What changed in this filing

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Item 1. Financial Statements

2024-05-20 compared with 2023-11-13 · 166 added, 206 removed, 368 unchanged (50% of the section changed)

3 unchanged sentences

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

September 30,

Current assets

11 unchanged sentences

Lease liabilities, current

Income tax payable

Other current liabilities

5 unchanged sentences

Stockholders’ equity:

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

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

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 3,592 and 13,765 shares issued and outstanding , at March 31, 2024 and December 31, 2023, respectively

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 1,379,750 and 889,668 shares issued and outstanding , at March 31, 2024 and December 31, 2023, respectively*

Additional paid-in capital

3 unchanged sentences

Total liabilities and stockholders’ equity

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

* reflects a one-for-thirty-five (1:

35 ) reverse stock split effected on September 21, 2023

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

2 unchanged sentences

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of revenue

8 unchanged sentences

Gain/(loss) on foreign currency transactions

Transaction costs allocable to warrants

Change in fair value of the warrant liability, net

1 unchanged sentence

Total non-operating income/(expense)

Loss before income taxes

Income tax expense

Other comprehensive loss:

1 unchanged sentence

Total comprehensive loss

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

Common share data:

Basic net loss per common share*

Diluted net loss per common share*

Dividend per common share

Weighted average number of basic shares outstanding*

Weighted average number of diluted shares outstanding*

* reflects a one-for-thirty-five (1:

35 ) reverse stock split effected on September 21, 2023

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

10 unchanged sentences

Stock-based compensation expense

Issuance of stock awards

Issuance of common stock to vendor

Foreign currency translation adjustment

Balance at March 31, 2023

Stock-based compensation expense

Issuance of preferred stock, net of issuance costs

Foreign currency translation adjustment

Balance at June 30, 2023

Stock-based compensation expense

Conversion of Preferred stock into common stock

Exercise of warrants into common stock

Exchange of Preferred stock into common stock warrants

Deemed dividend on extinguishment of Preferred stock

Cashless exercise of warrants into common stock

Foreign currency translation adjustment

Balance at September 30, 2023

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

SMARTKEM, INC.

Condensed Consolidated Statements of Stockholders’ Equity, continued

(in thousands, except share data)

Balance at March 31, 2024

Preferred Stock

7 unchanged sentences

Issuance of common stock to vendor

Issuance of common stock in private placement

Issuance costs related to common stock in private placement

Foreign currency translation adjustment

Balance at March 31, 2023

Stock-based compensation expense

Issuance of common stock to vendor

Issuance costs related to preferred stock in private placement

Foreign currency translation adjustment

Balance at June 30, 2022

Stock-based compensation expense

Foreign currency translation adjustment

Balance at September 30, 2022

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

3 unchanged sentences

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flow from operating activities:

4 unchanged sentences

Gain/(loss) on foreign currency transactions

Transaction costs allocable to warrant liability

Warrant liability fair value adjustment

Change in fair value of the warrant liability, net

Change in operating assets and liabilities:

7 unchanged sentences

Net cash used in operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Net cash used by investing activities

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 warrants

Net cash provided by financing activities

Effect of exchange rate changes on cash

3 unchanged sentences

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

Initial classification of fair value of warrants

Right-of-use asset and lease liability additions

Issuance of common shares for consulting services

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

7 unchanged sentences

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

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

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

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

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

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

SmartKem develops its materials at its research and development facility in Manchester, UK, its semiconductor manufacturing processes at the Centre for Process Innovation (CPI) at Sedgefield, UK and retains a field application office in Taiwan.

The Company develops its materials at its research and development facility in Manchester, UK and provides prototyping services at the Centre for Process Innovation (“CPI”) at Sedgefield, UK.

It has a field application office in Taiwan.

The Company has an extensive IP portfolio including 125 granted patents across 19 patent families and 40 codified trade secrets.

1 unchanged sentence

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

The Company is subject to risks that are common to companies in the growth stage, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology and compliance with regulatory requirements.

The Company is subject to risks that are common to companies in the development stage, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology and compliance with regulatory requirements.

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

3 unchanged sentences

The accompanying unaudited interim condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business.

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

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

The Company has incurred continuing losses including net losses of $ 1.7 million for the three months ended March 31, 2024.

The Company’s cash as of March 31, 2024 was $ 7.3 million.

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

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

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

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

The Company expects that its cash and cash equivalents of $ 7.3 million as of March 31, 2024, will be sufficient to fund its operating expenses and capital expenditure requirements into June 2025.

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

The Company’s future viability is dependent on its ability to raise additional capital to fund its operations.

The Company will need to obtain additional funds to satisfy its operational needs and to fund its sales and marketing efforts, research and development expenditures, and business development activities.

Until such time, if ever, as the Company can generate sufficient cash through revenue, management’s plans are to finance the Company’s working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements.

If the Company raises additional funds by issuing equity securities, the Company’s existing security holders will likely experience dilution.

If the Company borrows money, the incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that could restrict its operations.

If the Company enters into a collaboration, strategic alliance or other similar arrangement, it may be forced to give up valuable rights.

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

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

If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows for operations, then the Company will need to raise additional funding.

Basis of Presentation

The unaudited interim condensed consolidated financial statements of the Company as of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022 should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023 and may also be found on the Company’s website (www.smartkem.com).

The unaudited interim condensed consolidated financial statements of the Company as of March 31, 2024 and December 31, 2023 and for the three months ended March 31, 2024 and 2023 should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024 and may also be found on the Company’s website (www.smartkem.com).

In these notes to the interim condensed consolidated financial statements the terms “us,” “we” or “our” refer to the Company and its consolidated subsidiaries.

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The preparation of interim condensed consolidated financial statements requires management to make assumptions and estimates that impact the amounts reported.

These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended September 30, 2023 and 2022;

however, certain information and footnote disclosures normally included in our audited consolidated financial statements included in our Annual Report have been condensed or omitted as permitted by GAAP.

2 unchanged sentences

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.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Other than the policies listed below, there have been no material changes to the Company’s significant accounting policies as set forth in Note 3 Summary of Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report.

The Company records, when necessary, deemed dividends for:

(i) the exchange of preferred shares for pre-funded warrants, based on the fair value of the pre-funded warrants in excess of the carrying value of the preferred shares and (ii) the amendment of preferred stock accounted for as an extinguishment, based on the fair value of the preferred stock immediately before and after the amendments.

Management’s Use of Estimates

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

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

These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources.

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

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

Warrant Liability

The Company assessed its warrants in accordance with the guidance contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 480, Distinguishing Liabilities from Equity and 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity , 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.

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.

The total issuance costs were $ 1.6 million, with $ 0.2 million charged directly to the statement of operations.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments:

Credit Losses (Topic 326) , which requires measurement and recognition of expected losses for financial assets held.

The new standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses.

The estimate of expected credit losses will require organizations to incorporate considerations of historical information, current conditions and reasonable and supportable forecasts.

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

Securities Exchange filers.

However, the standard 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 August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments by removing major separation models required under current GAAP.

The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas.

This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years.

The Company adopted the ASU on January 1, 2023.

This update permits the use of either the modified retrospective or fully retrospective method of transition.

The Company has determined that the impact this ASU did not have material effect on its consolidated financial statements.

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.

SMARTKEM, INC.

2 unchanged sentences

Prepaid expenses and other current assets consist of the following:

September 30,

(in thousands)

Prepaid service charges and property taxes

Prepaid utilities

Prepaid insurance

Prepaid administrative expenses

Prepaid consulting fees

Research grant receivable

Prepaid technical fees

Prepaid facility costs

VAT receivable

Prepaid software licenses

Prepaid professional service fees

Other receivable and other prepaid expenses

2 unchanged sentences

Property, plant and equipment consist of the following:

September 30,

(in thousands)

4 unchanged sentences

Property, plant and equipment, net

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

Depreciation expense was $ 63.2 thousand and $ 42.2 thousand for the three months ended March 31, 2024 and 2023, respectively and is classified as research and development expense.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

September 30,

(in thousands)

Accounts payable

Accrued expenses – lab refurbishments

Accrued expenses – technical fees

Accrued expenses – variable rent & utilities

Payroll liabilities

Accrued expenses – audit & accounting fees

Accrued expenses – legal & other professional services

Accrued expenses – legal fees

Accrued expenses – technical fees

Accrued expenses – other professional service fees

Accrued expenses – other

Credit card liabilities

Payroll liabilities

Total accounts payable and accrued expenses

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

4 unchanged sentences

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

2 unchanged sentences

Total lease cost

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

September 30,

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

(in thousands)

6 unchanged sentences

Total lease liabilities

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

The Company had no right of use lease assets and lease liabilities for financing leases as of March 31, 2024 and December 31, 2023.

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

September 30,

(in thousands)

Operating cash outflows from operating leases

Supplemental non-cash amounts of operating lease liabilities arising from obtaining right of use assets

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:

September 30,

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

Weighted average discount rate – operating leases

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

September 30,

(in thousands)

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

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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”).

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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.

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Voting Rights

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

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.

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

3 unchanged sentences

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Mandatory Conversion at the Option of the Company

7 unchanged sentences

Negative Covenants

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

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

Trading Market

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

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

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”).

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

(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:

6 unchanged sentences

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Conversion at the Option of the Holder

4 unchanged sentences

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.

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.

However, any holder may increase or decrease such percentage to any other percentage not in excess

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

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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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

proceeds of $ 2.0 million.

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

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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 Company also expensed $ 0.2 million of

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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.

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

This provision may 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.

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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.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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.

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 filed with the SEC on January 29, 2024.

The Company credited additional paid in capital $ 7.1 million for deemed dividends as a result of (i) the exchange of Series A-1 Preferred Shares for Series C Warrants, based on the fair value of the Series C Warrants in excess of the carrying value of the preferred shares and (ii) the amendment of Series A-1 Preferred Stock accounted for as an extinguishment, based on the fair value of the Series A-1 Preferred Stock immediately before and after the amendments.

The Company estimated the fair value of the deemed dividend related to the exchange of Series A-1 Preferred Stock for Series C Warrants as part of the fair value model utilized to value all the securities issued in the transaction with the stock price input estimated as of the January 26, 2024, transaction date.

The Company estimated the fair value of the deemed dividend related to the amendment of preferred stock using an option pricing model based on the following assumptions:

(1) dividend yield of 19.99 %, (2) expected volatility of 50.0 %, (3) risk-free interest rate of 4.15 %, and (4) expected life of 10.0 years.

As of March 31, 2024, there was an aggregate of 1,106 shares of Series A-1 and 2,486 shares of Series A-2 Preferred Stock outstanding, respectively.

Voting Rights

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The Company has never paid any cash dividends to stockholders and do not anticipate paying any cash dividends to stockholders in the foreseeable future.

Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant.

Market Information

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

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

Common Stock Issued to Vendors for Services

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.

Any future determination to pay cash dividends will be at

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

the discretion of the board of directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant.

Common Stock Issued to Vendors for Services

On March 7, 2024, the Company issued 50,000 shares of common stock, as payment for financial consulting services.

Common Stock Warrants

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Warrants outstanding at January 1, 2024

Warrants outstanding at September 30, 2023

$ 0.35 - $ 70.00

Warrants outstanding at March 31, 2024

$ 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, 2024

Pre-funded warrants outstanding at September 30, 2023

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

There was no public trading market for our shares before February 2022 and the Company estimates its expected stock volatility based on historical volatility of publicly traded peer companies.

Pre-funded warrants outstanding at March 31, 2024

SHARE-BASED COMPENSATION:

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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

The Company uses the Black-Scholes option pricing model to value its share

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

option awards.

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

As a result, if factors change and management uses different assumptions, the share-based compensation expense could be materially different for future awards.

There were no options granted under the 2021 Plan for the three and nine months ended September 30, 2023 and 2022.

Prior to February 2022, in the absence of a public trading market for the common stock, on each grant date, the Company developed an estimate of the fair value of the shares of common stock underlying the option grants.

The Company estimated the fair value of the shares of common stock by referencing arms-length transactions inclusive of the shares of common stock underlying which occurred on or near the valuation date(s).

The Company determined the fair value of the common stock using methodologies, approaches and assumptions consistent with the AICPA Practice Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation and based in part on input from an independent third-party valuation firm.

From February 2022, the Company’s common stock is publicly traded, and the Company no longer has to estimate the fair value of the shares of common stock, rather the value is determined based on quoted market prices.

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

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

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

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

There were no options granted under the 2021 Plan for the three months ended March 31, 2024 and 2023.

There were 3,400 shares of Common Stock granted and no shares granted under the 2021 Plan during the three months ended March 31, 2024 and 2023, respectively.

The following table reflects share activity under the share option plans for the three months ended March 31, 2024:

Fair Value at

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Cancelled/Forfeited

Options outstanding at September 30, 2023

Options exercisable at September 30, 2023

Options outstanding at March 31, 2024

Options exercisable at March 31, 2024

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

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Selling, general and administration

Total compensation cost related to non-vested stock option awards not yet recognized as of September 30, 2023 was $ 0.9 million and will be recognized on a straight-line basis through the end of the vesting periods in July 2026.

Total compensation cost related to non-vested stock option awards not yet recognized as of March 31, 2024 was $ 0.6 million and will be recognized on a straight-line basis through the end of the vesting periods in July 2026.

The amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

NET LOSS PER COMMON SHARE:

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

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

September 30,

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31,

(in thousands, except share data)

Net loss - basic

Preferred stock dividends

Net loss - diluted

Weighted average shares outstanding - basic*

Weighted average shares outstanding - diluted*

Net loss per common share - basic*

Net loss per common share - diluted*

Dividend per common share

* reflects a one-for-thirty-five (1:

35 ) reverse stock split effected on September 21, 2023

The following potentially dilutive securities were excluded from the computation of earnings per share as of March 31, 2024 and 2023 because their effects would be anti-dilutive:

Common stock warrants

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Stock options

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

At March 31, 2024, the Company had 61,587 pre-funded warrants, 769,426 Class B Warrants and 726,344 Class C Warrants outstanding.

The following table provides a reconciliation of the weighted average shares outstanding calculation for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

Weighted average shares issued

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

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FAIR VALUE MEASUREMENTS

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

The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value for the quarter ended March 31, 2024:

(in thousands)

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Total change in the liability included in earnings

Balance at September 30, 2023

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

warrant liability issued in connection with the transaction.

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

Balance at March 31, 2024

The valuation of the warrants was 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.

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

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

September 30,

The fair value of the common warrants at March 31, 2024 was determined by using an option pricing model assuming the following:

Expected term (years)

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There are six inputs:

closing price of SmartKem stock on the day of evaluation;

closing price of the Company’s Common Stock on the day of evaluation;

the exercise price of the warrants;

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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.

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.

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Notes to Condensed Consolidated Financial Statements

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

The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of March 31, 2024 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value.

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

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Significant Other

September 30,

Warrant liability

Total liabilities

Deemed dividend on extinguishment of Preferred stock

Quoted Prices

Significant Other

Warrant liability

Total liabilities

SUBSEQUENT EVENTS:

Preferred Stock Conversions

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

Subsequent to March 31, 2024, the Company issued 8,574 shares of the Company’s common stock upon the conversion of 75 shares Series A-2 Preferred Stock.

Common Stock Issued to Vendors for Services

Subsequent to March 31, 2024, the Company issued 50,000 shares of common stock, as payment for financial consulting services.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements