What changed in this filing

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Item 1. Financial Statements

2024-08-12 compared with 2024-05-20 · 114 added, 73 removed, 461 unchanged (29% of the section changed)

23 unchanged sentences

Stockholders’ equity:

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*

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 1,106 and 13,765 shares issued and outstanding , at June 30, 2024 and December 31, 2023, respectively

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 1,721,900 and 889,668 shares issued and outstanding , at June 30, 2024 and December 31, 2023, respectively*

Additional paid-in capital

9 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Cost of revenue

8 unchanged sentences

Gain/(loss) on foreign currency transactions

Change in fair value of the warrant liability, net

Transaction costs allocable to warrants

Change in fair value of the warrant liability

Interest income

Total non-operating income/(expense)

Loss before income taxes

Income tax expense

Other comprehensive loss:

14 unchanged sentences

Preferred Stock

Accumulated other

$0.0001 par value

13 unchanged sentences

Balance at March 31, 2024

Stock-based compensation expense

Issuance of common stock to vendor

Conversion of Preferred stock into common stock

Exercise of warrants into common stock

Fair value of warrants reclassified from liability to equity

Foreign currency translation adjustment

Balance at June 30, 2024

Preferred Stock

Accumulated other

$0.0001 par value

8 unchanged sentences

Balance at March 31, 2023

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

Stock-based compensation expense

Issuance of preferred stock, net of issuance costs

Foreign currency translation adjustment

Balance at June 30, 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)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flow from operating activities:

4 unchanged sentences

Gain/(loss) on foreign currency transactions

Change in fair value of the warrant liability, net

Transaction costs allocable to warrants

Change in fair value of the warrant liability

Change in operating assets and liabilities:

2 unchanged sentences

Prepaid expenses and other current assets

Other non-current assets

Accounts payable and accrued expenses

3 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

Payment of issuance costs

Proceeds from the exercise of warrants

Net cash provided by financing activities

Effect of exchange rate changes on cash

4 unchanged sentences

Issuance of common shares for consulting services

Initial classification of fair value of warrants

Right-of-use asset and lease liability additions

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

ORGANIZATION, BUSINESS, LIQUIDITY AND BASIS OF PRESENTATION

ORGANIZATION, BUSINESS, GOING CONCERN AND BASIS OF PRESENTATION

SmartKem, Inc.

7 unchanged sentences

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 entered into a technology transfer agreement (TTA) with the Industrial Technology Research Institute (ITRI) in Taiwan for product prototyping on its Gen2.5 fabrication line and it also 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.

6 unchanged sentences

Alternative providers of similar services exist but would take effort and time to bring into the Company’s operations.

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 $ 1.7 million for the three months ended March 31, 2024.

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

Going Concern

The Company has incurred continuing losses including net losses of $ 4.8 million for the six months ended June 30, 2024.

The Company’s cash as of June 30, 2024 was $ 4.4 million with net cash used in operating activities of $ 4.4 million for the six months ended June 30, 2024.

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

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.

The Company expects that its cash and cash equivalents of $ 4.4 million as of June 30, 2024, will not be sufficient to fund its operating expenses and capital expenditure requirements for the 12 months from the issuance of these financial statements and that the Company will require additional capital funding to continue its operations and research development activity thereafter.

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.

8 unchanged sentences

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.

There is substantial doubt that the Company will be able to pay its obligations as they fall due, and this substantial doubt is not alleviated by management plans.

The condensed consolidated financial statements as of June 30, 2024 have been prepared assuming that the Company will continue as a going concern.

Accordingly, the consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

Basis of Presentation

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).

The unaudited interim condensed consolidated financial statements of the Company as of June 30, 2024 and December 31, 2023 and for the three and six months ended June 30, 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.

3 unchanged sentences

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

These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended March 31, 2024 and 2023;

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

It is important to note that the Company’s results of operations and cash flows for interim periods are not necessarily indicative of the results of operations and cash flows to be expected for a full fiscal year or any interim period.

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.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Reverse Stock Split

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

28 unchanged sentences

Prepaid software licenses

Prepaid stock exchange fees

Prepaid professional service fees

9 unchanged sentences

Property, plant and equipment, net

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.

Depreciation expense was $ 124.9 thousand and $ 81.4 thousand for the six months ended June 30, 2024 and 2023, respectively and is classified as research and development expense.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

14 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

4 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

11 unchanged sentences

Total lease liabilities

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 Company had no right of use lease assets and lease liabilities for financing leases as of June 30, 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:

1 unchanged sentence

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:

32 unchanged sentences

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).

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, 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, (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.

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”).

59 unchanged sentences

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

The Company had 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 could 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.

Upon the Company’s May 31, 2024 uplisting to the Nasdaq Capital Market the provisions relating to the adjustment in the number of shares were no longer in effect.

Additionally, the Company re-evaluated the pre-specified volatility input and determined that this did not preclude the Warrants from being considered indexed to the Company’s stock.

As a result, the Warrants are accounted for as an equity instrument beginning on May 31, 2024.

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 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.

3 unchanged sentences

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.

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 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.

6 unchanged sentences

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.

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.

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.

Consent, Conversion and Amendment Agreement

10 unchanged sentences

(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.

As of June 30, 2024, there were an aggregate of 1,106 shares of Series A-1 Preferred Stock outstanding.

Pursuant to the terms of the Series A -2 Certificate of Designation, on May 30, 2024, the trading day immediately prior to the listing of the common stock on the Nasdaq Capital Market, the 2,411 then outstanding shares of Series A-2 Preferred Stock automatically converted into an aggregate of 275,576 shares of common stock.

The Company filed a Certificate of Elimination with respect to the Series A-2 Certificate of Designation, pursuant to which, effective June 18, 2024, all matters set forth in the Series A-2 Certificate of Designation were eliminated from the Company’s Amended and Restated Certificate of Incorporation.

Voting Rights

1 unchanged sentence

The Company’s Charter and the Company’s Bylaws do not provide for cumulative voting rights.

The holders of one-third of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, constitutes a quorum for the transaction of business at all meetings of the stockholders.

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

Any future determination to pay cash dividends will be at

The holders of one-third of the stock issued and outstanding and entitled to

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.

vote, present in person or represented by proxy, constitutes a quorum for the transaction of business at all meetings of the stockholders.

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

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

On May 2, 2024, the Company issued 50,000 shares of common stock, as payment for financial consulting services.

Common Stock Warrants

3 unchanged sentences

$ 0.35 - $ 70.00

Warrants outstanding at March 31, 2024

Warrants outstanding at June 30, 2024

$ 0.35 - $ 70.00

1 unchanged sentence

Pre-funded warrants outstanding at January 1, 2024

Pre-funded warrants outstanding at March 31, 2024

Pre-funded warrants outstanding at June 30, 2024

SHARE-BASED COMPENSATION:

4 unchanged sentences

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

option awards.

issuance under the 2021 Plan from 125,045 shares to 743,106 shares.

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

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

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

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

There were no options granted under the 2021 Plan for the three months ended March 31, 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:

During the three months ended June 30, 2024, the Company issued options for 568,000 shares of common stock to employees, directors and consultants.

The option vesting periods range from immediate to three years, have an exercise price of $ 6.50 and expire on the ten-year anniversary of the grant date.

The following table reflects share activity under the share option plans for the six months ended June 30, 2024:

Fair Value at

2 unchanged sentences

Cancelled/Forfeited

Options outstanding at March 31, 2024

Options exercisable at March 31, 2024

Options outstanding at June 30, 2024

Options exercisable at June 30, 2024

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

1 unchanged sentence

Selling, general and administration

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.

Total compensation cost related to non-vested stock option awards not yet recognized as of June 30, 2024 was $ 2.3 million and will be recognized on a straight-line basis through the end of the vesting periods in June 2027.

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

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands, except share data)

9 unchanged sentences

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:

The following potentially dilutive securities were excluded from the computation of earnings per share as of June 30, 2024 and 2023 because their effects would be anti-dilutive:

Common stock warrants

1 unchanged sentence

Stock options

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,

At June 30, 2024, the Company had 61,587 pre-funded warrants, 761,426 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 and six months ended June 30, 2024 and 2023:

Three Months Ended June 30,

Six Months Ended June 30,

Weighted average shares issued

6 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

4 unchanged sentences

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 March 31, 2024:

The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value during the six months ended June 30, 2024:

(in thousands)

3 unchanged sentences

Total change in the liability included in earnings

Balance at March 31, 2024

Reclass from liability to equity

Balance at June 30, 2024

The valuation of the warrants was determined using option pricing models.

2 unchanged sentences

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.

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

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

Upon the Company’s uplisting to the Nasdaq Capital Market on May 31, 2024 certain provisions within the warrant agreements were no longer in effect.

As a result, the warrants are accounted for as an equity instrument with the balance of the derivative liability on May 31, 2024 being transferred to Additional Paid-In Capital.

The fair value of the common warrants at June 30, 2024 was determined by using an option pricing model assuming the following:

Expected term (years)

2 unchanged sentences

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.

Additionally, the Company had determined that the warrant liability was most appropriately 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:

9 unchanged sentences

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.

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of March 31, 2024 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 June 30, 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:

3 unchanged sentences

Total liabilities

Deemed dividend on extinguishment of Preferred stock

Quoted Prices

Significant Other

Warrant liability

Total liabilities

SUBSEQUENT EVENTS:

Preferred Stock Conversions

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.

Subsequent to June 30, 2024, the Company issued 28,572 shares of the Company’s common stock upon the conversion of 250 shares Series A-1 Preferred Stock.

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

What changed 10-Q

Item 1. Financial Statements