SmartKem, Inc. 10-K

Item 8. Financial Statements and Supplementary Data ​ ​ ​ ​ ​ SmartKem, Inc. ​ ​ Index to Consolidated Financial Statements ​ ​ ​ Page ​ Report of Independent Registered Public Accounting Firm (Marcum LLP, New York, USA, PCAOB ID # 688 ) 49 ​ ​ ​ ​ Consolidated Balance Sheets as of December 31, 2024, and 2023 50 ​ ​ ​ ​ Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2024, and 2023 51 ​ ​ ​ ​ Consolidated Statements of Stockholders' Equity for the years ended December 31, 2024, and 2023 52 ​ ​ ​ ​ Consolidated Statements of Cash Flows for the years ended December 31, 2024, and 2023 53 ​ ​ ​ ​ Notes to the Consolidated Financial Statements 54 ​ ​ ​ 48 Table of Contents Report of Independent Registered Public Accounting Firm ​ ​ To the Stockholders and Board of Directors of SmartKem, Inc. ​ Opinion on the Financial Statements ​ We have audited the accompanying consolidated balance sheets of SmartKem, Inc. and Subsidiaries (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2024 , and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. ​ Explanatory Paragraph – Going Concern ​ The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ​ Basis for Opinion ​ These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. ​ We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. ​ Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. ​ ​ /s/ Marcum LLP ​ Marcum LLP ​ We have served as the Company’s auditor since 2023. ​ New York, NY March 31, 2025 ​ ​ ​ ​ ​ ​ 49 Table of Contents ​ SMARTKEM, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except number of shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ ​ 2024 ​ 2023 Assets ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 7,141 ​ $ 8,836 Accounts receivable ​ — ​ 268 Research and development tax credit receivable ​ 519 ​ 610 Prepaid expenses and other current assets ​ 849 ​ 811 Total current assets ​ 8,509 ​ 10,525 Property, plant and equipment, net ​ 269 ​ 455 Right-of-use assets, net ​ 120 ​ 285 Other assets, non-current ​ 6 ​ 7 Total assets ​ $ 8,904 ​ $ 11,272 ​ ​ ​ ​ ​ ​ ​ Liabilities and stockholders’ equity ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable and accrued expenses ​ $ 1,791 ​ $ 1,178 Lease liabilities, current ​ 47 ​ 230 Other current liabilities ​ ​ 450 ​ ​ 360 Total current liabilities ​ 2,288 ​ 1,768 Lease liabilities, non-current ​ 25 ​ 19 Warrant liability ​ ​ — ​ 1,372 Total liabilities ​ 2,313 ​ 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 December 31, 2024 and December 31, 2023, respectively ​ — ​ — Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 3,590,217 and 889,668 shares issued and outstanding, at December 31, 2024 and December 31, 2023, respectively ​ — ​ — Additional paid-in capital ​ 122,316 ​ 104,757 Accumulated other comprehensive loss ​ ( 1,105 ) ​ ( 1,578 ) Accumulated deficit ​ ( 114,620 ) ​ ( 95,066 ) Total stockholders' equity ​ 6,591 ​ 8,113 Total liabilities and stockholders’ equity ​ $ 8,904 ​ $ 11,272 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements. ​ 50 Table of Contents ​ SMARTKEM, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Loss (in thousands, except number of shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2024 2023 Revenue ​ $ 82 ​ $ 27 ​ Cost of revenue ​ 32 ​ 23 ​ Gross profit ​ 50 ​ 4 ​ ​ ​ ​ ​ ​ ​ ​ ​ Other operating income ​ 1,017 ​ 836 ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ ​ Research and development ​ 5,111 ​ 5,556 ​ General and administrative ​ 6,342 ​ 5,188 ​ (Gain)/loss on foreign currency transactions ​ 78 ​ 87 ​ Total operating expenses ​ 11,531 ​ 10,831 ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss from operations ​ ( 10,464 ) ​ ( 9,991 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-operating income/(expense) ​ ​ ​ Gain/(loss) on foreign currency transactions ​ ​ ( 544 ) ​ 1,213 ​ Transaction costs allocable to warrants ​ ​ — ​ ( 198 ) ​ Change in fair value of the warrant liability ​ ​ 672 ​ 465 ​ Interest income/(expense) ​ 7 ​ 12 ​ Total non-operating income/(expense) ​ 135 ​ 1,492 ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss before income taxes ​ ​ ( 10,329 ) ​ ​ ( 8,499 ) ​ Income tax expense ​ ( 1 ) ​ — ​ Net loss ​ $ ( 10,330 ) ​ $ ( 8,499 ) ​ Preferred stock deemed dividends ​ ​ ( 9,224 ) ​ ​ — ​ Net loss attributed to common stockholders ​ $ ( 19,554 ) ​ $ ( 8,499 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average shares outstanding - basic and diluted ​ ​ 3,260,127 ​ ​ 1,344,892 ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and diluted net loss per common share attributed to common stockholders ​ $ ( 6.00 ) ​ $ ( 6.32 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 10,330 ) ​ $ ( 8,499 ) ​ Other comprehensive loss: ​ ​ ​ Foreign currency translation ​ 473 ​ ( 1,095 ) ​ Total comprehensive loss ​ $ ( 9,857 ) ​ $ ( 9,594 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements. ​ 51 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ Preferred Stock ​ Common stock ​ Additional ​ 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 — ​ — ​ — ​ — ​ 829 ​ — ​ — ​ 829 Issuance of stock awards — ​ ​ — ​ 3,400 ​ ​ — ​ ​ 21 ​ ​ — ​ ​ — ​ ​ 21 Issuance of common stock to vendor — ​ — ​ 130,000 ​ ​ — ​ ​ 253 ​ ​ — ​ ​ — ​ 253 Exchange of Preferred stock into common stock warrants ( 6,356 ) ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Deemed dividend on extinguishment of Preferred stock — ​ ​ — ​ — ​ ​ — ​ ​ 7,094 ​ ​ — ​ ​ ( 7,094 ) ​ ​ — Cashless exercise of warrants into common stock — ​ ​ — ​ 388 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Fair value of warrants reclassified from liability to equity — ​ ​ — ​ — ​ ​ — ​ ​ 700 ​ ​ — ​ ​ — ​ ​ 700 Issuance of common stock and warrants, net of issuance costs — ​ ​ — ​ 1,619,781 ​ ​ — ​ ​ 6,508 ​ ​ — ​ ​ — ​ 6,508 Deemed dividend on general release and amendment of Preferred stock — ​ ​ — ​ — ​ ​ — ​ ​ 2,130 ​ ​ — ​ ​ ( 2,130 ) ​ ​ — Conversion of preferred stock into common stock ( 6,553 ) ​ ​ — ​ 749,016 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — Exercise of warrants into common stock — ​ ​ — ​ 197,964 ​ ​ — ​ ​ 24 ​ ​ — ​ ​ — ​ 24 Foreign currency translation adjustment — ​ — ​ — ​ ​ — ​ ​ — ​ ​ 473 ​ ​ — ​ 473 Net loss — ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 10,330 ) ​ ( 10,330 ) Balance at December 31, 2024 856 ​ $ — ​ 3,590,217 ​ $ — ​ $ 122,316 ​ $ ( 1,105 ) ​ $ ( 114,620 ) ​ $ 6,591 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ Preferred Stock ​ Common stock ​ Additional ​ 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 — ​ — ​ — ​ — ​ 717 ​ — ​ — ​ 717 Issuance of common stock to vendor — ​ — ​ 2,937 ​ — ​ 55 ​ — ​ — ​ 55 Issuance of preferred stock, net of issuance costs 14,149 ​ — ​ — ​ — ​ 11,027 ​ — ​ — ​ ​ 11,027 Conversion of preferred stock into common stock ( 384 ) ​ — ​ 43,891 ​ — ​ — ​ — ​ — ​ ​ — Exercise of warrants into common stock — ​ — ​ 71,786 ​ — ​ 25 ​ — ​ — ​ ​ 25 Foreign currency translation adjustment — ​ — ​ — ​ — ​ — ​ ( 1,095 ) ​ — ​ ( 1,095 ) Net loss — ​ — ​ — ​ — ​ — ​ — ​ ( 8,499 ) ​ ( 8,499 ) Balance at December 31, 2023 13,765 ​ $ — ​ 889,668 ​ $ — ​ $ 104,757 ​ $ ( 1,578 ) ​ $ ( 95,066 ) ​ $ 8,113 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these consolidated financial statements. ​ ​ 52 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2024 2023 Cash flow from operating activities: ​ ​ Net loss ​ $ ( 10,330 ) ​ $ ( 8,499 ) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ ​ Depreciation ​ 258 ​ 145 Stock-based compensation expense ​ ​ 850 ​ 717 Issuance of common stock to vendor ​ ​ 253 ​ 55 Right-of-use asset amortization ​ 268 ​ 263 Gain/(loss) on foreign currency transactions ​ ​ 647 ​ ( 1,120 ) Transaction costs allocable to warrants ​ ​ — ​ 198 Change in fair value of the warrant liability ​ ​ ( 672 ) ​ ( 465 ) Change in operating assets and liabilities: ​ ​ ​ ​ Accounts receivable ​ 269 ​ ( 231 ) Research and development tax credit receivable ​ 84 ​ 562 Prepaid expenses and other assets ​ ( 33 ) ​ 70 Accounts payable and accrued expenses ​ 504 ​ 459 Lease liabilities ​ ​ ( 281 ) ​ ( 266 ) Income tax payable ​ ​ — ​ ( 23 ) Other current liabilities ​ 87 ​ 98 Net cash used in operating activities ​ ( 8,096 ) ​ ( 8,037 ) ​ ​ ​ ​ ​ ​ ​ Cash flows from investing activities: ​ ​ Purchases of property, plant and equipment ​ ( 75 ) ​ ​ ( 18 ) Net cash used by investing activities ​ ( 75 ) ​ ( 18 ) ​ ​ ​ ​ ​ ​ ​ 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 Proceeds from the issuance of common stock and warrants in private placement ​ 3,300 ​ — Proceeds from the issuance of common stock and warrants in public offering ​ 4,350 ​ — Payment of issuance costs ​ ​ ( 1,142 ) ​ ( 1,483 ) Proceeds from the exercise of warrants ​ ​ 24 ​ 25 Net cash provided by financing activities ​ 6,532 ​ 12,691 ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash ​ ( 56 ) ​ ( 35 ) ​ ​ ​ ​ ​ ​ ​ Net change in cash ​ ( 1,695 ) ​ 4,601 ​ ​ ​ ​ ​ ​ ​ Cash, beginning of period ​ 8,836 ​ 4,235 Cash, end of period ​ $ 7,141 ​ $ 8,836 ​ ​ ​ ​ ​ ​ ​ 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 consolidated financial statements. ​ 53 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ 1. ORGANIZATION & BUSINESS Organization & Reverse Recapitalization SmartKem, Inc. (“SmartKem” or the “Company”) a Delaware corporation, formerly known as Parasol Investments Corporation (“Parasol”), was formed on May 13, 2020, and is the successor, as discussed below, of SmartKem Limited, which was formed under the Laws of England and Wales. The Company was founded as a “shell” company registered under the Exchange Act, with no specific business plan or purpose until it began operating the business of SmartKem Limited following the closing of the Exchange described below. On February 23, 2021, Parasol entered into a Securities Exchange Agreement (“the Exchange Agreement”), 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 (the “Deferred Shares”) and which were purchased by Parasol for an aggregate purchase price of $ 1.40 , were exchanged for shares of Parasol common stock, par value $ 0.0001 per share (“common stock”), and SmartKem Limited became a wholly owned subsidiary of Parasol (the “Exchange”). ​ As a result of the Exchange, Parasol legally acquired the business of SmartKem Limited, and continues as the existing business operations of SmartKem Limited as a public reporting company under the name SmartKem, Inc. ​ Business We are seeking to change the world of electronics with a new class of transistor developed using our proprietary advanced semiconductor materials that we believe has the potential to revolutionize the display industry. Our TRUFLEX® semiconductor polymers enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost, high-performance displays. Our semiconductor platform can be used in a range of display technologies including MicroLED, miniLED and AMOLED, as well as in applications in advanced chip packaging, sensors and logic. The consolidated entity presented is referred to herein as “SmartKem”, “we”, “us”, “our”, or the “Company”, as the context requires and unless otherwise noted. ​ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis for Presentation These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and accounting principles generally accepted in the United States of America (“US GAAP”) as defined by the Financial Accounting Standards Board (FASB) within the FASB Accounting Standards Codification (“ASC”) and are presented in thousands, except number of shares and per share data. Going Concern As of December 31, 2024, we have incurred recurring losses including net losses of $ 10.3 million and $ 8.5 million for the years ended December 31, 2024, and 2023, respectively. We anticipate operating losses to continue for the foreseeable future due to, among other things, costs related to research funding, further development of our technology and products and expenses related to the commercialization of our products. In December 2024, the Company raised $ 7.7 million through an offering of common stock and warrants. Net proceeds after related expenses were $ 6.5 million. 54 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ The Company expects that its cash and cash equivalents of $ 7.1 million as of December 31, 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. Our future viability is dependent on our ability to raise additional capital to fund our operations. We will need to obtain additional funds to satisfy our operational needs and to fund our sales and marketing efforts, research and development expenditures, and business development activities. Until such time, if ever, as we can generate sufficient cash through revenue, management’s plans are to finance our working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. If we raise additional funds by issuing equity securities, our existing security holders will likely experience dilution. If we borrow money, the incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations. If we enter into a collaboration, strategic alliance or other similar arrangement, we 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 consolidated financial statements as of December 31, 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 Consolidation The consolidated financial statements include the accounts of SmartKem, Inc. and its wholly-owned subsidiary, SmartKem Limited. The Company does not have any non-consolidated subsidiaries. All intercompany balances and transactions have been eliminated on consolidation, including unrealized gains and losses on transactions between the companies. Comprehensive loss Comprehensive loss of all periods presented is comprised primarily of net loss and foreign currency translation adjustments. Management’s Use of Estimates The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relates to the fair value of share options and the fair value of warrant liability. These estimates and assumptions are based on current facts, historical experience and various other factors believed 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 55 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates. Certain Risk and Uncertainties The Company’s activities are subject to significant risks and uncertainties including the risk of failure to secure additional funding to properly execute the Company’s business plan. The Company is subject to risks that are common to companies in the growth stage, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology, and compliance with regulatory requirements. The Company 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. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. As of December 31, 2024 and 2023, the Company did no t have any cash equivalents. Accounts Receivable Accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The Company considers the following factors when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. These receivables have historically been paid timely. Due to the nature of the accounts receivable balance, the Company believes there is no significant risk of non-collection. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances for credit losses would be required. There was no allowance for credit losses recorded as of December 31, 2024 and 2023. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Periodically, the Company maintains deposits in financial institutions in excess of government insured limits. Property, Plant and Equipment Property, plant and equipment is stated at cost, less accumulated depreciation. Maintenance and repairs are expensed when incurred. Additions and improvements that extend the economic useful life of the asset are capitalized and depreciated over the remaining useful lives of the assets. The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts, and any resulting gain or loss is reflected in current earnings. Depreciation and amortization are provided using the accelerated declining balance method in amounts considered to be sufficient to amortize the cost of the assets to operations over their estimated useful lives. Property, plant and equipment is depreciated over an estimated useful life of approximately 4 years . 56 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ Impairment of Long-Lived Assets Management continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows in measuring whether the long-lived asset should be written down to fair value. Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate. If the carrying amount is greater than the undiscounted cash flows, the carrying amount of the asset is reduced to the asset’s fair value. An impairment loss is recognized immediately as an operating expense in the consolidated statements of operations. Reversal of previously recorded impairment losses are prohibited. As of December 31, 2024, and 2023, Company’s management believed that no revision to the remaining useful lives or impairment of the Company’s long-lived assets was required. Fair Value of Financial Instruments ​ ASC 820, Fair Value Measurements , provides guidance on the development and disclosure of fair value measurements. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. ​ The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes: ​ Level 1: Quoted prices in active markets for identical assets or liabilities. ​ Level 2: Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace. ​ Level 3: Unobservable inputs which are supported by little, or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. ​ Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and during the years ended December 31, 2024, and 2023. The carrying value of the Company’s cash, accounts receivable, other receivables, and accounts payable approximate fair value because of the short-term maturity of these financial instruments. Warrants The accounting treatment of warrants issued is determined pursuant to the guidance provided by ASC 480, Distinguishing Liabilities from Equity , and ASC 815-40, Contracts in Entity's Own Equity , as applicable. Each feature of a freestanding financial instrument including, without limitation, any rights relating to subsequent dilutive issuance, dividend issuances, equity sales, rights offerings, forced conversions, dividends, and exercise are assessed with determinations made regarding the proper classification in the Company’s consolidated financial statements. The Company assessed its warrants in accordance with this guidance, under which warrants that do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company will classify those warrants as liabilities at their fair value and adjusts the warrants to fair value in respect of each reporting period. This liability is subject to re-measurement at each balance sheet date and any change in fair value is recognized in the statements of operations. 57 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ Issuance Costs ​ The Company assessed the issuance cost in connection with the issuance of an equity offering. ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A, Expenses of Offering, states that specific incremental costs directly attributable to a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering. Analogizing to that guidance, specific incremental costs directly attributable to the issuance of an equity contract to be classified in equity should generally be recorded as a reduction in equity. However, issuance costs for equity contracts that are classified as a liability should be expensed immediately. The issuance costs are allocated to the equity and liability components of the underlying transaction on a basis of the allocated fair value of the gross proceeds in the overall transactions. ​ Direct and incremental legal and accounting costs associated with the Company’s issuance of common stock, preferred stock and warrants are deferred and classified as a component of other assets on the consolidated balance sheet until completion of the issuance. Upon completion of the issuance, deferred offering costs are reclassified from other assets to equity in additional paid-in capital and recorded against the net proceeds received in the issuance. For the year ended December 31, 2023, we recorded $ 1.5 million of offering costs of which $ 1.3 million were recorded in additional paid-in capital and $ 0.2 million were recorded as non-operating expenses and for the year ended December 31, 2022, $ 170 thousand of offering costs were recorded in additional paid-in capital. ​ Non-retirement Post-employment Benefits ​ The company records employee severance benefits as non-retirement post-employment benefits that are accounted for under the guidance of ASC 712-10 Compensation - Nonretirement Postemployment Benefits . A liability is accrued when it becomes probable that a payment will be made, and the amount is estimable. In most cases, a payment is not deemed probable until the employer makes the decision to terminate the employee. All severance payments identified were paid and expensed in the period incurred. ​ Leases ​ Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease obligation on the consolidated balance sheets as of December 31, 2024 and 2023. The Company has elected not to present short-term leases as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that the Company is reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s leases do not provide an implicit rate of return, the Company used an incremental borrowing rate based on inception date of the lease agreement in determining the present value of lease payments. ​ Revenue The Company applies the provisions of ASC 606, Revenue from Contracts with Customers . The Company recognizes revenue under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled to. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contact and (5) recognize revenue when a performance obligation is satisfied. The Company’s current contracts with customers do not contain significant estimates or judgments. All of the Company’s revenue contains a single performance obligation that is recognized upon fulfilment of the sales order. The Company derives its revenues primarily from sales of TRUFLEX® inks and of demonstrator units to customers evaluating organic semiconductor technology. The transaction price is stated in each customer agreement and is 58 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ allocated to a single performance obligation. Revenue is recognized upon shipment of each TRULFEX® ink or demonstrator, at a point in time. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year. Collaboration Arrangements The Company entered into several collaboration agreements during 2024. The business arrangements between the two parties are not accounted for as a Collaborative Arrangement, as defined within the guidance under ASC 808, Collaborative Arrangement , as both parties are not exposed to significant risks and rewards depending on the commercial success of the activity. It has also determined that other parties are a vendor and not a customer, as defined within the guidance under ASC 606, as the other parties did not primarily contract with SmartKem to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. It was SmartKem that contracted with the other parties to obtain design services from it. These agreements are accounted for under the guidance of ASC 705, Cost of Sales and Service. Within ASC 705–20, Accounting for Consideration Received from a Vendor , the section discusses the accounting for consideration received by an entity from a vendor or supplier. Consideration from a vendor includes cash amounts that an entity receives or expects to receive from a vendor (or from other parties that sell the goods or services to the vendor). Consideration from a vendor also includes credit or other items (e.g., a coupon or voucher) that the entity can apply against amounts owed to the vendor (or to other parties that sell the goods or services to the vendor). Consideration from a vendor should be accounted for as a reduction of the purchase price of the goods or services acquired from the vendor unless the consideration from the vendor is one of the following, a) in exchange for a distinct good or service; b) a reimbursement of costs incurred by the entity to sell the vendor’s products; or c) consideration for sales incentives offered to customers by manufacturers. Contract Liability ​ As of December 31, 2024, the Company has recognized contract liabilities of $ 0.5 million, primarily related to advance payments received from collaboration agreements for services to be performed in future periods. These contract liabilities are expected to be recognized as revenue within the next 12 months. ​ Research and Development Expenses The Company expenses research and development costs as incurred. Research and development costs include salaries, employee benefit costs, direct project costs, supplies and other related costs. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received. Patent and Licensing Costs Patent and licensing costs are expensed as incurred because their realization is uncertain. These costs are classified as research and development expenses in the accompanying consolidated statements of operations and comprehensive loss. Other Operating Income The Company’s other operating income includes government grants received for qualifying research and development projects, and research and development tax credits related to the United Kingdom’s Research and Development tax 59 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ relief for small and medium-sized enterprises, which is a government tax incentive designed to reward innovative companies for investing in research and development. Such incentives are recorded as other income when it is probable the amounts are collectible and can be reasonably estimated. The Company has applied the guidance of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance to account for grants and recognition of the other operating income related to the grant. The government grant is recognized only when there is reasonable assurance that a) the Company will comply with any conditions attached to the grant and, (b) the grant will be received. The grant is recognized as income over the period necessary to match the related costs, for which the grant is intended to compensated, on a systematic basis. A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, is recognized as other operating income in the period in which it is receivable. For the year ended December 31, 2024 and 2023, the Company recorded grant income and research & development tax credits of $ 1.0 million and $ 0.8 million, respectively, which are recorded as other operating income in the accompanying consolidated statements of operations. As of December 31, 2024 and 2023, the Company had receivables related to research & development tax credits for payments not yet received of $ 0.5 million and $ 0.6 million, respectively and receivables related to a government grants of $ 62 thousand as of December 31, 2024 and $ 160 thousand as of December 31, 2023. Share-based compensation All share-based payments, including grants of stock options, are measured based on the fair value of the share-based awards at the grant date and recognized over their respective vesting periods. Outstanding options generally expire 10 years after the grant date. The Company has issued options that vest based on service requirements and issued options that vest based on performance requirements. Options become exercisable when service requirements are met. In the case of performance-based options, options become exercisable when there is a liquidity event, such as a change in control, sale, or admission (listing as a public company or initial public offering (“IPO”)), and the employee, or consultant, must be providing services to the Company at the time of the event. Due to the Exchange, all options outstanding immediately prior to the event with a performance obligation requirement became vested and exercisable. Non-cash stock-based compensation expense for the year ended December 31, 2024 and 2023 were $ 0.9 million and $ 0.7 million, respectively (see also Note 9). The estimated fair value of stock options at the grant date is determined using the Black-Scholes pricing model. The Black-Scholes option pricing model requires inputs such as the fair value of common stock on date of grant, expected term using a simplified method, expected volatility, dividend yield, and risk-free interest rate. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards. The Company records forfeitures when they occur. Functional Currency and Operations Prior to the Exchange, SmartKem Limited’s (“the predecessor’s”) functional currency was the British Pound Sterling (“GBP”), and the consolidated financial statements were presented in United States dollars (“USD”). The predecessor’s functional currency was the respective local currency of the primary economic environment in which an entity’s operations are conducted. The predecessor translated the consolidated financial statements into the presentation currency using exchange rates in effect on the balance sheet date for assets and liabilities and average exchanges rates for the period for statement of operations accounts, with the difference recognized in accumulated other comprehensive loss. ​ 60 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ The Company’s functional currency is USD. The functional currency of the Company’s foreign operation is the respective local currency. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. The consolidated statements of operations and comprehensive loss are translated at the weighted average rate of exchange during the applicable period. The resulting unrealized gain/loss is recognized as foreign currency translation as a component of other comprehensive income. Income Taxes Valuation allowance of deferred tax assets Income taxes are recorded in accordance with ASC 740, Income Taxes , which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We considered the positive and negative evidence bearing upon its ability to realize the deferred tax assets. In addition to the Company’s history of cumulative losses, the Company cannot be certain that future taxable income will be sufficient to realize its deferred tax assets. Accordingly, a full valuation allowance has been provided against its net deferred tax assets at both December 31, 2024 and 2023. Should the Company change its determination, based on the evidence available as to the amount of its deferred tax assets that can be realized, the valuation allowance will be adjusted with a corresponding impact to the provision for income taxes in the period in which such determination is made and which may be material. As of December 31, 2024, and 2023, there were no material uncertain tax positions. Contingent Liabilities A provision for contingent liabilities is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. From time to time, the Company may be party to certain litigation and disputes arising in the normal course of business. As of December 31, 2024, the Company is not a party to any litigation or disputes. Segment Information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business as one operating segment: Semiconductor materials. Basic and Diluted Loss Per 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 61 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ with reported net operating losses, all common stock options and warrants are generally deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal. The following potentially dilutive securities were excluded from the computation of earnings per share as of December 31, 2024 and 2023 because their effects would be anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2024 ​ 2023 Common stock warrants ​ ​ 4,450,324 ​ ​ 1,772,829 Assumed conversion of preferred stock ​ ​ 1,973,200 ​ ​ 1,573,226 Stock options ​ ​ 619,910 ​ ​ 70,412 Total ​ ​ 7,043,434 ​ ​ 3,416,467 ​ ​ ​ ​ ​ ​ ​ ​ Recent Accounting Pronouncements In November 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures which will require companies to disclose significant segment expenses that are regularly provided to the CODM. The pronouncement is effective for annual filings for the year ended December 31, 2024. The adoption of this guidance did not have a material impact in the consolidated financial statements of the Company. See Note 14 – Segment Reporting for further information. In December 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures which will require companies to make additional income tax disclosures. The pronouncement is effective for annual filings for the year ended December 31, 2025. The Company is still assessing the impact of the adoption of this standard but does not expect it to have a material impact on its results of operations, financial position or cash flows. ​ On November 2024, the FASB issued Accounting Standards Update (ASU) No. 2024-03, Income Statement (Topic 220): Reporting Comprehensive Income - Expense Disaggregation Disclosures, Disaggregation of Income Statement Expenses, which requires public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the financial statements. The amendments in this pronouncement will be effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted and is effective on either a prospective basis or retrospective basis. The Company is currently assessing the potential impacts of adoption on its consolidated financial statements and related disclosures. ​ The Organization for Economic Co-operation and Development (OECD) reached an agreement among various countries to implement a minimum 15% tax rate on certain multinational enterprises, commonly referred to as Pillar Two. Many countries continue to announce changes in their tax laws and regulations based on Pillar Two Proposals. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes available. Given the numerous proposed changes in law and uncertainty regarding such proposed changes, the impact cannot be determined at this time. As the Company is U.S. headquartered and subject to the controlled foreign corporation regime in the United States, we expect the impact would be minimal. ​ 62 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ ​ 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, (in thousands) 2024 ​ 2023 Prepaid insurance ​ $ 194 ​ $ 274 Deferred research & development costs ​ ​ 138 ​ ​ — Research grant receivable ​ ​ 62 ​ ​ 160 Prepaid facility costs ​ ​ 67 ​ ​ 101 VAT receivable ​ ​ 319 ​ ​ 104 Prepaid software licenses ​ ​ 66 ​ ​ 24 Prepaid professional service fees ​ — ​ 68 Other receivable and other prepaid expenses ​ ​ 3 ​ ​ 80 Total prepaid expenses and other current assets ​ $ 849 ​ $ 811 ​ ​ ​ ​ ​ ​ ​ ​ 4. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, (in thousands) 2024 ​ 2023 Plant and equipment ​ $ 1,562 ​ $ 1,584 Furniture and fixtures ​ 106 ​ 108 Computer hardware and software ​ 98 ​ 24 ​ ​ 1,766 ​ 1,716 Less: Accumulated depreciation ​ ( 1,497 ) ​ ( 1,261 ) Property, plant and equipment, net ​ $ 269 ​ $ 455 ​ ​ ​ ​ ​ ​ ​ ​ Depreciation expense was $ 0.3 million and $ 0.1 million for the year ended December 31, 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, (in thousands) 2024 ​ 2023 Accounts payable - trade ​ $ 843 ​ $ 355 Payroll liabilities ​ 397 ​ 375 VAT payable ​ ​ 287 ​ ​ — Accrued expenses – audit & accounting fees ​ 106 ​ 182 Accrued expenses – technical fees ​ — ​ 91 Accrued expenses – other ​ 158 ​ 175 Total accounts payable and accrued expenses ​ $ 1,791 ​ $ 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. 63 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ The table below presents certain information related to the lease costs for the Company’s operating leases for the periods ended: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) 2024 2023 Operating lease cost ​ $ 293 ​ $ 276 Short-term lease cost ​ 29 ​ ​ 7 Variable lease cost ​ — ​ ​ 162 Total lease cost ​ $ 322 ​ $ 445 ​ ​ ​ ​ ​ ​ ​ ​ The total lease cost is included in the consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) 2024 2023 Research and development ​ $ 293 ​ $ 419 General and administrative ​ 29 ​ 26 Total lease cost ​ $ 322 ​ $ 445 ​ ​ ​ ​ ​ ​ ​ ​ Right of use lease assets and lease liabilities for our operating leases were recorded in the consolidated balance sheets as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, (in thousands) 2024 2023 Assets ​ ​ ​ Right of use assets - Operating Leases ​ $ 120 ​ $ 285 Total lease assets ​ $ 120 ​ $ 285 ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ Current liabilities: ​ ​ Lease liability, current - Operating Leases ​ $ 47 ​ $ 230 Noncurrent liabilities: ​ ​ ​ Lease liability, non-current - Operating Leases ​ 25 ​ 19 Total lease liabilities ​ $ 72 ​ $ 249 ​ ​ ​ ​ ​ ​ ​ ​ The Company had no right of use lease assets or lease liabilities classified financing leases as of December 31, 2024 and 2023. ​ The table below presents certain information related to the cash flows for the Company’s operating leases for the periods ended: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) 2024 2023 Operating cash outflows from operating leases ​ $ 281 ​ $ 266 Supplemental non-cash amounts of operating lease liabilities arising from obtaining right of use assets ​ $ 82 ​ $ 50 ​ ​ ​ ​ ​ ​ ​ ​ ​ 64 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2024 2023 Weighted average remaining lease term (in years) – operating leases ​ ​ 1.47 ​ ​ 1.31 Weighted average discount rate – operating leases ​ 10.31 % ​ 7.88 % ​ ​ ​ ​ ​ ​ ​ ​ Undiscounted operating lease liabilities as of December 31, 2024, by year and in the aggregate, having non-cancelable lease terms in excess of one year were as follows: ​ ​ ​ ​ ​ ​ ​ December 31, (in thousands) ​ 2024 2025 ​ $ 51 2026 ​ ​ 22 2027 ​ ​ 5 Total undiscounted lease payments ​ ​ 78 Less imputed interest ​ ​ ( 6 ) Total net lease liabilities ​ $ 72 ​ ​ ​ ​ ​ ​ 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 consolidated financial statements. ​ ​ ​ 8. STOCKHOLDERS’ EQUITY: Preferred Stock The board of directors has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences, and privileges could include dividend rights, conversion rights, voting rights, redemption rights, liquidation preferences, sinking fund terms, and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. Series A-1 Preferred Stock On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-1 Preferred Stock with a stated value of $ 1,000 per share (the “Series A-1 Certificate of Designation”). On January 29, 2024, the Company filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitation with the Secretary of the State of Delaware designating 11,100 shares of Series A-1 Preferred Stock, and on December 20, 2024, the Company filed a Second Amended and Restated Certificate of Designation of Preferences, Rights and Limitation with the Secretary of the State of 65 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ Delaware designating 11,100 shares of Series A-1 Preferred Stock. The following is a summary of the principal amended and restated terms of the Series A-1 Preferred Stock as set forth in the Second 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. ​ Voting Rights ​ The shares of Series A-1 Preferred Stock have no voting rights, except to the extent required by the Delaware General Corporation Law. ​ As long as any shares of Series A-1 Preferred Stock are outstanding, the Company may not, without the approval of a majority of the then outstanding shares of Series A-1 Preferred Stock which must include AIGH Investment Partners LP and its affiliates (“AIGH”) for so long as AIGH is holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement (a) alter or change the powers, preferences or rights given to the Series A-1 Preferred Stock, (b) alter or amend the Amended and Restated Certificate of Incorporation (the “Charter”), the Series A-1 Certificate of Designation or the 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) increase the number of authorized shares of Series A-1 Preferred Stock, (d) issue any Series A-1 Preferred Stock except pursuant to the Purchase Agreement, or (e) 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, pari passu with holders of the common stock, out of the assets available for distribution to stockholders of the Company an amount equal to the amount that would otherwise be payable to them if all of the shares of Series A-1 Preferred Stock had converted into shares of common stock immediately prior to such Liquidation. ​ Conversion The Series A-1 Preferred Stock is convertible into common stock at a conversion price of $ 4.34 . ​ Conversion at the Option of the Holder From and after the earlier of (i) the date on which the registration statement covering the resale or other disposition of the additional shares of common stock that are issuable as a result of the Second Amended and Restated Certificate of Designation of the Series A-1 Preferred Stock is declared effective by the SEC (the “Effective Date”) and (ii) the six-month anniversary of December 20, 2024, the Series A-1 Preferred Stock is convertible at the then-effective Series A-1 Conversion Price at the option of the holder at any time and from time to time. ​ Mandatory Conversion ​ All outstanding shares of Series A-1 Preferred Stock shall automatically be converted into shares of common stock upon the earlier of (i) the Effective Date and (ii) the date and time, or upon the occurrence of an event, specified by vote or written consent of the holders of a majority of the then outstanding 66 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ shares of the Series A-1 Preferred Stock 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 (a “Mandatory Conversion”). In the case of a Mandatory Conversion, the holders of Series A-1 Preferred Stock shall receive (i) shares of shares in an amount that would not cause such holder to exceed its Beneficial Ownership Limitation (as defined below) (after giving effect to the Mandatory Conversion of shares of Series A-1 Preferred Stock held by the other holders), and (ii) Class C Warrants exercisable for the remaining shares which the holder would otherwise be entitled to receive. 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. Trading Market There is no established trading market for any of the Series A-1 Preferred Stock, and we do not expect a market to develop. We do not intend to apply for a listing for any of the Series A-1 Preferred Stock on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series A-1 Preferred Stock will be limited. ​ Series A-2 Preferred Stock On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-2 Preferred Stock with a stated value of $ 1,000 per share (the “Series A-2 Certificate of Designation”). 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. ​ Series A-1 and A-2 Preferred Stock and Class A and Class B Warrant Issuances and related Amendments ​ 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 67 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ 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 issued related to a placement agent fee. The fair value of this fee is $ 31 thousand. ​ The Company 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 not 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. ​ The Company received net proceeds after expenses of $ 12.7 million. Of the net proceeds, the Company initially allocated an estimated fair value of $ 1.8 million to the derivative instrument liability related to the Warrants. The Company also expensed $ 0.2 million of issuance costs that were allocated to the warrant liability. ​ January 2024 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 remained outstanding after giving effect to the transactions contemplated by the Consent Agreement. ​ 68 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ 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 to (i) make certain adjustments to reflect the Company’s one -for-thirty-five (1:35) reverse stock split effected on September 21, 2023, (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 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. ​ December 2024 Consent and Amendment Agreement and Hewlett Release On December 17, 2024, the Company entered into a Consent and Amendment Agreement (the “December 2024 Consent and Amendment Agreement”) with certain holders of securities issued in the Company’s June 2023 PIPE pursuant to which, among other things, such holders agreed to (i) amend certain of the terms of the Purchase Agreement, dated June 14, 2023 and (ii) amend and restate certain of the provisions of the Company’s Series A-1 Preferred Stock effective immediately prior to the closing of the December 2024 Registered Direct Financing and Concurrent Private Placement discussed further below (the “Effective Time”). ​ In the December 2024 Consent and Amendment Agreement, the such holders agreed to further amend and restate the Amended and Restated Series A-1 Certificate of Designation to, among other things: (i) remove the obligation of the Company to pay dividends on shares of the Series A-1 Preferred Stock in certain circumstances; (ii) remove the provisions of the Amended and Restated Series A-1 Certificate of Designation that required the Company to obtain the consent of the holders of a majority of the outstanding shares of Series A-1 Preferred Stock to take certain actions, such as the incurrence of certain indebtedness, the granting of liens and the purchase or redemption of outstanding equity securities; (iii) remove the liquidation preference applicable to the Series A-1 Preferred Stock; (iv) reduce the conversion price of the Series A-1 Preferred Stock to $ 4.34 ; (v) prevent the conversion of the Series A-1 Preferred Stock for a period ending on the earlier of (A) the effective date of a resale registration statement covering the additional shares of common stock issuable upon the conversion of the Series A-1 Preferred Stock as a result of the reduction in the conversion price and (B) the six-month anniversary of the Effective Time; (vi) provide for the automatic conversion of the Series A-1 Preferred Stock into either shares of common stock or the Company’s Class C Warrants at the conversion price upon the earlier of (A) the Effective Date or (B) as determined by the written consent of the holders of at least a majority of the outstanding shares of Series A-1 Preferred Stock which must include AIGH for so long as AIGH holds at least $ 1,500,000 in aggregate Stated Value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement; and (vii) remove certain price protection provisions which had expired pursuant to their terms. ​ The Company also entered into a General Release with the Hewlett Fund LP pursuant to which the Hewlett Fund LP agreed on its own behalf and on behalf of certain of its related parties to release the Company and certain of its related parties from any claims, including claims arising out of the transactions contemplated by the Purchase Agreement, effective as of the Effective Time, in exchange for Class C Warrants to purchase 750,000 shares of common stock. ​ 69 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ The Company credited additional paid in capital $ 2.0 million for deemed dividends as a result of (i) 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 and (ii) the issuance of Class C Warrants to purchase 750,000 shares of common stock. The Company estimated the fair value immediately prior 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 December 31, 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 amended and restated certificate of incorporation and the Company’s amended and restated 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, shall constitute a quorum for the transaction of business at all meetings of the stockholders. Dividends The Company has never paid any cash dividends to shareholders and does not anticipate paying any cash dividends to shareholders in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant. Market Information ​ The Company’s common stock has been trading on the Nasdaq Stock Market LLC under the symbol “SMTK” since May 31, 2024. ​ December 2024 Registered Direct Financing and Concurrent Private Placement ​ On December 18, 2024, the Company entered into a securities purchase agreement with certain institutional investors pursuant to which the Company agreed to issue and sell: (i) in a registered direct public offering 1,449,997 shares of common stock; and (ii) in a concurrent private placement Class D Common Stock Purchase Warrants (the “Class D Warrants”) to purchase up to 1,449,997 shares of common stock. The purchase price for each share of common stock sold in the Public Offering was $ 3.00 . ​ Concurrently, the Company entered into a securities purchase agreement with certain institutional investors pursuant to which the Company agreed to issue and sell in a private placement: (i) 169,784 shares of common stock; (ii) Pre-funded Warrants to purchase up to 930,215 shares of common stock; and (iii) Class D Warrants to purchase up to 1,099,999 shares of common stock. The purchase price for each share of common stock sold in the Private Placement was $ 3.00 . The purchase price for each Pre-funded Warrant sold in the Private Placement was $ 2.9999 . ​ 70 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ Pre-funded Warrants ​ The Pre-funded Warrants may be exercised at any time until all of the Pre-funded Warrants are exercised in full. Each Pre-funded Warrant is exercisable for one share of common stock at an exercise price of $ 0.0001 per share of common stock. ​ Class D Warrants ​ The Class D Warrants have an exercise price of $ 3.00 per share of common stock. The Class D Warrants were exercisable upon issuance and will expire on December 31, 2025. If at the time of exercise more than six months after the issuance date there is no effective registration statement registering, or the prospectus contained therein is not available for the resale or other disposition of the shares of common stock underlying the Class D Warrants, then the Class D Warrants may be exercised, in whole or in part, at such time by means of a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the Class D Warrant. ​ The Company issued an additional 127,499 warrants to the placement agent. ​ The Company received gross proceeds of $ 7.7 million, before deducting offering expenses payable by the Company. ​ Common Stock Issued to Vendors for Services On March 7, 2024, the Company issued 50,000 shares of common stock, as payment for consulting services. On May 2, 2024, the Company issued 50,000 shares of common stock, as payment for consulting services. On September 10, 2024, the Company issued 30,000 shares of common stock, as payment for consulting services. ​ 71 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ 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 2,677,495 ​ ​ ​ ​ ​ 3.00 Exercised ( 48,720 ) ​ ​ ​ ​ 0.35 Expired — ​ ​ ​ ​ — Warrants outstanding at December 31, 2024 5,171,430 ​ ​ $ 0.35 - $ 70.00 ​ $ 4.94 2.26 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 2,406,559 ​ 0.0001 ​ Exercised ( 149,644 ) ​ 0.0460 ​ Expired — ​ ​ ​ Pre-funded warrants outstanding at December 31, 2024 2,318,502 ​ $ 0.0064 ​ ​ ​ ​ ​ ​ ​ ​ ​ The Company’s pre-funded warrants have no expiration date and may be exercised at any time until all of the pre-funded warrants are exercised in full . ​ August 2024 Shelf Registration Statement ​ On August 18, 2024, the Company filed a universal shelf registration statement on Form S-3 (the “August 2024 Shelf Registration Statement”) with the SEC, pursuant to which the Company may offer, issue and sell any combination of shares of the Company’s common stock, shares of the Company’s preferred stock, debt securities, subscription rights, warrants, and units consisting of any combination of the other types of securities registered under such August 2024 Shelf Registration Statement in an aggregate amount of up to $ 100 million, in each case, to the public in one or more registered offerings. The August 2024 Shelf Registration Statement was declared effective on August 22, 2024. ​ ​ ​ 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 issuance under the 2021 72 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ Plan from 125,045 shares to 743,106 shares. The Company’s Board of Directors (the “Board”) had previously approved the 2021 Plan Amendment, subject to stockholder approval. Determining the appropriate fair value of share-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for share options, the expected life of the option, and expected share price volatility. The Company uses the Black-Scholes option pricing model to value its share option awards. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and 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. ​ ​ ​ ​ ​ ​ ​ ​ For Year Ended ​ ​ ​ December 31, 2024 Expected term (years) ​ ​ 5.73 Risk-free interest rate ​ ​ 4.21 % Expected volatility ​ ​ 50 % Expected dividend yield ​ ​ 0 % ​ ​ ​ ​ ​ The Company estimates its expected volatility by using a combination of historical share price volatilities of similar companies within our industry. The risk-free interest rate assumption is based on observed interest rates for the appropriate term of the Company’s options on a grant date. The contractual term is 10 years , and the expected option term is lower. The following table reflects share activity under the share option plans for the year ended December 31, 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 ​ ​ Granted 568,000 6.50 ​ ​ Exercised ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ Cancelled/Forfeited ( 18,501 ) 70.00 ​ ​ Expired — — ​ ​ Options outstanding at December 31, 2024 619,910 $ 12.31 9.06 $ 3.54 ​ ​ Options exercisable at December 31, 2024 ​ 279,809 ​ $ 17.65 ​ 8.49 ​ ​ ​ ​ $ 19.99 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of our common stock at the end of the year for those options that had exercise prices lower than the fair value of our common stock. Stock-based compensation, including stock options is included in the consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) ​ 2024 2023 Research and development ​ $ 268 ​ $ 254 General and administration ​ 582 ​ 463 Total ​ $ 850 ​ $ 717 ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, 2024, there was $ 1.7 million of compensation cost related to non-vested stock option awards not yet recognized that will be recognized on a straight-line basis through the end of the vesting periods in June 2027. The 73 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures. 10. INCOME TAXES: United States and foreign profit/(loss) from operations before income taxes was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ 2024 2023 United States ​ ​ ( 1,294 ) ​ ​ ( 2,299 ) Foreign ​ ​ ( 9,035 ) ​ ​ ( 6,200 ) Loss before income taxes ​ $ ( 10,329 ) ​ $ ( 8,499 ) ​ ​ ​ ​ ​ ​ ​ ​ A reconciliation of the statutory income tax rate to the Company’s effective tax rate consists of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, ​ 2024 ​ 2023 Taxes at domestic rate ​ 21.0 % ​ 21.0 % State and local income taxes ​ - % ​ ( 1.4 ) % Non-US statutory rates ​ 3.5 % ​ 1.8 % Permanent items ​ ( 2.4 ) % ​ ( 1.6 ) % Nondeductible Research Expense ​ ( 6.1 ) % ​ ( 7.4 ) % Change in valuation allowance ​ ( 17.2 ) % ​ ( 16.9 ) % Warrant revaluation ​ 1.4 % ​ 1.1 % Prior year true-up ​ ( 0.2 ) % ​ 3.4 % Effective tax rate ​ — % ​ — % ​ The components of income tax provision/(benefit) are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ 2024 2023 Current ​ ​ Federal ​ $  — ​ $ — State ​ ​ 1 ​ ​ — Foreign ​ ​ — ​ ​ — Total Current ​ $ 1 ​ $ — ​ ​ ​ ​ ​ ​ ​ Deferred ​ ​ ​ ​ ​ ​ Federal ​ ​ — ​ ​ — State ​ ​ — ​ ​ — Foreign ​ — ​ ​ — Total Deferred ​ ​ — ​ ​ — Total ​ $ 1 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ 74 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ ​ Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The temporary differences that give rise to deferred tax assets and liabilities are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ 2024 2023 Deferred tax assets/(liabilities): ​ ​ ​ Net operating loss carryforwards ​ $ 12,356 ​ $ 10,874 Stock Compensation ​ 263 ​ 207 Property plant and equipment ​ ( 67 ) ​ ( 114 ) Other ​ 79 ​ 45 ​ ​ 12,631 ​ 11,012 Valuation allowance ​ ( 12,631 ) ​ ( 11,012 ) Deferred tax assets, net of allowance ​ $ — ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ The Company recorded a full valuation allowance against its net deferred tax assets as of December 31, 2024, and 2023. The Company considered the positive and negative evidence bearing upon its ability to realize the deferred tax assets. In addition to the Company’s history of cumulative losses, the Company cannot be certain that future taxable income will be sufficient to realize its deferred tax assets. Accordingly, a full valuation allowance has been provided against its net deferred tax assets. When the Company changes its determination as to the amount of its deferred tax assets that can be realized, the valuation allowance is adjusted with a corresponding impact to the provision for income taxes in the period in which such determination is made. As of December 31, 2024, and 2023, the Company had United Kingdom net operating loss carry-forwards of approximately $ 43.3 million and $ 38.4 million, respectively. The United Kingdom net operating loss carry-forwards were generated in the tax years from 2009 to 2024 with an unlimited carry-forward period. As of December 31, 2024, and 2023, the Company had United States federal net operating loss carry-forwards of approximately $ 6.4 million and $ 5.4 million, respectively. The United States federal net operating loss carry-forwards were generated in the tax years from 2020 to 2024 with an unlimited carry-forward period. As of December 31, 2024, and 2023, the Company had U.S. state net operating loss carry-forwards of approximately $ 1.8 million and $ 1.8 million, respectively. The U.S. state net operating loss carry-forwards were generated in the tax years from 2021 to 2022 expiring at various dates through 2042. The Company has no uncertain tax positions, or penalties and interest accrued, that if recognized would reduce net operating loss carry-forwards or affect tax expense. The Company files tax returns as prescribed by the tax laws in the Unites States and United Kingdom in which they operate. In the normal course of business, the Company is subject to examination by the federal jurisdiction based on the statute of limitations. As of December 31, 2024, open years related to the United States and United Kingdom are 2021 to 2023. The Company has no open tax audits with any taxing authority as of December 31, 2024. As of December 31, 2024 and December 31, 2023, the Company had no accrued interest and penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations. ​ 75 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ 11. DEFINED CONTRIBUTION PENSION: The Company operates a defined contribution pension scheme. 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 consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (in thousands) 2024 2023 Research and development ​ $ 83 ​ $ 90 General and administration ​ 71 ​ 65 Total ​ $ 154 ​ $ 155 ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, 2024, there was $ 16 thousand owed to the pension scheme that is recorded under accounts payable and accrued expenses on the consolidated balances sheets. As of December 31, 2023, there was $ 5 thousand owed to the pension scheme. ​ 12. FAIR VALUE MEASUREMENTS: The table below presents activity within Level 3 of the fair value hierarchy, our liabilities carried at fair value for the year ended December 31, 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 December 31, 2024 ​ $ — ​ ​ ​ ​ ​ As disclosed in Note 8 of the Company’s consolidated financial statements, the Company allocated part of the proceeds of private placement of the Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock to warrant liability issued in connection with the transaction. The valuations of the warrants were determined using option pricing models. These models use inputs such as the underlying price of the shares issued at the measurement date, expected volatility, risk free interest rate and expected life of the instrument. Since our common stock was not publicly traded until February 2022 there has been insufficient volatility data available. Accordingly, we 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 stock warrants at May 30, 2024 and December 31, 2023 was determined by using option pricing models assuming the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ May 30 ​ 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 % ​ ​ ​ ​ ​ ​ ​ ​ 76 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ Additionally, the Company had determined that the warrant liability should be classified within Level 3 of the fair-value hierarchy by evaluating each input for the option pricing models against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820. There are six inputs: closing price of SmartKem stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of the Company’s stock over that term; annual rate of dividends; and the risk-free rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrant agreements. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of SmartKem stock would fall under Level 1 of the fair-value hierarchy as it is a quoted price in an active market (ASC 820-10). The risk-free rate of return is a Level 2 input as defined in ASC 820-10, while the historical volatility is a Level 3 input as defined in ASC 820. Since the lowest level input is a Level 3, the Company determined the warrant liability is most appropriately classified within Level 3 of the fair value hierarchy. ​ There were no assets or liabilities measured at fair value as of December 31, 2024. 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 13. RELATED PARTY TRANSACTIONS: The were no related party transaction during the year ended December 31, 2024. 14. SEGMENT REPORTING: We manage our business activities on a consolidated basis and operate as a single operating segment: Semiconductor materials. Our revenue is mostly generated from R&D grants and R&D tax credits. The accounting policies of the semiconductor materials are the same as those described in Note 2 – Summary of Significant Accounting Policies. Our CODM is our Chief Executive Officer and President, Ian Jenks. The CODM uses Net income, as reported on our Consolidated Statements of Comprehensive Income, in evaluating performance of the Semiconductor materials segment and determining how to allocate resources of the Company as a whole and making decisions on perspective joint development and collaboration agreements. The CODM does not review assets in evaluating the results of the Semiconductor materials segment, and therefore, such information is not presented. ​ 77 Table of Contents SMARTKEM, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ​ The following table provides the net losses of the Semiconductor materials segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2024 2023 Revenue ​ $ 82 ​ $ 27 Cost of revenue ​ ​ 32 ​ ​ 23 Gross profit ​ ​ 50 ​ ​ 4 Other operating income ​ ​ 1,017 ​ ​ 836 Operating expenses ​ ​ ​ ​ ​ ​ Research and development ​ ​ 5,111 ​ ​ 5,556 General and administrative ​ ​ 6,342 ​ ​ 5,188 (Gain)/loss on foreign currency transactions ​ ​ 78 ​ ​ 87 Total operating expenses ​ ​ 11,531 ​ ​ 10,831 Loss from operations ​ ​ ( 10,464 ) ​ ​ ( 9,991 ) Total non-operating income/(expense) ​ ​ 135 ​ ​ 1,492 Loss before income taxes ​ ​ ( 10,329 ) ​ ​ ( 8,499 ) Income tax expense ​ ​ ( 1 ) ​ ​ - Net loss ​ $ ( 10,330 ) ​ $ ( 8,499 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ 15. SUBSEQUENT EVENTS: 2021 Plan Under the evergreen adjustment provisions of the 2021 Plan, on January 1, 2025, the number of shares of the Company’s common stock available for issuance under the 2021 Plan was increased by 65,000 . After giving effect to the increase, the total number of shares of common stock that may be issued under the 2021 Plan is 843,692 . Consultant Shares On January 1, 2025, 10,000 shares of our common stock were issued to a vendor in consideration for services to be provided. ​ On February 3, 2025, 10,000 shares of our common stock were issued to a vendor in consideration for services to be provided. ​ On March 3, 2025, 10,000 shares of our common stock were issued to a vendor in consideration for services to be provided. ​ New CPIIS Framework Agreement On March 28, 2025 we executed a two-month extension of the Framework Agreement with CPIIS commencing on April 1, 2025. New CPIIS License of Office Space Agreement On March 28, 2025, we executed a twelve-month agreement for the lease of office space at CPIIS commencing on April 1, 2025. ​ ​ ​ ​ 78 Table of Contents ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure ​ None. ​