SmartKem, Inc. 10-Q

Item 1. Financial Statements SMARTKEM, INC. Condensed Consolidated Balance Sheets (in thousands, except number of shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2024 ​ 2023 ​ ​ (Unaudited) ​ ​ ​ Assets ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 1,783 ​ $ 8,836 Accounts receivable ​ — ​ 268 Research and development tax credit receivable ​ 1,163 ​ 610 Prepaid expenses and other current assets ​ 804 ​ 811 Total current assets ​ 3,750 ​ 10,525 Property, plant and equipment, net ​ 353 ​ 455 Right-of-use assets, net ​ 197 ​ 285 Other assets, non-current ​ 6 ​ 7 Total assets ​ $ 4,306 ​ $ 11,272 ​ ​ ​ ​ ​ ​ ​ Liabilities and stockholders’ equity ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable and accrued expenses ​ $ 1,463 ​ $ 1,178 Lease liabilities, current ​ 165 ​ 230 Other current liabilities ​ ​ 367 ​ ​ 360 Total current liabilities ​ 1,995 ​ 1,768 Lease liabilities, non-current ​ 31 ​ 19 Warrant liability ​ ​ — ​ 1,372 Total liabilities ​ 2,026 ​ 3,159 ​ ​ ​ ​ ​ ​ ​ Commitments and contingencies (Note 7) ​ — ​ — ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 856 and 13,765 shares issued and outstanding , at September 30, 2024 and December 31, 2023, respectively ​ — ​ — Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 1,780,472 and 889,668 shares issued and outstanding , at September 30, 2024 and December 31, 2023, respectively ​ — ​ — Additional paid-in capital ​ 113,374 ​ 104,757 Accumulated other comprehensive loss ​ ( 1,297 ) ​ ( 1,578 ) Accumulated deficit ​ ( 109,797 ) ​ ( 95,066 ) Total stockholders' equity ​ 2,280 ​ 8,113 Total liabilities and stockholders’ equity ​ $ 4,306 ​ $ 11,272 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ 3 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (in thousands, except number of shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ 2024 2023 2024 2023 Revenue ​ $ — ​ $ 3 ​ $ 40 ​ $ 27 Cost of revenue ​ — ​ 1 ​ 32 ​ 23 Gross profit ​ — ​ 2 ​ 8 ​ 4 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other operating income ​ 287 ​ ​ 257 ​ 725 ​ 695 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ ​ ​ Research and development ​ 1,504 ​ ​ 1,568 ​ 3,938 ​ 4,104 Selling, general and administrative ​ 1,578 ​ ​ 1,268 ​ 4,784 ​ 4,025 (Gain)/loss on foreign currency transactions ​ 43 ​ ​ 118 ​ 75 ​ 186 Total operating expenses ​ 3,125 ​ 2,954 ​ 8,797 ​ 8,315 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss from operations ​ ( 2,838 ) ​ ( 2,695 ) ​ ( 8,064 ) ​ ( 7,616 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-operating income/(expense) ​ ​ ​ ​ Gain/(loss) on foreign currency transactions ​ ​ — ​ ​ ( 787 ) ​ ​ ( 249 ) ​ ​ 248 Transaction costs allocable to warrants ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 198 ) Change in fair value of the warrant liability ​ ​ — ​ ​ 458 ​ ​ 672 ​ ​ 461 Interest income/(expense) ​ ( 4 ) ​ ​ 2 ​ 5 ​ 8 Total non-operating income/(expense) ​ ( 4 ) ​ ( 327 ) ​ 428 ​ 519 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss before income taxes ​ ​ ( 2,842 ) ​ ​ ( 3,022 ) ​ ​ ( 7,636 ) ​ ​ ( 7,097 ) Income tax expense ​ ​ — ​ ​ — ​ ( 1 ) ​ — Net loss ​ $ ( 2,842 ) ​ $ ( 3,022 ) ​ $ ( 7,637 ) ​ $ ( 7,097 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 2,842 ) ​ $ ( 3,022 ) ​ $ ( 7,637 ) ​ $ ( 7,097 ) Other comprehensive loss: ​ ​ ​ ​ Foreign currency translation ​ 125 ​ ​ 850 ​ 281 ​ ( 123 ) Total comprehensive loss ​ $ ( 2,717 ) ​ $ ( 2,172 ) ​ $ ( 7,356 ) ​ $ ( 7,220 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common share data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic net loss per common share* ​ $ ( 0.86 ) ​ $ ( 1.78 ) ​ $ ( 2.49 ) ​ $ ( 5.82 ) Diluted net loss per common share* ​ $ ( 0.86 ) ​ $ ( 1.78 ) ​ $ ( 4.80 ) ​ $ ( 5.82 ) Dividend per common share ​ $ — ​ $ — ​ $ ( 2.31 ) ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average number of basic shares outstanding* ​ ​ 3,308,975 ​ ​ 1,701,166 ​ ​ 3,068,110 ​ ​ 1,219,450 Weighted average number of diluted shares outstanding* ​ ​ 3,308,975 ​ ​ 1,701,166 ​ ​ 3,068,110 ​ ​ 1,219,450 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ * 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. ​ ​ ​ 4 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Preferred Stock ​ Common stock ​ Additional ​ Accumulated other ​ ​ ​ ​ Total ​ ​ $0.0001 par value ​ $0.0001 par value ​ paid-in ​ comprehensive ​ Accumulated ​ Stockholders' ​ ​ Shares Amount ​ Shares Amount capital income / (loss) deficit equity Balance at January 1, 2024 ​ 13,765 ​ $ — ​ 889,668 ​ $ — ​ $ 104,757 ​ $ ( 1,578 ) ​ $ ( 95,066 ) ​ $ 8,113 Stock-based compensation expense ​ — ​ — ​ — ​ — ​ 107 ​ — ​ — ​ 107 Issuance of stock awards ​ — ​ — ​ 3,400 ​ — ​ 21 ​ — ​ — ​ 21 Issuance of common stock to vendor ​ — ​ — ​ 50,000 ​ — ​ 53 ​ — ​ — ​ 53 Conversion of Preferred stock into common stock ​ ( 3,817 ) ​ — ​ 436,294 ​ — ​ — ​ — ​ — ​ — Exchange of Preferred stock into common stock warrants ​ ( 6,356 ) ​ — ​ — ​ — ​ — ​ — ​ — ​ — Deemed dividend on extinguishment of Preferred stock ​ — ​ — ​ — ​ — ​ 7,069 ​ — ​ ( 7,094 ) ​ ( 25 ) Cashless exercise of warrants into common stock ​ — ​ — ​ 388 ​ — ​ — ​ — ​ — ​ — Foreign currency translation adjustment ​ — ​ — ​ — ​ — ​ — ​ ( 18 ) ​ — ​ ( 18 ) Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 1,696 ) ​ ( 1,696 ) Balance at March 31, 2024 ​ 3,592 ​ $ — ​ 1,379,750 ​ $ — ​ $ 112,007 ​ $ ( 1,596 ) ​ $ ( 103,856 ) ​ $ 6,555 Stock-based compensation expense ​ — ​ — ​ — ​ — ​ 207 ​ — ​ — ​ 207 Issuance of common stock to vendor ​ — ​ — ​ 50,000 ​ — ​ 48 ​ — ​ — ​ 48 Conversion of Preferred stock into common stock ​ ( 2,486 ) ​ — ​ 284,150 ​ — ​ — ​ — ​ — ​ — Exercise of warrants into common stock ​ — ​ — ​ 8,000 ​ — ​ 3 ​ — ​ — ​ 3 Fair value of warrants reclassified from liability to equity ​ — ​ — ​ — ​ — ​ 700 ​ — ​ — ​ 700 Foreign currency translation adjustment ​ — ​ — ​ — ​ — ​ — ​ 174 ​ — ​ 174 Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 3,099 ) ​ ( 3,099 ) Balance at June 30, 2024 ​ 1,106 ​ $ — ​ 1,721,900 ​ $ — ​ $ 112,965 ​ $ ( 1,422 ) ​ $ ( 106,955 ) ​ $ 4,588 Stock-based compensation expense ​ — ​ — ​ — ​ — ​ 257 ​ — ​ — ​ 257 Issuance of common stock to vendor ​ — ​ — ​ 30,000 ​ — ​ 152 ​ — ​ — ​ 152 Conversion of Preferred stock into common stock ​ ( 250 ) ​ — ​ 28,572 ​ — ​ — ​ — ​ — ​ — Foreign currency translation adjustment ​ — ​ — ​ — ​ — ​ — ​ 125 ​ — ​ 125 Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 2,842 ) ​ ( 2,842 ) Balance at September 30, 2024 ​ 856 ​ $ — ​ 1,780,472 ​ $ — ​ $ 113,374 ​ $ ( 1,297 ) ​ $ ( 109,797 ) ​ $ 2,280 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 5 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Stockholders’ Equity (continued) (Unaudited) (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Preferred Stock ​ Common stock ​ Additional ​ Accumulated other ​ ​ ​ ​ Total ​ ​ $0.0001 par value ​ $0.0001 par value ​ paid-in ​ comprehensive ​ Accumulated ​ Stockholders' ​ ​ Shares Amount ​ Shares Amount capital income / (loss) deficit equity Balance at January 1, 2023 ​ — ​ $ — ​ 771,054 ​ $ — ​ $ 92,933 ​ $ ( 483 ) ​ $ ( 86,567 ) ​ $ 5,883 Stock-based compensation expense ​ — ​ — ​ — ​ — ​ 293 ​ — ​ — ​ 293 Issuance of common stock to vendor ​ — ​ — ​ 2,937 ​ — ​ 55 ​ — ​ — ​ 55 Foreign currency translation adjustment ​ — ​ — ​ — ​ — ​ — ​ ( 456 ) ​ — ​ ( 456 ) Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 2,048 ) ​ ( 2,048 ) Balance at March 31, 2023 ​ — ​ $ — ​ 773,991 ​ $ — ​ $ 93,281 ​ $ ( 939 ) ​ $ ( 88,615 ) ​ $ 3,727 Stock-based compensation expense ​ — ​ — ​ — ​ — ​ 119 ​ — ​ — ​ 119 Issuance of preferred stock, net of issuance costs ​ 14,149 ​ — ​ — ​ — ​ 11,027 ​ — ​ — ​ 11,027 Foreign currency translation adjustment ​ — ​ — ​ — ​ — ​ — ​ ( 517 ) ​ — ​ ( 517 ) Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 2,027 ) ​ ( 2,027 ) Balance at June 30, 2023 ​ 14,149 ​ $ — ​ 773,991 ​ $ — ​ $ 104,427 ​ $ ( 1,456 ) ​ $ ( 90,642 ) ​ $ 12,329 Stock-based compensation expense ​ — ​ — ​ — ​ — ​ 119 ​ — ​ — ​ 119 Conversion of Preferred stock into common stock ​ ( 270 ) ​ — ​ 30,859 ​ — ​ — ​ — ​ — ​ — Exercise of warrants into common stock ​ — ​ — ​ 71,428 ​ — ​ 25 ​ — ​ — ​ 25 Foreign currency translation adjustment ​ — ​ — ​ — ​ — ​ — ​ 850 ​ — ​ 850 Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 3,022 ) ​ ( 3,022 ) Balance at September 30, 2023 ​ 13,879 ​ $ — ​ 876,278 ​ $ — ​ $ 104,571 ​ $ ( 606 ) ​ $ ( 93,664 ) ​ $ 10,301 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ * 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 . ​ 6 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2024 2023 Cash flow from operating activities: ​ ​ Net loss ​ $ ( 7,637 ) ​ $ ( 7,097 ) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ Depreciation ​ ​ 194 ​ ​ 122 Stock-based compensation expense ​ ​ 592 ​ ​ 531 Issuance of common stock to vendor ​ ​ 253 ​ ​ 55 Right-of-use asset amortization ​ ​ 201 ​ ​ 197 Loss on foreign currency transactions ​ ​ 283 ​ ​ ( 66 ) Transaction costs allocable to warrants ​ ​ — ​ ​ 198 Change in fair value of the warrant liability ​ ​ ( 672 ) ​ ​ ( 461 ) Change in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ 269 ​ ​ ( 24 ) Research and development tax credit receivable ​ ​ ( 499 ) ​ ​ 697 Prepaid expenses and other current assets ​ ​ 43 ​ ​ ( 159 ) Other non-current assets ​ ​ 1 ​ ​ — Accounts payable and accrued expenses ​ ​ 149 ​ ​ 713 Lease liabilities ​ ​ ( 166 ) ​ ​ ( 201 ) Income tax payable ​ ​ — ​ ​ ( 23 ) Other current liabilities ​ ​ ( 20 ) ​ ​ ( 102 ) Net cash used in operating activities ​ ( 7,009 ) ​ ( 5,620 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ Purchases of property, plant and equipment ​ ​ ( 75 ) ​ ​ ( 12 ) Net cash used by investing activities ​ ( 75 ) ​ ( 12 ) ​ ​ ​ ​ ​ ​ ​ Cash flow from financing activities: ​ ​ Proceeds from the issuance of preferred stock in private placement ​ ​ — ​ ​ 12,386 Proceeds from the issuance of warrants in private placement ​ ​ — ​ ​ 1,763 Payment of issuance costs ​ ​ — ​ ​ ( 1,483 ) Proceeds from the exercise of warrants ​ ​ 3 ​ ​ 25 Net cash provided by financing activities ​ 3 ​ 12,691 ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash ​ ​ 28 ​ ( 84 ) ​ ​ ​ ​ ​ ​ ​ Net change in cash ​ ( 7,053 ) ​ 6,975 ​ ​ ​ ​ ​ ​ ​ Cash, beginning of period ​ ​ 8,836 ​ ​ 4,235 Cash, end of period ​ $ 1,783 ​ $ 11,210 ​ ​ ​ ​ ​ ​ ​ Supplemental disclosure of cash and non-cash investing and financing activities ​ ​ Issuance of common shares for consulting services ​ $ 253 ​ $ 55 Initial classification of fair value of warrants ​ $ — ​ $ 1,837 Right-of-use asset and lease liability additions ​ $ 82 ​ $ 50 ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ 7 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 1. ORGANIZATION, BUSINESS, GOING CONCERN AND BASIS OF PRESENTATION Organization SmartKem, Inc. (the “Company”) formerly known as Parasol Investments Corporation (“Parasol”), was formed on May 13, 2020, and is the successor of SmartKem Limited, which was formed under the Laws of England and Wales. The Company was founded as a “shell” company registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with no specific business plan or purpose until it began operating the business of SmartKem Limited following the closing of the transactions contemplated by the Securities Exchange Agreement (the “Exchange Agreement”), dated February 21, 2021, with SmartKem Limited. Pursuant to the Exchange Agreement all of the equity interests in SmartKem Limited, except certain deferred shares which had no economic or voting rights and which were purchased by Parasol for an aggregate purchase price of $ 1.40 , were exchanged for shares of Parasol common stock and SmartKem Limited became a wholly owned subsidiary of Parasol (the “Exchange”). Business The Company is seeking to reshape the world of electronics with its disruptive organic thin-film transistors (“OTFTs”) that have the potential to revolutionize the display industry. The Company’s patented TRUFLEX® liquid semiconductor polymers are used to make a new type of transistor that can be used in a number of display technologies including next generation microLED displays. 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 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. 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. Risk and Uncertainties The Company’s activities are subject to significant risks and uncertainties including the risk of failure to secure additional funding to properly execute the Company’s business plan. The Company is subject to risks that are common to companies in the 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. If the Company lost access to this fabrication facility, it would materially and adversely affect the Company’s ability to manufacture prototypes and demonstrate products for potential customers. The loss of this access could significantly impede the Company’s ability to engage in product development and process improvement activities. Alternative providers of similar services exist but would take effort and time to bring into the Company’s operations. Going Concern The Company has incurred continuing losses including net losses of $ 7.6 million for the nine months ended September 30, 2024. The Company’s cash as of September 30, 2024 was $ 1.8 million with net cash used in operating activities of $ 7.0 million for the nine months ended September 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. The Company expects that its cash and cash equivalents of $ 1.8 million as of September 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 8 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 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. 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. 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 September 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 September 30, 2024 and December 31, 2023 and for the three and nine months ended September 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. These interim condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. They include the accounts of all wholly owned subsidiaries and all significant inter-company accounts and transactions have been eliminated in consolidation. Amounts are presented in thousands, except number of shares and per share data. The preparation of interim condensed consolidated financial statements requires management to make assumptions and estimates that impact the amounts reported. These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended September 30, 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. 9 Table of Contents 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. 2. 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 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. Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (“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. 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. 10 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, (in thousands) 2024 ​ 2023 Prepaid insurance ​ $ 292 ​ $ 274 Research grant receivable ​ ​ 20 ​ ​ 160 Prepaid facility costs ​ ​ 230 ​ ​ 101 VAT receivable ​ ​ 201 ​ ​ 104 Prepaid software licenses ​ ​ 44 ​ ​ 24 Prepaid professional service fees ​ — ​ 68 Other receivable and other prepaid expenses ​ ​ 17 ​ ​ 80 Total prepaid expenses and other current assets ​ $ 804 ​ $ 811 ​ ​ ​ ​ ​ ​ ​ ​ 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, (in thousands) 2024 ​ 2023 Plant and equipment ​ $ 1,662 ​ $ 1,584 Furniture and fixtures ​ 113 ​ 108 Computer hardware and software ​ 104 ​ 24 ​ ​ 1,879 ​ 1,716 Less: Accumulated depreciation ​ ( 1,526 ) ​ ( 1,261 ) Property, plant and equipment, net ​ $ 353 ​ $ 455 ​ ​ ​ ​ ​ ​ ​ ​ Depreciation expense was $ 194.4 thousand and $ 121.7 thousand for the nine months ended September 30, 2024 and 2023, respectively and is classified as research and development expense. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, (in thousands) 2024 ​ 2023 Accounts payable - trade ​ $ 747 ​ $ 355 Payroll liabilities ​ 404 ​ 375 VAT payable ​ ​ 116 ​ ​ — Accrued expenses – audit & accounting fees ​ — ​ 182 Accrued expenses – technical fees ​ 33 ​ 91 Accrued expenses – other ​ 163 ​ 175 Total accounts payable and accrued expenses ​ $ 1,463 ​ $ 1,178 ​ ​ ​ ​ ​ ​ ​ ​ 6. LEASES The Company has operating leases consisting of office space, lab space and equipment with remaining lease terms of 1 to 3 years , subject to certain renewal options as applicable. The Company is not the lessor in any lease agreement, and no related party transactions for lease arrangements have occurred. 11 Table of Contents 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, (in thousands) 2024 2023 2024 2023 Operating lease cost ​ $ 58 ​ $ 70 ​ $ 193 ​ $ 209 Short-term lease cost ​ 5 ​ — ​ 11 ​ 7 Variable lease cost ​ — ​ 53 ​ — ​ 118 Total lease cost ​ $ 63 ​ $ 123 ​ $ 204 ​ $ 334 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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, (in thousands) ​ 2024 2023 2024 2023 Research and development ​ $ 58 ​ $ 113 ​ $ 193 ​ $ 312 Selling, general and administrative ​ 5 ​ 10 ​ 11 ​ 22 Total lease cost ​ $ 63 ​ $ 123 ​ $ 204 ​ $ 334 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, (in thousands) 2024 2023 Assets ​ ​ ​ Right of use assets - Operating Leases ​ $ 197 ​ $ 285 Total lease assets ​ $ 197 ​ $ 285 ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ Current liabilities: ​ ​ Lease liability, current - Operating Leases ​ $ 165 ​ $ 230 Noncurrent liabilities: ​ ​ ​ Lease liability, non-current - Operating Leases ​ 31 ​ 19 Total lease liabilities ​ $ 196 ​ $ 249 ​ ​ ​ ​ ​ ​ ​ ​ The Company had no right of use lease assets and lease liabilities for financing leases as of September 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, (in thousands) ​ 2024 2023 Operating cash outflows from operating leases ​ $ 166 ​ $ 201 Supplemental non-cash amounts of operating lease liabilities arising from obtaining right of use assets ​ $ 82 ​ $ 50 ​ ​ ​ ​ ​ ​ ​ ​ 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, ​ ​ 2024 Weighted average remaining lease term (in years) – operating leases ​ ​ 1.21 Weighted average discount rate – operating leases ​ ​ 9.39 % ​ 12 Table of Contents 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) ​ 2024 2024 ​ $ 123 2025 ​ ​ 55 2026 ​ ​ 23 2027 ​ ​ 5 Total undiscounted lease payments ​ ​ 206 Less imputed interest ​ ​ ( 10 ) Total net lease liabilities ​ $ 196 ​ ​ ​ ​ ​ 7. COMMITMENTS AND CONTINGENCIES Legal proceedings In the normal course of business, the Company may become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material effect on the interim condensed consolidated financial statements. 8. STOCKHOLDERS’ EQUITY Reverse Stock Split At the Company’s Annual Meeting of Stockholders held on August 25, 2023 (the “2023 Annual Meeting”), the Company’s stockholders approved a proposal to approve and adopt an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of its shares of common stock, issued and outstanding or reserved for issuance, at a specific ratio within a range from 1-for- 30 to 1-for- 60 , inclusive, prior to the first anniversary of stockholder approval of the proposal, and to grant authorization to the Board of Directors to determine, in its sole discretion, whether to effect the reverse stock split, as well as its specific timing and ratio. On September 19, 2023, the Company’s Board of Directors adopted resolutions to effect as soon as reasonably practicable the reverse split of the issued and outstanding shares of the common stock at a ratio of 1-for- 35 . On September 19, 2023, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation (the “Charter Amendment”) to effect a reverse stock split of the issued and outstanding shares of the Company’s common stock, $ 0.01 par value per share, at a ratio of 1-for- 35 to be effective as of September 21, 2023 at 12:01 a.m., New York City time (the “Reverse Stock Split”). The Charter Amendment did not change the par value or any other terms of the common stock. Preferred Stock The board of directors has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences, and privileges could include dividend rights, conversion rights, voting rights, redemption rights, liquidation preferences, sinking fund terms, and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. Series A-1 Preferred Stock On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-1 Preferred Stock with a stated value of $ 1,000 per share (the “Series A-1 Certificate of Designation”). On January 29, 2024, the Company filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitation (the “Amended and Restated Series A-1 Certificate of Designation”) with the Secretary of State of Delaware designating 11,100 shares 13 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ of Series A-1 Preferred Stock The following is a summary of the principal amended and restated terms of the Series A-1 Preferred Stock as set forth in the Amended and Restated Series A-1 Certificate of Designation: Dividends The holders of Series A-1 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of common stock, when and if actually paid. In addition, in the event that on the 18 th month anniversary of the Closing Date, the trailing 30-day VWAP (as defined in the Series A-1 Certificate of Designation) is less than the then-effective Series A-1 Conversion Price, the Series A-1 Preferred Stock will begin accruing dividends at the annual rate of 19.99 % of the stated value thereof (the “Series A-1 Dividend”). The Series A-1 Dividend would be paid in cash, or, at the option of the Company, if certain equity conditions are met, in shares of common stock at a price per share equal to ninety percent ( 90 %) of the trailing 10-day VWAP for the last 10 trading date prior to the date the Series A-1 Dividend is paid. Voting Rights The shares of Series A-1 Preferred Stock have no voting rights, except to the extent required by the Delaware General Corporation Law (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, 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. Liquidation 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. Conversion The Series A-1 Preferred Stock is convertible into common stock at any time at a conversion price of $ 87.50 , subject to adjustment for certain anti-dilution provisions set forth in the Series A-1 Certificate of Designation (the “Series A-1 Conversion Price”). Upon conversion the shares of Series A-1 Preferred Stock will resume the status of authorized but unissued shares of preferred stock of the Company. Conversion at the Option of the Holder The Series A-1 Preferred Stock is convertible at the then-effective Series A-1 Conversion Price at the option of the holder at any time and from time to time. 14 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ Mandatory Conversion at the Option of the Company So long as certain equity conditions are satisfied, the Company may give notice requiring the holders to convert all of the outstanding shares of Series A-1 Preferred Stock into shares of common stock at the then-effective Series A-1 Conversion Price. Beneficial Ownership Limitation The Series A-1 Preferred Stock cannot be converted to common stock if the holder and its affiliates would beneficially own more than 4.99 % (or 9.99 % at the election of the holder) of the outstanding common stock. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99 % upon notice to us, provided that any increase in this limitation will not be effective until 61 days after such notice from the holder to us and such increase or decrease will apply only to the holder providing such notice. Preemptive Rights No holders of Series A-1 Preferred Stock will, as holders of Series A-1 Preferred Stock, have any preemptive rights to purchase or subscribe for common stock or any of our other securities. Redemption The shares of Series A-1 Preferred Stock are not redeemable by the Company. Negative Covenants As long as any Series A-1 Preferred Stock is outstanding, unless the holders of more than 50 % in stated value of the then outstanding shares of Series A-1 Preferred Stock shall have otherwise given prior written consent (which must include AIGH for so long as AIGH is holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement), the Company cannot, subject to certain exceptions, (a) enter into, create, incur, assume, guarantee or suffer to exist any indebtedness, (b) enter into, create, incur, assume or suffer to exist any liens, (c) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its common stock, common stock equivalents or junior securities, (d) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company, (e) declare or pay a dividend on junior securities or (f) enter into any agreement with respect to any of the foregoing. Trading Market There is no established trading market for any of the Series A-1 Preferred Stock, and we do not expect a market to develop. We do not intend to apply for a listing for any of the Series A-1 Preferred Stock on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series A-1 Preferred Stock will be limited. Series A-2 Preferred Stock On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-2 Preferred Stock with a stated value of $ 1,000 per share 15 Table of Contents 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: Dividends The holders of Series A-2 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of common stock, when and if actually paid. Voting Rights The shares of Series A-2 Preferred Stock have no voting rights, except to the extent required by the DGCL. As long as any shares of Series A-2 Preferred Stock are outstanding, the Company may not, without the approval of a majority of the then outstanding shares of Series A-2 Preferred Stock (a) alter or change the powers, preferences or rights of the Series A-2 Preferred Stock, (b) alter or amend the Charter, the Series A-2 Certificate of Designation or the Bylaws in such a manner so as to materially adversely affect any rights given to the Series A-2 Preferred Stock, (c) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to, or otherwise pari passu with, the Series A-2 Preferred Stock or (d) enter into any agreement to do any of the foregoing. Liquidation Upon a Liquidation, the then holders of the Series A-2 Preferred Stock are entitled to receive out of the assets available for distribution to stockholders of the Company an amount equal to 100 % of the stated value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon, prior and in preference to the common stock or any other series of preferred stock (other than the Series A-1 Preferred Stock). Conversion The Series A-2 Preferred Stock is convertible into common stock at any time at a conversion price of $ 8.75 , subject to adjustment for certain anti-dilution provisions set forth in the Series A-2 Certificate of Designation (the “Series A-2 Conversion Price”). Upon conversion the shares of Series A-2 Preferred Stock will resume the status of authorized but unissued shares of preferred stock of the Company. Conversion at the Option of the Holder The Series A-2 Preferred Stock is convertible at the then-effective Series A-2 Conversion Price at the option of the holder at any time and from time to time. Automatic Conversion On the trading day immediately preceding the date on which shares of common stock commence trading on the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange all, but not less than all, of the outstanding shares of Series A-2 Preferred Stock shall automatically convert, without any action on the part of the holder thereof and without payment of any additional consideration, into that number of shares of common stock determined by dividing the stated of such share of Series A-2 Preferred Stock by the then applicable Series A-2 Conversion Price. Beneficial Ownership Limitation The Series A-2 Preferred Stock cannot be converted to common stock if the holder and its affiliates would beneficially own more than 4.99 % (or 9.99 % at the election of the holder) of the outstanding common stock. However, any holder may increase or decrease such percentage to any other percentage not in excess 16 Table of Contents 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 No holders of Series A-2 Preferred Stock will, as holders of Series A-2 Preferred Stock, have any preemptive rights to purchase or subscribe for common stock or any of our other securities. Redemption The shares of Series A-2 Preferred Stock are not redeemable by the Company. Trading Market There is no established trading market for any of the Series A-2 Preferred Stock, and the Company does not expect a market to develop. The Company does not intend to apply for a listing for any of the Series A-2 Preferred Stock on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series A-2 Preferred Stock will be limited. Series A-1 and A-2 Preferred Stock and Class A and Class B Warrant Issuances On June 14, 2023, the Company and certain investors entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold an aggregate of (i) 9,229 shares of Series A-1 Convertible Preferred Stock at a price of $ 1,000 per share (the “Series A-1 Preferred Stock”), (ii) 2,950 shares of the Company’s Series A-2 Convertible Preferred Stock at a price of $ 1,000 per share (“Series A-2 Preferred Stock” and together with the Series A-1 Preferred Stock, the “Preferred Stock”), (iii) Class A Warrants to purchase up to an aggregate of 1,391,927 shares of common stock (the “Class A Warrant”), and (iv) Class B Warrants to purchase up to an aggregate of 798,396 shares of common stock (the “Class B Warrant” and together with the Class A Warrant, the “Warrants”) for aggregate gross proceeds of $ 12.2 million (the “June 2023 PIPE”). In addition, 34,286 Class B Warrants were issued in lieu of cash payments for consulting services related to the offering. The fair value of the service provided was $ 59 thousand. On June 22, 2023, in a second closing of the June 2023 PIPE, the Company sold an aggregate of (i) 1,870.36596 Series A-1 Preferred Stock, (ii) 100 shares of Series A-2 Preferred Stock, and (iii) Class A Warrants to purchase up to an aggregate of 225,190 shares of common stock pursuant to the Purchase Agreement for aggregate gross proceeds of $ 2.0 million. In addition, 8,572 Class B Warrants were issued in lieu of cash payments for consulting services related to the offering. The fair value of the service provided was $ 15 thousand. Each Class A Warrant has an exercise price of $ 8.75 and each Class B Warrant has an exercise price of $ 0.35 , both subject to adjustments in accordance with the terms of the Warrants. The Warrants expire five years from the issuance date. There were an additional 127,551 warrants issues related to a placement agent fee. The fair value of this fee is $ 31 thousand. The Company 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. 17 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ The Company received net proceeds after expenses of $ 12.7 million. Of the net proceeds, the Company allocated an estimated fair value of $ 1.8 million to the Warrants. The Company also expensed $ 0.2 million of issuance costs that were allocated to the warranty liability during the three and six months ended June 30, 2023. The terms of the June 2023 PIPE include a number of restrictions on our operations and on our ability to raise additional capital. The Purchase Agreement, among other things, provides that, for a period ending on June 14, 2024, we may not use cash from operating activities (as defined under GAAP) of more than an average of $ 2.8 million for any consecutive three-month period (subject to certain exceptions). This provision may cause us to delay certain actions that may benefit our business and may prevent us from pursuing potentially favorable business opportunities, even if a majority of our board of directors believes such actions or opportunities are in the best interest of our company and our stockholders. Under the terms of the Purchase Agreement, for a period ending on December 15, 2025, in the event that we issue common stock or common stock equivalents in a subsequent financing (as defined in the Purchase Agreement), the significant purchasers (defined in the Purchase Agreement as a purchaser acquiring at least 1,000 shares of Series A-1 Preferred Stock) will have the right to purchase up to 40 % of the securities sold in the subsequent financing. This provision may make it more difficult for us to raise additional capital because other investors may want to provide all, or a larger portion of the capital provided in the subsequent financing or may be unwilling to co-invest with one or more of the significant purchasers or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers. In addition, during such period, the Company may not issue common stock or common stock equivalents in a subsequent financing with an effective price per share of common stock that is or may become lower than the then-effective conversion price of the Series A-1 Preferred Stock without the consent of the significant purchasers, which must include AIGH and its affiliates for so long as they are holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement. This provision may prevent the Company from obtaining additional capital on market terms even if a majority of the Company’s board of directors believes that the terms of the subsequent financing are in the best interests of the Company and its stockholders. This provision may also have the effect of increasing the cost of obtaining additional capital either because the significant purchasers refuse to consent to any such subsequent financing unless provided by them on terms approved by them or because the Company is required to provide additional consideration to such significant purchasers in exchange for their consent. In the event that the Company issues common stock or common stock equivalents in a subsequent financing prior to the time the common stock is listed on a national securities exchange, the Purchase Agreement provides that if a significant purchaser reasonably believes that any of the terms and conditions of the subsequent financing are more favorable to an investor in the subsequent financing than the terms of the June 2023 PIPE, such significant purchaser has the right to require the Company to amend the terms of the June 2023 PIPE to include such more favorable term for such significant purchaser. This provision may make it more expensive to obtain additional capital prior to an uplisting because it permits any significant purchaser to “cherry pick” the terms of the subsequent financing and to require any term deemed to be more favorable to be included retroactively in the terms of the June 2023 PIPE. This provision also potentially creates uncertainty around the terms of a subsequent financing because the significant purchasers have the right to review terms of a completed subsequent financing before deciding which, if any, of the terms thereof they find more favorable to them. The Purchase Agreement provides that, until June 14, 2025, a significant purchaser may participate in a subsequent transaction by exchanging some or all of its Series A-1 Preferred Stock having a stated value equal to its subscription amount in the subsequent financing. This provision may adversely affect the amount of capital the Company raises in a subsequent financing, as it permits a significant purchaser to roll its existing investment into the new financing rather than being required to invest cash. This provision also has the potential to make it more difficult for the Company to raise additional capital as other investors may want to provide all or a larger portion of the capital provided in the subsequent financing or may require the Company to raise a minimum amount of new capital or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers in cash. 18 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 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 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 September 30, 2024, there were an aggregate of 856 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. Common Stock Voting Rights Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. The Company’s 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 19 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ vote, present in person or represented by proxy, constitutes a quorum for the transaction of business at all meetings of the stockholders. Dividends The Company has never paid any cash dividends to stockholders and do not anticipate paying any cash dividends to stockholders in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of 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 September 10, 2024, the Company issued 30,000 shares of common stock, as payment for consulting services. Common Stock Warrants A summary of the Company’s warrants to purchase common stock activity is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ ​ ​ ​ Weighted- ​ Remaining ​ ​ ​ ​ ​ ​ ​ Average ​ Contractual ​ ​ Number of ​ ​ Exercise Price ​ Exercise ​ Term ​ ​ Shares ​ ​ per Share ​ Price ​ (Years) Warrants outstanding at January 1, 2024 2,542,655 ​ ​ $ 0.35 - $ 70.00 ​ $ 6.89 4.43 Issued — ​ ​ ​ ​ ​ — Exercised ( 8,400 ) ​ ​ ​ ​ 0.35 Expired — ​ ​ ​ ​ — Warrants outstanding at September 30, 2024 2,534,255 ​ ​ $ 0.35 - $ 70.00 ​ $ 6.91 3.67 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ A summary of the Company’s pre-funded warrants to purchase common stock activity is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ Average ​ ​ ​ Number of ​ Exercise ​ ​ ​ Shares ​ Price ​ Pre-funded warrants outstanding at January 1, 2024 61,587 ​ $ 0.3500 ​ Issued 726,344 ​ 0.0001 ​ Exercised — ​ ​ ​ Expired — ​ ​ ​ Pre-funded warrants outstanding at September 30, 2024 787,931 ​ $ 0.02745 ​ ​ ​ ​ ​ ​ ​ ​ ​ 9. SHARE-BASED COMPENSATION On February 23, 2021, the Company approved the 2021 Equity Incentive Plan (“2021 Plan”), in which a maximum aggregate number of shares of common stock that may be issued under the 2021 Plan is 65,000 shares. Subject to the adjustment provisions of the 2021 Plan, the number of shares of the Company’s common stock available for issuance under the 2021 Plan will also include an annual increase on the first day of each fiscal year beginning with 2022 fiscal year and ending on the Company’s 2031 fiscal year in an amount equal to the least of: 1) 65,000 shares of the Company’s common stock; 2) four percent ( 4 %) of the outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year; or 3) such number of shares of the Company’s common stock as the administrator may determine. 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 reserved for 20 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 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. Determining the appropriate fair value of share-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for share options, the expected life of the option, and expected share price volatility. The Company uses the Black-Scholes option pricing model to value its share option awards. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, the share-based compensation expense could be materially different for future awards. The Company did not issue any options during the three months ended September 30, 2024. During the nine months ended September 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 nine months ended September 30, 2024: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ Remaining ​ Weighted- ​ Aggregate ​ ​ ​ ​ Average ​ Contractual ​ Average ​ Intrinsic ​ ​ Number of ​ Exercise ​ Term ​ Fair Value at ​ Value ​ ​ Shares ​ Price ​ (Years) ​ Grant Date ​ (in thousands) Options outstanding at January 1, 2024 70,411 $ 63.07 7.28 $ 33.98 ​ ​ Exercised ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ Cancelled/Forfeited ( 5,865 ) 70.00 ​ ​ Expired — — ​ ​ Granted 568,000 6.50 ​ ​ Options outstanding at September 30, 2024 632,546 $ 12.21 9.44 $ 3.48 ​ ​ Options exercisable at September 30, 2024 ​ 241,831 ​ $ 18.49 ​ 8.92 ​ ​ ​ ​ $ 29.47 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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, ​ (in thousands) ​ 2024 2023 2024 2023 ​ Research and development ​ $ 79 ​ $ 49 ​ $ 175 ​ $ 168 ​ Selling, general and administration ​ 178 ​ 70 ​ 396 ​ 363 ​ Total ​ $ 257 ​ $ 119 ​ $ 571 ​ $ 531 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total compensation cost related to non-vested stock option awards not yet recognized as of September 30, 2024 was $ 2.0 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. 10. NET LOSS PER COMMON SHARE Basic net loss per share is determined by dividing net loss by the weighted average shares of common stock outstanding during the period, without consideration of potentially dilutive securities, except for those shares that are issuable for little or no cash consideration. Diluted net loss per share is determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflects the dilutive effect, if any, of potentially dilutive common shares, such as stock options and warrants calculated using the treasury stock method. 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. 21 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, (in thousands, except share data) ​ 2024 2023 2024 2023 Net loss - basic ​ $ ( 2,842 ) ​ $ ( 3,022 ) ​ $ ( 7,637 ) ​ $ ( 7,097 ) Preferred stock dividends ​ ​ — ​ ​ — ​ ​ ( 7,094 ) ​ ​ — Net loss - diluted ​ $ ( 2,842 ) ​ $ ( 3,022 ) ​ $ ( 14,731 ) ​ $ ( 7,097 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average shares outstanding - basic* ​ ​ 3,308,975 ​ ​ 1,701,166 ​ ​ 3,068,110 ​ ​ 1,219,450 Weighted average shares outstanding - diluted* ​ ​ 3,308,975 ​ ​ 1,701,166 ​ ​ 3,068,110 ​ ​ 1,219,450 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss per common share - basic* ​ $ ( 0.86 ) ​ $ ( 1.78 ) ​ $ ( 2.49 ) ​ $ ( 5.82 ) Net loss per common share - diluted* ​ $ ( 0.86 ) ​ $ ( 1.78 ) ​ $ ( 4.80 ) ​ $ ( 5.82 ) Dividend per common share ​ $ - ​ $ - ​ ​ ( 2.31 ) ​ ​ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ * 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 September 30, 2024 and 2023 because their effects would be anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ 2024 ​ 2023 Common stock warrants ​ ​ 1,772,829 ​ ​ 1,772,829 Assumed conversion of preferred stock ​ ​ 97,866 ​ ​ 1,586,258 Stock options ​ ​ 632,546 ​ ​ 70,657 Total ​ ​ 2,503,241 ​ ​ 3,429,744 ​ ​ ​ ​ ​ ​ ​ ​ At September 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 nine months ended September 30, 2024 and 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ 2024 2023 2024 2023 Weighted average shares issued ​ ​ 1,759,618 ​ ​ 868,619 ​ ​ 1,527,473 ​ ​ 805,808 Weighted average pre-funded and penny warrants ​ ​ 1,549,357 ​ ​ 832,547 ​ ​ 1,540,637 ​ ​ 413,641 Weighted average shares outstanding ​ ​ 3,308,975 ​ ​ 1,701,166 ​ ​ 3,068,110 ​ ​ 1,219,450 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 11. DEFINED CONTRIBUTION PENSION The Company operates a defined contribution pension scheme for its UK employees. The assets of the scheme are held separately from those of the Company in an independently administered fund. The pension cost charge represents contributions payable by the Company to the fund. Pension cost is included in the unaudited interim condensed consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, (in thousands) ​ 2024 2023 2024 2023 Research and development ​ $ 23 ​ $ 23 ​ $ 64 ​ $ 67 Selling, general and administration ​ 19 ​ 18 ​ 55 ​ 50 Total ​ $ 42 ​ $ 41 ​ $ 119 ​ $ 117 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 22 Table of Contents SMARTKEM, INC. Notes to Condensed Consolidated Financial Statements ​ 12. FAIR VALUE MEASUREMENTS The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value during the nine months ended September 30, 2024: ​ ​ ​ ​ ​ (in thousands) ​ Warrant Liability Balance at January 1,2024 ​ $ 1,372 Total change in the liability included in earnings ​ ( 672 ) Reclass from liability to equity ​ ​ ( 700 ) Balance at September 30, 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. Since our common stock was not publicly traded until February 2022 there has been insufficient volatility data available. Accordingly, we have used an expected volatility based on historical common stock volatility of our peers. The Company 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 was determined by using an option pricing model assuming the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ May-24 ​ December 31 ​ ​ 2024 2023 Expected term (years) ​ 4.05 ​ ​ 4.46 Risk-free interest rate ​ 4.55 % ​ ​ 3.81 % Expected volatility ​ 50.0 % ​ ​ 50.0 % Expected dividend yield ​ 0.0 % ​ ​ 0.0 % ​ ​ ​ ​ ​ ​ ​ ​ 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: closing price of the Company’s common stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of the Company’s stock over that term; annual rate of dividends; and the risk-free rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of SmartKem stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10). The risk-free rate of return is a Level 2 input as defined in ASC 820-10, while the historical volatility is a Level 3 input as defined in ASC 820. Since the lowest level input is a Level 3, the Company determined the warrant liability was most appropriately classified within Level 3 of the fair value hierarchy. The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of December 31, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value. In general, the fair values were determined using Level 3: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Quoted Prices ​ Significant Other ​ Significant ​ ​ ​ ​ ​ in Active ​ Observable ​ Unobservable ​ ​ ​ ​ ​ Markets ​ Inputs ​ Inputs ​ December 31, ​ ​ (Level 1) ​ (Level 2) ​ (Level 3) ​ 2023 Description ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Warrant liability ​ $ — ​ $ — ​ $ 1,372 ​ $ 1,372 Total liabilities ​ $ — ​ $ — ​ $ 1,372 ​ $ 1,372 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 23 Table of Contents