 2023 and 2022, respectively, and $ 0.1 million is classified as research and development expense.

Depreciation expense was $ 0.1 million for each of the nine months ended September 30, 2023 and 2022 and is classified as research and development expense.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

September 30,

(in thousands)

14 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

4 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

3 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,

(in thousands)

Right-of-use assets, net

Right of use assets - Operating Leases

Total lease assets

Current liabilities:

Lease liability, current

Lease liability, current - Operating Leases

Noncurrent liabilities:

Lease liability, non-current

Lease liability, non-current - Operating Leases

Total lease liabilities

The Company had no right of use lease assets and lease liabilities for financing leases as of June 30, 2023 and December 31, 2022.

The Company had no right of use lease assets and lease liabilities for financing leases as of September 30, 2023 and December 31, 2022.

SMARTKEM, INC.

1 unchanged sentence

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

September 30,

(in thousands)

2 unchanged sentences

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:

Weighted average remaining lease term (in years)

– operating leases

September 30,

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

Weighted average discount rate – operating leases

Remaining maturities of the Company’s operating leases, excluding short-term leases, are as follows:

September 30,

(in thousands)

7 unchanged sentences

STOCKHOLDERS’ EQUITY

Reverse Stock Split

At the Company’s Annual Meeting of Stockholders held on August 25, 2023 (the “Annual Meeting”), the Company’s stockholders approved a proposal to approve and adopt an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of its shares of common stock, issued and outstanding or reserved for issuance, at a specific ratio within a range from 1-for -30 to 1-for -60 , inclusive, prior to the first anniversary of stockholder approval of the proposal, and to grant authorization to the Board of Directors to determine, in its sole discretion, whether to effect the reverse stock split, as well as its specific timing and ratio.

On September 19, 2023, the Company’s Board of Directors adopted resolutions to effect as soon as reasonably practicable the reverse split of the issued and outstanding shares of the Common Stock at a ratio of 1-for -35 .

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

On September 19, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to effect a reverse stock split of the issued and outstanding shares of the Company’s common stock, $ 0.01 par value per share, at a ratio of 1-for- 35 to be effective as of September 21, 2023 at 12:01 a.m., New York City time (the “Reverse Stock Split”).

The Charter Amendment did not change the par value or any other terms of the common stock.

Preferred Stock

4 unchanged sentences

The following is a summary of the principal terms of the Series A-1 Preferred Stock as set forth in the Series A-1 Certificate of Designation:

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

The holders of Series A-1 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of Common Stock, when and if actually paid.

3 unchanged sentences

The shares of Series A-1 Preferred Stock have no voting rights, except (a) the right to vote, with the holders of Common Stock, as a single class, on any resolution presented to stockholders for the purpose of obtaining approval of a proposed amendment to the Charter to effect a reverse split of the outstanding shares of the Common Stock at a ratio to be determined, with each share of Series A-1 Preferred Stock entitled to vote on an as-converted basis and (b) to the extent required by the Delaware General Corporation Law (the “DGCL”).

As long as any shares of Series A-1 Preferred Stock are outstanding, the Company may not, without the approval of a majority of the then outstanding shares of Series A-1 Preferred Stock which must include AIGH Investment Partners LP and its affiliates (“AIGH”) for so long as AIGH is holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement (a) alter or change the powers, preferences or rights given to the Series A-1 Preferred Stock, (b) alter or amend the Charter, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation (as defined below) or the bylaws of the Company (the “Bylaws”) in such a manner so as to materially adversely affect any rights given to the Series A-1 Preferred Stock, (c) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a Liquidation (as defined below) senior to, or otherwise pari passu with, the Series A-1 Preferred Stock, other than the Series A-2 Preferred Stock, (d) increase the number of authorized shares of Series A-1 Preferred Stock, (e) issue any Series A-1 Preferred Stock except pursuant to the Purchase Agreement, or (f) enter into any agreement to do any of the foregoing.

As long as any shares of Series A-1 Preferred Stock are outstanding, the Company may not, without the approval of a majority of the then outstanding shares of Series A-1 Preferred Stock which must include AIGH Investment Partners LP and its affiliates (“AIGH”) for so long as AIGH is holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement (a) alter or change the powers, preferences or rights given to the Series A-1 Preferred Stock, (b) alter or amend the Amended and Restated Certificate of Incorporation (the “Charter”), the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation (as defined below) or the Amended and Restated Bylaws of the Company (the “Bylaws”) in such a manner so as to materially adversely affect any rights given to the Series A-1 Preferred Stock, (c) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a Liquidation (as defined below) senior to, or otherwise pari passu with, the Series A-1 Preferred Stock, other than the Series A-2 Preferred Stock, (d) increase the number of authorized shares of Series A-1 Preferred Stock, (e) issue any Series A-1 Preferred

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Stock except pursuant to the Purchase Agreement, or (f) enter into any agreement to do any of the foregoing.

Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), the then holders of the Series A-1 Preferred Stock are entitled to receive out of the assets available for distribution to stockholders of the Company an amount equal to 100 % of the stated value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon, prior and in preference to the Common Stock or any other series of preferred stock (other than the Series A-2 Preferred Stock).

3 unchanged sentences

The Series A-1 Preferred Stock is convertible at the then-effective Series A-1 Conversion Price at the option of the holder at any time and from time to time.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Mandatory Conversion at the Option of the Company

7 unchanged sentences

Negative Covenants

As long as any Series A-1 Preferred Stock is outstanding, unless the holders of more than 50 % in stated value of the then outstanding shares of Series A-1 Preferred Stock shall have otherwise given prior written consent (which must include AIGH for so long as AIGH is holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement), the Company cannot, subject to certain exceptions, (a) enter into, create, incur, assume, guarantee or suffer to exist any indebtedness, (b) enter into, create, incur, assume or suffer to exist any liens, (c) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its Common Stock, Common Stock equivalents or junior securities, (d) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company, (e) declare or pay a dividend on junior securities or (f) enter into any agreement with respect to any of the foregoing.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

otherwise acquire more than a de minimis number of shares of its Common Stock, Common Stock equivalents or junior securities, (d) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company, (e) declare or pay a dividend on junior securities or (f) enter into any agreement with respect to any of the foregoing.

Trading Market

There is no established trading market for any of the Series A-1 Preferred Stock, and we do not expect a market to develop.

We do not intend to apply for a listing for any of the Series A-1 Preferred Stock on any securities exchange or other nationally recognized trading system.

There is no established trading market for any of the Series A-1 Preferred Stock, and the Company does not expect a market to develop.

The Company does not intend to apply for a listing for any of the Series A-1 Preferred Stock on any securities exchange or other nationally recognized trading system.

Without an active trading market, the liquidity of the Series A-1 Preferred Stock will be limited.

2 unchanged sentences

The following is a summary of the principal terms of the Series A-2 Preferred Stock as set forth in the Series A-2 Certificate of Designation:

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

The holders of Series A-2 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of Common Stock, when and if actually paid.

5 unchanged sentences

Upon conversion the shares of Series A-2 Preferred Stock will resume the status of authorized but unissued shares of preferred stock of the Company.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Conversion at the Option of the Holder

5 unchanged sentences

However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99 % upon notice to us, provided that any increase in this limitation will not be effective until 61 days after such notice from the holder to us and such increase or decrease will apply only to the holder providing such notice.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Preemptive Rights

2 unchanged sentences

Trading Market

There is no established trading market for any of the Series A-2 Preferred Stock, and we do not expect a market to develop.

We do not intend to apply for a listing for any of the Series A-2 Preferred Stock on any securities exchange or other nationally recognized trading system.

There is no established trading market for any of the Series A-2 Preferred Stock, and the Company does not expect a market to develop.

The Company does not intend to apply for a listing for any of the Series A-2 Preferred Stock on any securities exchange or other nationally recognized trading system.

Without an active trading market, the liquidity of the Series A-2 Preferred Stock will be limited.

3 unchanged sentences

The fair value of the service provided was $ 59 thousand.

On June 22, 2023, in a second closing of the June 2023 PIPE, the Company sold an aggregate of (i) 1,870.36596 Series A-1 Preferred Stock, (ii) 100 shares of Series A-2 Preferred Stock, and (iii) Class A Warrants to purchase up to an aggregate of 7,881,464 shares of Common Stock pursuant to the Purchase Agreement for aggregate gross proceeds of $ 2.0 million.

On June 22, 2023, in a second closing of the June 2023 PIPE, the Company sold an aggregate of (i) 1,870.36596 Series A-1 Preferred Stock, (ii) 100 shares of Series A-2 Preferred Stock, and (iii) Class A Warrants to purchase up to an aggregate of 225,190 shares of Common Stock pursuant to the Purchase Agreement for aggregate gross

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

proceeds of $ 2.0 million.

In addition, 8,572 Class B Warrants were issued in lieu of cash payments for consulting services related to the offering.

9 unchanged sentences

The Company also expensed $ 0.2 million of issuance costs that were allocated to the warranty liability during the three and six months ended June 30, 2023.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

The terms of the June 2023 PIPE include a number of restrictions on our operations and on our ability to raise additional capital.

The Purchase Agreement, among other things, provides that, for a period ending on June 14, 2024, we may not use cash from operating activities (as defined under U.S.

generally accepted accounting principles) of more than an average of $ 2.8 million for any consecutive three-month period (subject to certain exceptions).

The Purchase Agreement, among other things, provides that, for a period ending on June 14, 2024, we may not use cash from operating activities (as defined under GAAP) of more than an average of $ 2.8 million for any consecutive three-month period (subject to certain exceptions).

This provision may cause us to delay certain actions that may benefit our business and may prevent us from pursuing potentially favorable business opportunities, even if a majority of our board of directors believes such actions or opportunities are in the best interest of our company and our stockholders.

1 unchanged sentence

This provision may make it more difficult for us to raise additional capital because other investors may want to provide all, or a larger portion of the capital provided in the subsequent financing or may be unwilling to co-invest with one or more of the significant purchasers or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers.

In addition, during such period, we may not issue common stock or common stock equivalents in a subsequent financing with an effective price per share of common stock that is or may become lower than the then-effective conversion price of the Series A-1 Preferred Stock without the consent of the significant purchasers, which must include AIGH Investment Partners LP and its affiliates for so long as they are holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement.

This provision may prevent us from obtaining additional capital on market terms even if a majority of our board of directors believes that the terms of the subsequent financing are in the best interests of our company and our stockholders.

This provision may also have the effect of increasing the cost of obtaining additional capital either because the significant purchasers refuse to consent to any such subsequent financing unless provided by them on terms approved by them or because we are required to provide additional consideration to such significant purchasers in exchange for their consent.

In the event that we issue common stock or common stock equivalents in a subsequent financing prior to the time our common stock is listed on a national securities exchange, the Purchase Agreement provides that if a significant purchaser reasonably believes that any of the terms and conditions of the subsequent financing are more favorable to an investor in the subsequent financing than the terms of the June 2023 PIPE, such significant purchaser has the right to require us to amend the terms of the June 2023 PIPE to include such more favorable term for such significant purchaser.

This provision may make it more expensive to obtain additional capital prior to an uplisting because it permits any significant purchaser to “cherry pick” the terms of the subsequent financing and to require any term deemed to be more favorable to be included retroactively in the terms of the June 2023 PIPE.

This provision also potentially creates uncertainty around the terms of a subsequent financing because the significant purchasers have the right to review terms of a completed subsequent financing before deciding which, if any, of the terms thereof they find more favorable to them.

The Purchase Agreement provides that, until June 14, 2025, a significant purchaser may participate in a subsequent transaction by exchanging some or all of its Series A-1 Preferred Stock having a stated value equal to its subscription amount in the subsequent financing.

This provision may adversely affect the amount of capital we raise in a subsequent financing, as it permits a significant purchaser to roll its existing investment into the new financing rather than being required to invest cash.

This provision also has the potential to make it more difficult for us to raise additional capital as other investors may want to provide all or a larger portion of the capital provided in the subsequent financing or may require us to raise a minimum amount of new capital or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers in cash.

If we are unable to raise additional capital when needed, we may be required to delay, limit, reduce or terminate commercialization, our research and product development, or grant rights to develop and market our products that we would otherwise prefer to develop and market ourselves and may have a material adverse effect on our business, financial condition and results of operations.

In addition, during such period, the Company may not issue common stock or common stock equivalents in a subsequent financing with an effective price per share of common stock that is or may become lower than the then-effective conversion price of the Series A-1 Preferred Stock without the consent of the significant purchasers, which must include AIGH Investment Partners LP and its affiliates for so long as they are holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement.

This provision may prevent the Company from obtaining additional capital on market terms even if a majority of the Company’s board of directors believes that the terms of the subsequent financing are in the best interests of the Company and its stockholders.

This provision may also have the effect of increasing the cost of obtaining additional capital either because the significant purchasers refuse to consent to any such subsequent financing unless provided by them on terms approved by them or because the Company is required to provide additional consideration to such significant purchasers in exchange for their consent.

In the event that the Company issues common stock or common stock equivalents in a subsequent financing prior to the time the common stock is listed on a national securities exchange, the Purchase Agreement provides that if a significant purchaser reasonably believes that any of the terms and conditions of the subsequent financing are more favorable to an investor in the subsequent financing than the terms of the June 2023 PIPE, such significant purchaser has the right to require the Company to amend the terms of the June 2023 PIPE to include such more favorable term for such significant purchaser.

This provision may make it more expensive to obtain additional capital prior to an uplisting because it permits any significant purchaser to “cherry pick” the terms of the

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

subsequent financing and to require any term deemed to be more favorable to be included retroactively in the terms of the June 2023 PIPE.

This provision may adversely affect the amount of capital the Company raises in a subsequent financing, as it permits a significant purchaser to roll its existing investment into the new financing rather than being required to invest cash.

This provision also has the potential to make it more difficult for the Company to raise additional capital as other investors may want to provide all or a larger portion of the capital provided in the subsequent financing or may require the Company to raise a minimum amount of new capital or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers in cash.

If the Company is unable to raise additional capital when needed, the Company may be required to delay, limit, reduce or terminate commercialization, its research and product development, or grant rights to develop and market its products that the Company would otherwise prefer to develop and market itself and may have a material adverse effect on the Company’s business, financial condition and results of operations.

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 Company’s Charter and the Company’s 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.

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.

Any future determination to pay cash dividends will be at the discretion of the 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.

Quotations on the Company’s 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 the common stock on the OTCQB or any other over-the-counter market prior to February 2022.

Common Stock Issued to Vendors for Services

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On February 27, 2023, the Company issued 1,508 shares of common stock as payment for investor relations services.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Common Stock Warrants

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Warrants outstanding at January 1, 2023

Warrants outstanding at June 30, 2023

Warrants outstanding at September 30, 2023

$ 0.35 - $ 70.00

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Pre-funded warrants outstanding at January 1, 2023

Pre-funded warrants outstanding at June 30, 2023

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

For any grant dates prior to February 2022, the fair value of common stock warrants is determined using the Black Scholes option-pricing model.

Pre-funded warrants outstanding at September 30, 2023

For any issuance dates prior to February 2022, the 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.

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

At the Annual Meeting, the Company’s stockholders approved an amendment (the “2021 Plan Amendment”) to the Company’s 2021 Plan, increasing the number of the shares of common stock, par value $ 0.0001 per share (“Common Stock”), reserved for issuance under the 2021 Plan from 124,045 shares to 743,106 shares.

The Company’s Board of Directors (the “Board”) had previously approved the 2021 Plan Amendment, subject to stockholder approval.

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.

The assumptions used in calculating the fair value of share-based awards represent

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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 and six months ended June 30, 2023 and 2022.

There were no options granted under the 2021 Plan for the three and nine months ended September 30, 2023 and 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.

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The contractual term is 10 years , and the expected option term is lower.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

The following table reflects share activity under the share option plans for the six months ended June 30, 2023:

The following table reflects share activity under the share option plans for the nine months ended September 30, 2023:

Fair Value at

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Cancelled/Forfeited

Options outstanding at June 30, 2023

Options exercisable at June 30, 2023

Options outstanding at September 30, 2023

Options exercisable at September 30, 2023

Stock-based compensation is included in the unaudited interim condensed consolidated statements of operations as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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Selling, general and administration

Total compensation cost related to non-vested stock option awards not yet recognized as of June 30, 2023 was $ 1.1 million and will be recognized on a straight-line basis through the end of the vesting periods in July 2026.

Total compensation cost related to non-vested stock option awards not yet recognized as of September 30, 2023 was $ 0.9 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.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

NET LOSS PER COMMON SHARE:

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In periods with reported net operating losses, all common stock options and warrants are generally deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.

The following potentially dilutive securities were excluded from the computation of earnings per share as of June 30, 2023 and 2022 because their effects would be anti-dilutive:

The following potentially dilutive securities were excluded from the computation of earnings per share as of September 30, 2023 and 2022 because their effects would be anti-dilutive:

September 30,

Common stock warrants

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Stock options

At June 30, 2023, the Company had 2,168,000 pre-funded warrants outstanding.

The following table provides a reconciliation of the weighted average shares outstanding calculation for the three and six months ended June 30, 2023 and 2022:

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Three Months Ended June 30,

Six Months Ended June 30,

At September 30, 2023, the Company had 61,945 pre-funded warrants outstanding.

The following table provides a reconciliation of the weighted average shares outstanding calculation for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30,

Nine Months Ended September 30,

Weighted average shares issued

Weighted average pre-funded warrants

Weighted average penny warrants

Weighted average pre-funded and penny warrants

Weighted average shares outstanding

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

1 unchanged sentence

Selling, general and administration

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

FAIR VALUE MEASUREMENTS

The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value for the quarter ended June 30, 2023:

The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value for the quarter ended September 30, 2023:

(in thousands)

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Total change in the liability included in earnings

Balance at June 30, 2023

As disclosed in Note 7 of the Company’s consolidated financial statements, the Company allocated part of the proceeds of private placement of the Company’s preferred A-1 and A-2 shares to warrant liability issued in connection with the transaction.

Balance at September 30, 2023

As disclosed in Note 7 of the Company’s consolidated financial statements, the Company allocated part of the proceeds of private placement of the Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock to

warrant liability issued in connection with the transaction.

The valuations of the warrants were determined using option pricing models.

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The Company has accounted for them as derivative instruments in accordance with ASC 815, adjusting the fair value at the end of each reporting period.

The fair value of the preferred and common warrants at June 30, June 22 and June 14, 2023 was determined by using option pricing models assuming the following:

The fair value of the common warrants at September 30, June 22 and June 14, 2023 was determined by using option pricing models assuming the following:

September 30,

Expected term (years)

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Expected dividend yield

Underlying stock price

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Additionally, the Company has determined that the warrant liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the option pricing models against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820.

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Since the lowest level input is a Level 3, the Company determined the warrant liability is most appropriately classified within Level 3 of the fair value hierarchy.

The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of June 30, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of September 30, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value.

In general, the fair values were determined using Level 3:

Quoted Prices in

Quoted Prices

Significant Other

Active Markets

Observable Inputs

Unobservable Inputs

September 30,

Warrant liability

1 unchanged sentence

SUBSEQUENT EVENTS:

Warrant Exercises

Subsequent to June 30, 2023, warrants to purchase 2,500,000 shares of the Company’s common stock with an exercise price of $ 0.01 per share were exercised for proceeds of $ 25,000 .

Preferred Stock Conversions

Subsequent to June 30, 2023, the Company issued 800,000 shares of the Company’s common stock upon the conversion of 200 Series A-2 Preferred Stock.

Subsequent to September 30, 2023, the Company issued 7,137 shares of the Company’s common stock upon the conversion 64 shares Series A-2 Preferred Stock.

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