What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-27 compared with 2023-03-30 · 428 added, 264 removed, 485 unchanged (59% of the section changed)

2 unchanged sentences

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm (BDO LLP:

London, United Kingdom:

PCAOB ID # 1295 )

Report of Independent Registered Public Accounting Firm ( Marcum LLP , New York, USA , PCAOB ID # 688 )

Report of Independent Registered Public Accounting Firm (BDO LLP, London, United Kingdom, PCAOB ID # 1295)

Consolidated Balance Sheets as of December 31, 2023, and 2022

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

SmartKem, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of SmartKem, Inc.

and subsidiaries (the “Company”) as of December 31, 2023, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Marcum llp

We have served as the Company’s auditor since 2023.

March 27, 2024

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of SmartKem, Inc.

(the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheet of SmartKem, Inc.

(the “Company”) as of December 31, 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022 , in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

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These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 2020.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

We have served as the Company's auditor from 2020 through to 2023.

Manchester, United Kingdom

March 30, 2023

March 30, 2023, except for the effects of the reverse stock split as described in Notes 2 and 8, which is dated March 27, 2024

SMARTKEM, INC.

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Cash and cash equivalents

Accounts receivable, net

Accounts receivable

Research and development tax credit receivable

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Lease liabilities, current

Income taxes payable

Income tax payable

Other current liabilities

1 unchanged sentence

Lease liabilities, non-current

Warrant liability

Total liabilities

1 unchanged sentence

Stockholders’ equity:

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, zero shares issued and outstanding, at December 31, 2022 and December 31, 2021, respectively

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 13,765 and zero shares issued and outstanding , at December 31, 2023 and December 31, 2022, respectively

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 889,668 and 771,054 shares issued and outstanding , at December 31, 2023 and December 31, 2022, respectively *

4 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 consolidated financial statements.

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Selling, general and administrative

Transaction expenses

Loss on foreign currency transactions

Total operating expenses

Operating Loss

Loss from operations

Non-operating income/(expense)

Loss on foreign currency transactions

Interest expense

Gain/(loss) on foreign currency transactions

Transaction costs allocable to warrants

Change in fair value of the warrant liability, net

Interest income

Total non-operating expense

Total non-operating income/(expense)

Loss before income taxes

Income tax expense

Other comprehensive gain/(loss)

Foreign currency translation gain

Other comprehensive loss:

Foreign currency translation

Total comprehensive loss

Basic & diluted net loss per common share

Basic & diluted weighted average shares outstanding

Basic and diluted net loss per common share *

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 consolidated financial statements.

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(in thousands, except share data)

Preferred Stock

Common stock *

$0.0001 par value

comprehensive

Stockholders'

Equity (Deficit)

income / (loss)

Balance at January 1, 2023

Issuance of common stock due to exercise of stock-options

Stock-based compensation expense

Repurchase of common stock

( 2,307,700 )

Effect of reverse capitalization

Issuance of common stock to vendor

Issuance of common stock and warrants in private placement

Issuance costs related to common stock and warrants in private placement

Issuance of preferred stock, net of issuance costs

Conversion of preferred stock into common stock

Exercise of warrants into common stock

Foreign currency translation adjustment

Balance at December 31, 2023

Preferred Stock

Common stock *

$0.0001 par value

comprehensive

Stockholders'

Equity (Deficit)

income / (loss)

Balance at January 1, 2022

3 unchanged sentences

Issuance costs related to common stock in private placement

Reverse stock split rounding

Foreign currency translation adjustment

Balance at December 31, 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 consolidated financial statements.

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Year Ended December 31,

Cash flows from operating activities:

Cash flow from operating activities:

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

Depreciation expense

Common shares issued to vendor for services

Amortization of right of use asset

Stock option compensation expense

Loss on foreign currency transactions

Change in assets and liabilities:

Accounts receivable, net

Research & development tax credit receivable

Stock-based compensation expense

Issuance of common stock to vendor

Right-of-use asset amortization

Gain/(loss) on foreign currency transactions

Transaction costs allocable to warrants

Change in fair value of the warrant liability, net

Change in operating assets and liabilities:

Accounts receivable

Research and development tax credit receivable

Prepaid expenses and other current assets

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Lease liabilities

Income taxes payable

Income tax payable

Other current liabilities

3 unchanged sentences

Net cash used by investing activities

Cash flows from financing activities:

Proceeds from term loan payable

Repayment of term loan payable

Proceeds from the issuance of common stock and warrants in private placement

Cash flow from financing activities:

Proceeds from the issuance of preferred stock in private placement

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 stock options

Proceeds from the exercise of warrants

Net cash provided by financing activities

Foreign currency effects on cash

Effect of exchange rate changes on cash

Net change in cash

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Cash, beginning of period

Cash, end of period

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

Cash paid for interest

Initial classification of fair value of warrants

Right-of-use asset and lease liability additions

4 unchanged sentences

Notes to Consolidated Financial Statements

ORGANIZATION & BUSINESS

Organization & Reverse Recapitalization

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Notes to Consolidated Financial Statements

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 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.

We are seeking to reshape the world of electronics with our disruptive organic thin-film transistors (OTFTs) that we believe have the potential to drive the next generation of displays.

Our patented TRUFLEX® semiconductor and dielectric inks, or electronic polymers, are used to make a new type of transistor that we believe have the capability to revolutionize the display industry.

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

Our electronic polymer platform can be used in a range 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.

COVID-19 Pandemic

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The additional costs incurred by the Company related to COVID-19 for the years ended December 31, 2023, and 2022, respectively were deemed to be immaterial to the consolidated financial statements.

The Company anticipates there may be additional costs relating to the Pandemic incurred in the upcoming months that will be attributable to fiscal year 2023 and thereafter.

These costs are not expected to be material.

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

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These 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 (“US GAAP”) as defined by the Financial Accounting Standards Board (FASB) within the FASB Accounting Standards Codification (“ASC”) and are presented in thousands, except number of shares and per share data.

Going Concern

The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities, and commitments in the ordinary course of business.

We have incurred recurring losses including net losses of $ 11.5 million and $ 17.1 million for the years ended December 31, 2022, and 2021, respectively.

As of December 31, 2022, we had an accumulated deficit of $ 86.6 million.

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

We expect that our cash and cash equivalents of $ 4.2 million as of December 31, 2022, will be sufficient to fund our operating expenses and capital expenditure requirements through the end of May 2023.

It is possible this period could be shortened if there are any significant increases in planned spending or development programs or more rapid progress of development programs than anticipated.

Reclassification

Certain accounts in the prior period consolidated financial statements have been reclassified to conform to the presentation of the current year consolidated financial statements.

These reclassifications had no effect on the previously reported operating results.

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 (see also Note 8).

As of December 31, 2023, we have incurred recurring losses including net losses of $ 8.5 million and $ 11.5 million for the years ended December 31, 2023, and 2022, respectively.

We anticipate operating losses to continue for the

SMARTKEM, INC.

1 unchanged sentence

Notes to Consolidated Financial Statements

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.

In June 2023 the Company raised $ 14.2 million through two closings of a private placement of Preferred Stock and Warrants.

Net proceeds after related expenses was $ 12.7 million.

In addition, the company has also gone through various cost cutting measures such as lowering personnel costs through a reduction in force, reduced spending on professional service fees and reduced our lease and related utility costs by consolidating office and lab space.

All of these actions together have alleviated the going concern that was reported in 2022.

We expect that our cash and cash equivalents of $ 8.8 million as of December 31, 2023, will be sufficient to fund our operating expenses and capital expenditure requirements through the end of April 2025.

It is possible this period could be shortened if there are any significant increases in planned spending or development programs or more rapid progress of development programs than anticipated.

Our future viability is dependent on our ability to raise additional capital to fund our operations.

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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 consolidated financial statements as of December 31, 2022 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.

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.

Basis of Consolidation

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

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

and SmartKem Limited.

and its wholly-owned subsidiary, SmartKem Limited.

The Company does not have any nonconsolidated subsidiaries.

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

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

was dissolved on May 13, 2021.

Comprehensive loss

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

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

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

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

These estimates and assumptions are based on current facts, historical experience and various other factors believed

SMARTKEM, INC.

1 unchanged sentence

Notes to Consolidated Financial Statements

to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources.

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

Certain Risk and Uncertainties

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Due to the nature of the accounts receivable balance, the Company believes there is no significant risk of non-collection.

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 December 31, 2022, and 2021.

If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances for credit losses would be required.

There was no allowance for credit losses recorded as of December 31, 2023 and 2022.

Concentrations of Credit Risk

1 unchanged sentence

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

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

Property, Plant and Equipment

16 unchanged sentences

As of December 31, 2023, and 2022, Company’s management believed that no revision to the remaining useful lives or impairment of the Company’s long-lived assets was required.

Derivative Asset for Embedded Conversion Features

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

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

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

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

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

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

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

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

Fair Value of Financial Instruments

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Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Unobservable inputs which are supported by little, or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and during the years ended December 31, 2023, and 2022.

The carrying value of the Company’s cash, accounts receivable, other receivables, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value because of the short-term maturity of these financial instruments.

Convertible Notes

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

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

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

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

The carrying value of the Company’s cash, accounts receivable, other receivables, and accounts payable approximate fair value because of the short-term maturity of these financial instruments.

The accounting treatment of warrants issued is determined pursuant to the guidance provided by ASC 480, Distinguishing Liabilities from Equity , and ASC 815-40, Contracts in Entity's Own Equity , as applicable.

Each feature of a freestanding financial instrument 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 consolidated financial statements.

The Company determined that all warrants meet the criteria to be classified as equity.

The Company assessed its warrants in accordance with this guidance, under which warrants that do not meet the criteria for equity treatment and must be recorded as liabilities.

Accordingly, the Company will classify those warrants as liabilities at their fair value and adjusts the warrants to fair value in respect of each reporting period.

This liability is subject to re-measurement at each balance sheet date and any change in fair value is recognized in the statements of operations.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Issuance Costs

The Company assessed the issuance cost in connection with the issuance of an equity offering.

ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A, Expenses of Offering, states that specific incremental costs directly attributable to a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering.

Analogizing to that guidance, specific incremental costs directly attributable to the issuance of an equity contract to be classified in equity should generally be recorded as a reduction in equity.

However, issuance costs for equity contracts that are classified as a liability should be expensed immediately.

The issuance costs are allocated to the equity and liability components of the underlying transaction on a basis of the allocated fair value of the gross proceeds in the overall transactions.

Direct and incremental legal and accounting costs associated with the Company’s issuance of common stock, preferred stock and warrants are deferred and classified as a component of other assets on the consolidated balance sheet until completion of the issuance.

Upon completion of the issuance, deferred offering costs are reclassified from other assets to equity in additional paid-in capital and recorded against the net proceeds received in the issuance.

For the year ended December 31, 2023, we recorded $ 1.5 million of offering costs of which $ 1.3 million were recorded in additional paid-in capital and $ 0.2 million were recorded as non-operating expenses and for the year ended December 31, 2022, $ 170 thousand of offering costs were recorded in additional paid-in capital.

Non-retirement Post-employment Benefits

The company records employee severance benefits as non-retirement post-employment benefits that are accounted for under ASC 712-10.

The company records employee severance benefits as non-retirement post-employment benefits that are accounted for under the guidance of ASC 712-10 Compensation - Nonretirement Postemployment Benefits .

A liability is accrued when it becomes probable that a payment will be made, and the amount is estimable.

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All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date.

Because most of the Company’s leases do not provide an implicit rate of return, the Company used an incremental borrowing rate based on the information available at adoption date of ASC 842 (January 1, 2019) in determining the present value of lease payments.

Because most of the Company’s leases do not provide an implicit rate of return, the Company used an incremental borrowing rate based on inception date of the lease agreement in determining the present value of lease payments.

The Company applies the provisions of ASC 606, Revenue from Contracts with Customers .

The Company recognizes revenue under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

consideration the Company expects to be entitled to.

The Company recognizes revenue under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled to.

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

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The Company derives its revenues primarily from sales of TRUFLEX® inks and of demonstrator units to customers evaluating organic semiconductor technology.

The transaction price is stated in each customer agreement and is allocated to a single performance obligation.

The transaction price is stated in each customer agreement and is

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

allocated to a single performance obligation.

Revenue is recognized upon shipment of each TRULFEX® ink or demonstrator, at a point in time.

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Collaboration Arrangements

The company entered into several joint development agreements during the year.

The business arrangement between the two parties is not accounted for as a Collaborative Arrangement, as defined within the guidance under ASC 808, as both parties are not exposed to significant risks and rewards dependent on the commercial success of the activity.

It has also determined that other party is a vendor and not a customer, as defined within the guidance under ASC 606, as the other party did not primarily contract with SmartKem to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

It was SmartKem that contracted with the other party to obtain design services from it.

The Company entered into several collaboration agreements during 2023.

The business arrangements between the two parties are not accounted for as a Collaborative Arrangement, as defined within the guidance under ASC 808, Collaborative Arrangement , as both parties are not exposed to significant risks and rewards dependent on the commercial success of the activity.

It has also determined that other parties are a vendor and not a customer, as defined within the guidance under ASC 606, as the other parties did not primarily contract with SmartKem to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

It was SmartKem that contracted with the other parties to obtain design services from it.

These agreements are accounted for under the guidance of ASC 705, Cost of Sales and Service.

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

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Other Operating Income

1 unchanged sentence

Such incentives are recorded as other income when it is probable the amounts are collectible and can be reasonably estimated.

The Company has applied the guidance of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance to account for grants and recognition of the other operating income related to the grant.

The government

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

grant is recognized only when there is reasonable assurance that a) the Company will comply with any conditions attached to the grant and, (b) the grant will be received.

The grant is recognized as income over the period necessary to match the related costs, for which the grant is intended to compensated, on a systematic basis.

A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, is recognized as other operating income in the period in which it is receivable.

For the year ended December 31, 2023 and 2022, the Company recorded grant income and research & development tax credits of $ 836 thousand and $ 1,172 thousand, respectively, which are recorded as other operating income in the accompanying consolidated statements of operations.

As of December 31, 2022, and December 31, 2021, the Company had receivables related to research & development tax credits for payments not yet received of $ 1,121 thousand and $ 1,070 thousand, respectively.

As of December 31, 2023 and 2022, the Company had receivables related to research & development tax credits for payments not yet received of $ 610 thousand and $ 1,121 thousand, respectively and receivables related to a government grants of $ 160 thousand as of December 31, 2023.

The Company had no receivables related to government grants as of December 31, 2022.

Ordinary Shares Valuation

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Options become exercisable when service requirements are met.

In the case of performance-based options, options become exercisable when there is a liquidity event, such as a change in control or sale or admission (listing as a public company or initial public offering (“IPO”)), and the employee, or consultant, must be

Due to the Exchange, all options outstanding immediately prior to the event with a performance obligation requirement became vested and exercisable.

SMARTKEM, INC.

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Notes to Consolidated Financial Statements

providing services to the Company at the time of the event.

Due to the Exchange, all options outstanding immediately prior to the event with a performance obligation requirement became vested and exercisable.

Non-cash stock-based compensation expense for the year ended December 31, 2023 and 2022 were $ 0.7 million and $ 0.5 million, respectively (see also Note 9).

The estimated fair value of stock options at the grant date is determined using the Black-Scholes pricing model.

The Black-Scholes option pricing model requires inputs such as the fair value of common stock on date of grant, expected term, expected volatility, dividend yield, and risk-free interest rate.

The Black-Scholes option pricing model requires inputs such as the fair value of common stock on date of grant, expected term using a simplified method, expected volatility, dividend yield, and risk-free interest rate.

The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

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Valuation allowance of deferred tax assets

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

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

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns.

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With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.

The Company is a party to certain litigation and disputes arising in the normal course of business.

As of December 31, 2022, the Company does not expect that such matters will have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

Issuance Costs

Direct and incremental legal and accounting costs associated with the Company’s issuance of common stock and warrants are deferred and classified as a component of other assets on the consolidated balance sheet until completion of the issuance.

Upon completion of the issuance, deferred offering costs are reclassified from other assets to equity in additional paid-in capital and recorded against the net proceeds received in the issuance.

For the year ended December 31, 2022, $ 170 thousand of offering costs were recorded in additional paid-in capital and for the year ended December 31, 2021, $ 2,454 thousand of offering costs were recorded in additional paid-in capital.

For the year ended December 31, 2021, $ 1.3 million of direct and incremental costs associated with the Exchange were recorded as Transaction Expenses in the Consolidated Statement of Operations and Comprehensive Loss.

From time to time, the Company may be party to certain litigation and disputes arising in the normal course of business.

As of December 31, 2023, the Company is not a party to any litigation or disputes.

Segment Information

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

As the pre-funded common stock warrants are exercisable for $ 0.01 , these shares are considered outstanding common shares and included in computation of basic and diluted Earnings Per Share as the exercise of the pre-funded common stock warrants is virtually assured.

The Company included these pre-funded common stock warrants in basic and diluted earnings per share when all conditions were met on April 23, 2021.

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Notes to Consolidated Financial Statements

As of December 31, 2023, the Company had 61,587 pre-funded common stock warrants and 769,826 Class B Warrants outstanding and exercisable.

As the pre-funded common stock warrants and Class B Warrants are exercisable for $ 0.35 , these shares are considered outstanding common shares and included in computation of basic and diluted Earnings Per Share as the exercise of the pre-funded common stock warrants is virtually assured.

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

Common stock warrants

Assumed conversion of preferred stock

Stock options

Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments:

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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 estimate of expected credit losses will require organizations to

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Notes to Consolidated Financial Statements

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 filer.

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.

Securities Exchange filers.

However, the standard was 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.

In November 2023, the FASB issued Accounting Standards Update (ASU) No.

2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures which will require companies to disclose significant segment expenses that are regularly provided to the chief operating decision maker ("CODM").

The pronouncement is effective for annual filings for the year ended December 31, 2024.

The Company is still assessing the impact of the adoption of this standard but does not expect it to have a material impact on its results of operations, financial position or cash flows.

On December 14, 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures which applies to all entities subject to income taxes.

The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid.

The standard is intended to provide more detailed income tax disclosures.

For public business entities (PBEs), the new requirements will be effective for annual periods beginning after December 15, 2024.

The guidance will be applied on a prospective basis with the option to apply the standard retrospectively.

The Company is still assessing the impact of the adoption of this standard but does not expect it to have a material impact on its results of operations, financial position or cash flows.

The OECD reached an agreement among various countries to implement a minimum 15% tax rate on certain multinational enterprises, commonly referred to as Pillar Two.

Many countries continue to announce changes in their tax laws and regulations based on Pillar Two Proposals.

We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes available.

Given the numerous proposed changes in law and uncertainty regarding such proposed changes, the impact cannot be determined at this time.

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Notes to Consolidated Financial Statements

PREPAID EXPENSES AND OTHER CURRENT ASSETS:

Prepaid expenses and other current assets consist of the following:

Prepaid service charges and property taxes

Prepaid utilities

(in thousands)

Prepaid facility costs

Prepaid insurance

Prepaid administrative expenses

Prepaid technical fees

Prepaid consulting fees

Prepaid professional service fees

Research grant receivable

Prepaid software licenses

VAT receivable

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Total prepaid expenses and other current assets

As of December 31, 2022 and 2021, there was $ 169 thousand and $ 217 thousand, respectively, of non-current prepaid insurance related to directors’ and officers’ liability insurance that was included in the amounts above.

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Notes to Consolidated Financial Statements

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

(in thousands)

Plant and equipment

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Accounts payable and accrued expenses consist of the following:

(in thousands)

Accounts payable

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Accrued expenses – technical fees

Accrued expenses – variable rent & utilities

Accrued expenses – audit & accounting fees

Accrued expenses – other

Credit card liabilities

Payroll and social security liabilities

Payroll liabilities

Total accounts payable and accrued expenses

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

There was no sublease rental income for the year ended December 31, 2022 and 2021.

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

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

For the Year Ended December 31,

Year Ended December 31,

(in thousands)

Operating lease cost

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

For the Year Ended December 31,

Year Ended December 31,

(in thousands)

Research and development

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

Operating lease right of use assets

(in thousands)

Right of use assets - Operating Leases

Total lease assets

Current liabilities:

Operating lease liability – current portion

Lease liability, current - Operating Leases

Noncurrent liabilities:

Operating lease liability, net of current portion

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 December 31, 2022 and 2021.

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

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

For the Year Ended December 31,

Year Ended December 31,

(in thousands)

Operating cash outflows from operating leases

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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:

For the Year Ended December 31,

Year Ended December 31,

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

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Undiscounted operating lease liabilities as of December 31, 2023, by year and in the aggregate, having non-cancelable lease terms in excess of one year were as follows:

(in thousands)

Total undiscounted lease payments

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Total net lease liabilities

NOTES PAYABLE:

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

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

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

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

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

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

The loan carried a monthly interest rate of 1.25 %.

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

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

The interest expense recognized based on the debt’s effective interest rate for the year ended December 31, 2022 and 2021, was zero and $ 19 thousand, respectively, relating to notes payable.

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

There were no notes payable outstanding at the years ended December 31, 2022 and 2021.

COMMITMENTS AND CONTINGENCIES:

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In the opinion of management, any potential liabilities resulting from such claims would not have a material effect on the consolidated financial statements.

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 .

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

SMARTKEM, INC.

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Notes to Consolidated Financial Statements

Expenditure commitments contracted for but not yet incurred totaled $ 681 thousand and primarily consists of purchase commitments in the normal course of business for research & development services, communications infrastructure and administrative services.

STOCKHOLDERS’ EQUITY:

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

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.

Series A-1 Preferred Stock

On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-1 Preferred Stock with a stated value of $ 1,000 per share (the “Series A-1 Certificate of Designation”).

On January 29, 2024, the Company filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitation with the Secretary of the State of Delaware designating 11,100 shares of Series A-1 Preferred Stock.

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

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.

In addition, in the event that on the 18th month anniversary of the Closing Date, the trailing 30-day VWAP (as defined in the Series A-1 Certificate of Designation) is less than the then-effective Series A-1 Conversion Price, the Series A-1 Preferred Stock will begin accruing dividends at the annual rate of 19.99 % of the stated value thereof (the “Series A-1 Dividend”).

The Series A-1 Dividend would be paid in cash, or, at the option of the Company if certain equity conditions are met, in shares of Common Stock at a price per share equal to ninety percent (90%) of the trailing 10-day VWAP for the last 10 trading date prior to the date the Series A-1 Dividend is paid.

Voting Rights

The shares of Series A-1 Preferred Stock have no voting rights, except to the extent required by the Delaware General Corporation Law.

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 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 3,050 shares of Series A-2 Preferred Stock of the Company, (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.

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Notes to Consolidated Financial Statements

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).

The Series A-1 Preferred Stock is convertible into Common Stock at any time at a conversion price of $ 87.50 , subject to adjustment for certain anti-dilution provisions set forth in the Series A-1 Certificate of Designation (the “Series A-1 Conversion Price”).

Upon conversion the shares of Series A-1 Preferred Stock will resume the status of authorized but unissued shares of preferred stock of the Company.

Conversion at the Option of the Holder

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.

Mandatory Conversion at the Option of the Company

So long as certain equity conditions are satisfied, the Company may give notice requiring the holders to convert all of the outstanding shares of Series A-1 Preferred Stock into shares of Common Stock at the then-effective Series A-1 Conversion Price.

Beneficial Ownership Limitation

The Series A-1 Preferred Stock cannot be converted to Common Stock if the holder and its affiliates would beneficially own more than 4.99 % (or 9.99 % at the election of the holder) of the outstanding common stock.

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.

Preemptive Rights

No holders of Series A-1 Preferred Stock will, as holders of Series A-1 Preferred Stock, have any preemptive rights to purchase or subscribe for Common Stock or any of our other securities.

The shares of Series A-1 Preferred Stock are not redeemable by the Company.

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

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Notes to Consolidated Financial Statements

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.

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

Series A-2 Preferred Stock

On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-2 Preferred Stock with a stated value of $ 1,000 per share (the “Series A-2 Certificate of Designation”).

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:

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.

Voting Rights

The shares of Series A-2 Preferred Stock have no voting rights, except to the extent required by the DGCL.

As long as any shares of Series A-2 Preferred Stock are outstanding, the Company may not, without the approval of a majority of the then outstanding shares of Series A-2 Preferred Stock (a) alter or change the powers, preferences or rights of the Series A-2 Preferred Stock, (b) alter or amend the Charter, the Series A-2 Certificate of Designation or the Bylaws in such a manner so as to materially adversely affect any rights given to the Series A-2 Preferred Stock, (c) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to, or otherwise pari passu with, the Series A-2 Preferred Stock or (d) enter into any agreement to do any of the foregoing.

Upon a Liquidation, the then holders of the Series A-2 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-1 Preferred Stock).

The Series A-2 Preferred Stock is convertible into Common Stock at any time at a conversion price of $ 8.75 , subject to adjustment for certain anti-dilution provisions set forth in the Series A-2 Certificate of Designation (the

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Notes to Consolidated Financial Statements

“Series A-2 Conversion Price”).

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.

Conversion at the Option of the Holder

The Series A-2 Preferred Stock is convertible at the then-effective Series A-2 Conversion Price at the option of the holder at any time and from time to time.

Automatic Conversion

On the trading day immediately preceding the date on which shares of Common Stock commence trading on the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange all, but not less than all, of the outstanding shares of Series A-2 Preferred Stock shall automatically convert, without any action on the part of the holder thereof and without payment of any additional consideration, into that number of shares of Common Stock determined by dividing the stated of such share of Series A-2 Preferred Stock by the then applicable Series A-2 Conversion Price.

Beneficial Ownership Limitation

The Series A-2 Preferred Stock cannot be converted to common stock if the holder and its affiliates would beneficially own more than 4.99 % (or 9.99 % at the election of the holder) of the outstanding common stock.

Preemptive Rights

No holders of Series A-2 Preferred Stock will, as holders of Series A-2 Preferred Stock, have any preemptive rights to purchase or subscribe for Common Stock or any of our other securities.

The shares of Series A-2 Preferred Stock are not redeemable by the Company.

Trading Market

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.

Series A-1 and A-2 Preferred Stock and Class A and Class B Warrant Issuances

On June 14, 2023, the Company and certain investors entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold an aggregate of (i) 9,229 shares of Series A-1 Convertible Preferred Stock at a price of $ 1,000 per share (the “Series A-1 Preferred Stock”), (ii) 2,950 shares of the Company’s Series A-2 Convertible Preferred Stock at a price of $ 1,000 per share (“Series A-2 Preferred Stock” and together with the Series A-1 Preferred Stock, the “Preferred Stock”), (iii) Class A Warrants to purchase up to an aggregate of 1,391,927 shares of common stock (the “Class A Warrant”), and (iv) Class B Warrants to purchase up to an aggregate of 798,396 shares of common stock (the “Class B Warrant” and together with the Class A Warrant, the “Warrants”) for aggregate gross

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Notes to Consolidated Financial Statements

proceeds of $ 12.2 million (the “June 2023 PIPE”).

In addition, 34,286 Class B Warrants were issued in lieu of cash payments for consulting services related to the offering.

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 225,190 shares of Common Stock pursuant to the Purchase Agreement for aggregate gross 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.

The fair value of the service provided was $ 15 thousand.

Each Class A Warrant has an exercise price of $ 8.75 and each Class B Warrant has an exercise price of $ 0.35 , both subject to adjustments in accordance with the terms of the Warrants.

The Warrants expire five years from the issuance date.

There were an additional 127,551 warrants issues related to a placement agent fee.

The fair value of this fee is $ 31 thousand.

The Company has accounted for the Class A and Class B Warrants as derivative instruments in accordance with ASC 815, Derivatives and Hedging.

The Company classified the Warrants as a liability because they cannot be considered indexed to the Company’s stock due to provisions that, in certain circumstances, adjust the number of shares to be issued if the exercise price is adjusted and the existence of a pre-specified volatility input to the Black-Scholes calculation which could be used to calculate consideration in the event of a Fundamental Transaction, as defined in the agreements.

The Company received net proceeds after expenses of $ 12.7 million.

Of the net proceeds, the Company allocated an estimated fair value of $ 1.8 million to the Warrants.

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.

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 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.

Under the terms of the Purchase Agreement, for a period ending on December 15, 2025, in the event that we issue common stock or common stock equivalents in a subsequent financing (as defined in the Purchase Agreement), the significant purchasers (defined in the Purchase Agreement as a purchaser acquiring at least 1,000 shares of Series A-1 Preferred Stock) will have the right to purchase up to 40 % of the securities sold in the subsequent financing.

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, 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

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Notes to Consolidated Financial Statements

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 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 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.

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Market Information

Our common stock is traded on the OTC Market Group’s OTCQB® Market (“OTCQB”) under the ticker symbol “SMTK”.

Preferred Stock

The Company currently has no shares of preferred stock outstanding.

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 years ended December 31, 2021 and December 31, 2022, 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 year ended December 31, 2021.

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.

SMARTKEM, INC.

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Notes to Consolidated Financial Statements

Common Stock Issued to Vendors for Services

On January 6, 2023, the Company issued 1,429 shares of common stock, as payment for investor relations and other financial consulting services.

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

Common Stock Warrants

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

Warrants outstanding at January 1, 2021

Forfeited or Expired

Exercise Price

Warrants outstanding at January 1, 2023

Forfeited or Expired

Warrants outstanding at December 31, 2023

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 years ended December 31, 2021, and December 31, 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 .

The pre-funded common stock warrants have no expiration date and terminate upon exercise.

$ 0.35 - $ 70.00

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

Pre-funded warrants outstanding at January 1, 2023

Forfeited or Expired

Pre-funded warrants outstanding at January 1, 2022

Forfeited or Expired

Pre-funded warrants outstanding at December 31, 2023

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 estimated its expected stock volatility based on historical volatility of publicly traded peer companies.

The Company did no t issue any warrants in the year ended December 31, 2022.

Common Stock Issued to Vendors for Services

On February 23, 2021, the Company issued 50,000 shares of common stock for advisory services.

On May 27, 2021, and November 29, 2021, the Company issued 25,000 and 12,500 shares of common stock, respectively, as payment for investor relations services.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On August 13, 2021, the company issued 60,000 shares of common stock for advisory services.

On February 28, 2022, May 27, 2022, and November 29, 2022, the Company issued 12,500 , 22,473 and 35,714 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.

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..

SHARE-BASED COMPENSATION:

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

As of January 1, 2021, there were 1,810,749 SmartKem Limited options that were outstanding.

Of these options 1,424,622 were accelerated and exercised by the holders thereof for a like number of ordinary shares of SmartKem Limited and exchanged for shares of the Company’s common stock pursuant to the Exchange.

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

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

These options were fully vested on the grant date.

During the year ended December 31, 2022, the Company issued additional options exercisable for 918,000 shares of common stock to employees, directors and consultants.

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

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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At the 2023 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 125,045 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 involves inherent uncertainties and the application of management’s judgment.

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.

Options granted under the 2021 Plan for year ended December 31, 2022, and December 31, 2021, were valued using the Black-Scholes option-pricing model with the following assumptions:

December 31, 2022

For Year Ended

December 31, 2022

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6 years - 6.3 years

5 years - 6 years

Risk-free interest rate

3.1 % - 3.6 %

0.3 % - 1.2 %

Expected volatility

Expected dividend yield

There were no options granted under the 2021 Plan during the year ended December 31, 2023.

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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 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.

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

The following table reflects share activity under the option plans for the years ended December 31, 2022, and 2021:

The following table reflects share activity under the share option plans for the year ended December 31, 2023:

Fair Value at

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Options outstanding at January 1, 2023

( 1,424,622 )

Options outstanding at December 31, 2021

Cancelled/Forfeited

Options outstanding at December 31, 2023

Options exercisable at December 31, 2023

Vested and expected to vest after December 31, 2022

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of our common stock at the end of the year for those options that had exercise prices lower than the fair value of our common stock.

No options were exercised in the year end December 31, 2022.

The aggregate intrinsic value of options exercised during the year ended December 31, 2021, was $ 2.4 million.

The total fair value of options vesting in the year ended December 31, 2022 was $ 690 thousand.

The total fair value of options vesting in the year ended December 31, 2021 was $ 6.6 million.

The weighted-average grant date fair value per option granted for the year ended December 31, 2022 and 2021 was $ 0.68 .

and $ 1.14 respectively.

Stock-based compensation, including stock options is included in the consolidated statements of operations as follows:

SMARTKEM, INC.

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Notes to Consolidated Financial Statements

For the Year Ended December 31,

Stock-based compensation, including stock options is included in the consolidated statements of operations as follows:

Year Ended December 31,

(in thousands)

Research and development

Selling, general and administrative

Selling, general and administration

As of December 31, 2023, there was $ 0.7 million of compensation cost related to non-vested stock option awards not yet recognized that will be recognized on a straight-line basis through the end of the vesting periods in July 2026.

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United States and foreign profit/(loss) from operations before income taxes was as follows:

For the Year Ended December 31,

United States

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A reconciliation of the statutory income tax rate to the Company’s effective tax rate consists of the following:

Year Ended December 31,

For the Years Ended December 31,

Taxes at domestic rate

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Permanent items

Nondeductible Research Expense

Change in valuation allowance

Statutory Rate Change

Warrant revaluation

Prior year true-up

Effective tax rate

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Net operating loss carryforwards

Stock Compensation

Property plant and equipment

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When the Company changes its determination as to the amount of its deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to the provision for income taxes in the period in which such determination is made.

As of December 31, 2022, and 2021, the Company had net operating loss carry-forwards of approximately $ 39.5 million and $ 30.7 million, respectively.

The net operating loss carry-forwards were generated in the tax years from 2009 to 2022 with an unlimited carry-forward period.

As of December 31, 2023, and 2022, the Company had United Kingdom net operating loss carry-forwards of approximately $ 38.4 million and $ 32.9 million, respectively.

The United Kingdom net operating loss carry-forwards were generated in the tax years from 2009 to 2023 with an unlimited carry-forward period.

As of December 31, 2023, and 2022, the Company had United States federal net operating loss carry-forwards of approximately $ 5.4 million and $ 3.3 million, respectively.

The United States federal net operating loss carry-forwards were generated in the tax years from 2020 to 2023 with an unlimited carry-forward period.

As of December 31, 2023, and 2022, the Company had U.S.

state net operating loss carry-forwards of approximately $ 1.8 million and $ 3.3 million, respectively.

state net operating loss carry-forwards were generated in the tax years from 2021 to 2022 expiring at various dates through 2042.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company has no uncertain tax positions, or penalties and interest accrued, that if recognized would reduce net operating loss carry-forwards or affect tax expense.

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As of December 31, 2023, open years related to the United States and United Kingdom are 2020 to 2022.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company has no open tax audits with any taxing authority as of December 31, 2023.

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

For the Years End December 31,

Year Ended December 31,

(in thousands)

Research and development

Selling, general and administrative

Total pension cost

Selling, general and administration

As of December 31, 2023, there was $ 5 thousand owed to the pension scheme that is recorded under accounts payable and accrued expenses on the consolidated balances sheets.

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

As of December 31, 2022, there was $ 1 thousand owed to the pension scheme.

FAIR VALUE MEASUREMENTS:

The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value for the year ended December 31, 2023:

(in thousands)

Warrant Liability

Balance at January 1,2023

Fair value of warrant issued in Private Placement Offering

Total change in the liability included in earnings

Balance at December 31, 2023

As disclosed in Note 8 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.

These models use inputs such as the underlying price of the shares issued at the measurement date, expected volatility, risk free interest rate and expected life of the instrument.

Since our common stock was not publicly traded until February 2022 there has been insufficient volatility data available.

Accordingly, we have used an expected volatility based on historical common stock volatility of our peers.

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.

SMARTKEM, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The fair value of the common warrants at December 31, 2023, June 22, 2023 and June 14, 2023 was determined by using option pricing models assuming the following:

Expected term (years)

Risk-free interest rate

Expected volatility

Expected dividend yield

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.

There are six inputs:

closing price of SmartKem stock on the day of evaluation;

the exercise price of the warrants;

the remaining term of the warrants;

the volatility of the Company’s stock over that term;

annual rate of dividends;

and the risk-free rate of return.

Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements.

The annual rate of dividends is based on the Company’s historical practice of not granting dividends.

The closing price of SmartKem stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10).

The risk-free rate of return is a Level 2 input as defined in ASC 820-10, while the historical volatility is a Level 3 input as defined in ASC 820.

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 December 31, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value.

We had no movement in or out of level 3 during the year.

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

Quoted Prices

Significant Other

Warrant liability

Total liabilities

RELATED PARTY TRANSACTIONS:

In addition to transactions and balances related to share-based compensation to officers and directors, the Company incurred expenses of $ 110 thousand and $ 65 thousand, for the year ended December 31, 2022 and 2021, respectively, due to reimbursement of expenses and compensation for members of the Board of Directors.

These expenses are recorded in selling, general & administrative in the consolidated statements of operations.

As of December 31, 2022 and December 31, 2021, there was $ 16 thousand and $ 18 thousand, respectively, payable to members of the Board of Directors that are recorded in accounts payable and accrued expenses on the consolidated balance sheets.

During the year ended December 31, 2021, the Company reimbursed an owner for legal fees and other expenses as a result of the Exchange (see Note 1).

The reimbursement of these fees for services resulted in an expense of $ 66 thousand for the year ended December 31, 2021 and there was zero payable as of December 31, 2021.

During the year ended December 31, 2021, the Company obtained consulting services from an individual who is a family member of a Director of the Company.

The consulting services resulted in an expense of $ 35 thousand for the year ended December 31, 2021 and there was zero payable as of December 31, 2021.

Octopus Share Purchase

On January 27, 2022, we sold an aggregate of 28,572 shares of our common stock at a purchase price of $ 70.00 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.

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The reimbursement of these fees for services resulted in an expense of $ 11 thousand for the year ended December 31, 2022 and there was zero payable as of December 31, 2022.

SUBSEQUENT EVENTS:

Under the evergreen adjustment provisions of the 2021 Plan, on January 1, 2023 the number of shares of the Company’s common stock available for issuance under the 2021 Plan was increased by 1,079,399 or four percent ( 4 %)

SMARTKEM, INC.

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Notes to Consolidated Financial Statements

of the total number of shares of Common Stock outstanding on December 31, 2022.

After giving effect to increase, the total number of shares of Common Stock that may be issued under Plan will be 4,376,571 .

In January 2023, 50,000 shares of our common stock were issued to a vendor in consideration for services to be provided.

SUBSEQUENT EVENTS:

Consent, Conversion and Amendment Agreement

On January 26, 2024, the Company entered into a Consent, Conversion and Amendment Agreement (the “Consent Agreement”) with each holder of the Series A-1 Preferred Stock (each a “Holder” and together, the “Holders”).

Pursuant to the Consent Agreement, each Holder converted, subject to the terms and conditions of the Consent Agreement, 90 % of its Series A-1 Preferred Stock (the “Conversion Commitment”) into shares of Common Stock or Class C warrants (each a “Class C Warrant”) covering the shares of Common Stock that would have been issued to such Holder but for the Beneficial Ownership Limitation (the “Exchange”).

The Class C Warrants have an exercise price of $ 0.0001 , were exercisable upon issuance and will expire when exercised in full.

Under the Consent Agreement, the Company issued (i) 412,293 shares of Common Stock and (ii) Class C Warrants to purchase up to 726,344 shares of Common Stock upon the conversion or exchange of an aggregate of 9,963 shares of Series A-1 Preferred Stock.

1,106 shares of Series A-1 Preferred Stock remain outstanding after giving effect to the transactions contemplated by the Consent Agreement.

Pursuant to the Consent Agreement, the Company and the Holders agreed to amend and restate the Certificate of Designation of Preferences, Rights and Limitations for the Series A-1 Preferred Stock (the “Amended and Restated Series A-1 Certificate of Designation”) to (i) make certain adjustments to reflect the Reverse Split, (ii) remove all voting rights, except as required by applicable law, (iii) increase the stated value of the Series A-1 Preferred Stock to $ 10,000 from $ 1,000 , and (iv) adjust the conversion price of the Series A-1 Preferred Stock to $ 87.50 as a result of the increase in stated value.

The Consent Agreement, the Registration Rights Agreement, the Amended and Restated Series A-1 Certificate of Designation and the form of Class C Warrant, are attached as Exhibits 10.1, 10.2, 3.1 and 4.2 to the Form 8-K files with the SEC on January 29, 2024.

Under the evergreen adjustment provisions of the 2021 Plan, on January 1, 2024, the number of shares of the Company’s common stock available for issuance under the 2021 Plan was increased by 35,586 or four percent ( 4 %) of the total number of shares of Common Stock outstanding on December 31, 2023.

After giving effect to the increase, the total number of shares of Common Stock that may be issued under the 2021 Plan is 778,692 .

On January 31, 2024, the Company granted its employees a total 3,400 shares of common stock.

The shares were issued pursuant to the 2021 Plan.

Consultant Shares

In March 2024, 50,000 shares of our common stock were issued to a vendor in consideration for services to be provided.

New CPIIS Framework Agreement

On March 22, 2024 we executed a new Framework Agreement with CPIIS for a twelve-month term commencing on April 1, 2024.

Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

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-K

Item 8. Financial Statements and Supplementary Data