What changed in this filing

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Item 1. Financial Statements

2025-05-13 compared with 2024-11-08 · 150 added, 321 removed, 266 unchanged (64% of the section changed)

3 unchanged sentences

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

September 30,

Current assets

Cash and cash equivalents

Accounts receivable

Research and development tax credit receivable

11 unchanged sentences

Lease liabilities, non-current

Warrant liability

Total liabilities

1 unchanged sentence

Stockholders’ equity:

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 856 and 13,765 shares issued and outstanding , at September 30, 2024 and December 31, 2023, respectively

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 1,780,472 and 889,668 shares issued and outstanding , at September 30, 2024 and December 31, 2023, respectively

Preferred stock, par value $ 0.0001 per share, 10,000,000 shares authorized, 856 shares issued and outstanding , at March 31, 2025 and December 31, 2024, respectively

Common stock, par value $ 0.0001 per share, 300,000,000 shares authorized, 3,620,217 and 3,590,217 shares issued and outstanding, at March 31, 2025 and December 31, 2024, respectively

Additional paid-in capital

7 unchanged sentences

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of revenue

2 unchanged sentences

Research and development

Selling, general and administrative

General and administrative

(Gain)/loss on foreign currency transactions

3 unchanged sentences

Gain/(loss) on foreign currency transactions

Transaction costs allocable to warrants

Change in fair value of the warrant liability

2 unchanged sentences

Loss before income taxes

Income tax expense

Income tax refund

Preferred stock deemed dividends

Net loss attributed to common stockholders

Weighted average shares outstanding - basic and diluted

Basic and diluted net loss per common share attributed to common stockholders

Other comprehensive loss:

1 unchanged sentence

Total comprehensive loss

Common share data:

Basic net loss per common share*

Diluted net loss per common share*

Dividend per common share

Weighted average number of basic shares outstanding*

Weighted average number of diluted shares outstanding*

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

35 ) reverse stock split effected on September 21, 2023

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

11 unchanged sentences

Stock-based compensation expense

Issuance of stock awards

Issuance of common stock to vendor

Conversion of Preferred stock into common stock

Exchange of Preferred stock into common stock warrants

Deemed dividend on extinguishment of Preferred stock

Cashless exercise of warrants into common stock

Foreign currency translation adjustment

Balance at March 31, 2025

Stock-based compensation expense

Issuance of common stock to vendor

Conversion of Preferred stock into common stock

Exercise of warrants into common stock

Fair value of warrants reclassified from liability to equity

Foreign currency translation adjustment

Balance at June 30, 2024

Stock-based compensation expense

Issuance of common stock to vendor

Conversion of Preferred stock into common stock

Foreign currency translation adjustment

Balance at September 30, 2024

SMARTKEM, INC.

Condensed Consolidated Statements of Stockholders’ Equity (continued)

(in thousands, except share data)

Preferred Stock

7 unchanged sentences

Stock-based compensation expense

Issuance of stock awards

Issuance of common stock to vendor

Foreign currency translation adjustment

Balance at March 31, 2023

Stock-based compensation expense

Issuance of preferred stock, net of issuance costs

Foreign currency translation adjustment

Balance at June 30, 2023

Stock-based compensation expense

Conversion of Preferred stock into common stock

Exercise of warrants into common stock

Exchange of Preferred stock into common stock warrants

Deemed dividend on extinguishment of Preferred stock

Cashless exercise of warrants into common stock

Foreign currency translation adjustment

Balance at September 30, 2023

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

35 ) reverse stock split effected on September 21, 2023

Balance at March 31, 2024

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

2 unchanged sentences

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flow from operating activities:

3 unchanged sentences

Right-of-use asset amortization

Loss on foreign currency transactions

Transaction costs allocable to warrants

Gain/(loss) on foreign currency transactions

Change in fair value of the warrant liability

2 unchanged sentences

Research and development tax credit receivable

Prepaid expenses and other current assets

Other non-current assets

Prepaid expenses and other assets

Accounts payable and accrued expenses

Lease liabilities

Income tax payable

Other current liabilities

Net cash used in operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Net cash used by investing activities

Cash flow from financing activities:

Proceeds from the issuance of preferred stock in private placement

Proceeds from the issuance of warrants in private placement

Payment of issuance costs

Proceeds from the exercise of warrants

Net cash provided by financing activities

Effect of exchange rate changes on cash

4 unchanged sentences

Issuance of common shares for consulting services

Initial classification of fair value of warrants

Right-of-use asset and lease liability additions

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

ORGANIZATION, BUSINESS, GOING CONCERN AND BASIS OF PRESENTATION

Notes to the Unaudited Condensed Consolidated Financial Statements

SmartKem, Inc.

(the “Company”) formerly known as Parasol Investments Corporation (“Parasol”), was formed on May 13, 2020, and is the successor of SmartKem Limited, which was formed under the Laws of England and Wales.

The Company was founded as a “shell” company registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with no specific business plan or purpose until it began operating the business of SmartKem Limited following the closing of the transactions contemplated by the Securities Exchange Agreement (the “Exchange Agreement”), dated February 21, 2021, with SmartKem Limited.

Pursuant to the Exchange Agreement all of the equity interests in SmartKem Limited, except certain deferred shares which had no economic or voting rights and which were purchased by Parasol for an aggregate purchase price of $ 1.40 , were exchanged for shares of Parasol common stock and SmartKem Limited became a wholly owned subsidiary of Parasol (the “Exchange”).

The Company is seeking to reshape the world of electronics with its disruptive organic thin-film transistors (“OTFTs”) that have the potential to revolutionize the display industry.

The Company’s patented TRUFLEX® liquid semiconductor polymers are used to make a new type of transistor that can be used in a number of display technologies including next generation microLED displays.

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

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

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

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

(“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.

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 .

We design and develop our materials at our research and development facility in Manchester, UK and provide prototyping services at the Centre for Process Innovation (“CPI”) in Sedgefield, UK.

We also operate a field application office in Hsinchu, Taiwan, close to our collaboration partner, The Industrial Technology Research Institute of Taiwan (“ITRI”).

With our collaboration partners, we are developing a commercial-scale production process and EDA tools for our materials to demonstrate the commercial viability of manufacturing a new generation of displays using our materials.

We have an extensive IP portfolio including 138 granted patents across 17 patent families, 16 pending patents and 40 codified trade secrets .

Risk and Uncertainties

1 unchanged sentence

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

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

If the Company lost access to this fabrication facility, it would materially and adversely affect the Company’s ability to manufacture prototypes and demonstrate products for potential customers.

The loss of this access could significantly impede the Company’s ability to engage in product development and process improvement activities.

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

The Company entered into a framework services agreement with CPI Innovation Services Limited (“CPIIS”), the commercial trading company for CPI, pursuant to which the Company purchases services consisting primarily of access to CPI process equipment required for fabrication as well as access to CPI staff with specific skills, to the extent required, at specified costs, including a minimum annual spending requirement.

The Company’s agreement with CPIIS expired on March 31, 2025, but has been extended as described below.

CPIIS is in the process of reviewing the operation of the clean room facility used by the Company and is seeking to reduce the facility’s operating costs by, among other things, consolidating its clean rooms and seeking to pass more of its operating costs to users including the Company.

On March 28, 2025, the Company entered into an agreement with CPIIS pursuant to which the term of the current CPIIS agreement was extended until May 31, 2025.

The Company intends to use the extension period to complete negotiations with CPIIS regarding a

SMARTKEM, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

longer-term agreement.

Under the terms of the extension, the Company has agreed to an increase in its share of the costs of the CPI facility and to increased minimum usage obligations during the extension period.

The Company expects that any longer-term agreement with CPIIS will require the Company to bear additional costs.

If the Company is unable to reach a new agreement with CPIIS on terms that are satisfactory to the Company, the Company intends to find an alternative facility.

The Company believes that there are adequate alternative sites available at which it could conduct its prototyping operations.

In the event that the Company decides to move its prototyping operation to an alternative facility, the Company believes that the move would take between two and nine months, depending on equipment availability and any required facility modifications, during which time the Company would incur additional costs to prepare the new facility and install any necessary equipment.

In such event, the Company intends to schedule its prototyping activities to minimize any disruption to those operations and would use ITRI’s prototyping line as an interim facility for such work.

If the Company is unable to obtain access to another prototyping facility on similar terms to its arrangements with CPI, the Company would be materially and adversely affected.

The Company has approximately 11 employees located at CPI.

Even if the Company is able to locate a suitable replacement facility on acceptable terms, there is no assurance that the key employees at CPI would accept positions at a new facility, particularly if it is located remotely from the CPI facility.

Even if the Company locates a suitable replacement facility, it is possible that the Company’s ability to engage in product development, prototyping of demonstration products and process improvement activities may be significantly delayed as a result of the relocation of those functions.

Going Concern

The Company has incurred continuing losses including net losses of $ 7.6 million for the nine months ended September 30, 2024.

The Company’s cash as of September 30, 2024 was $ 1.8 million with net cash used in operating activities of $ 7.0 million for the nine months ended September 30, 2024.

The Company has incurred continuing losses including net losses of $ 2.1 million for the three months ended March 31, 2025.

The Company’s cash as of March 31, 2025 was $ 3.9 million with net cash used in operating activities of $ 3.3 million for the three months ended March 31, 2025.

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

The Company expects that its cash and cash equivalents of $ 1.8 million as of September 30, 2024, will not be sufficient to fund its operating expenses and capital expenditure requirements for the 12 months from the issuance of these financial statements and that the Company will require additional capital funding to continue

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

its operations and research development activity thereafter.

The Company expects that its cash and cash equivalents of $ 3.9 million as of March 31, 2025 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.

9 unchanged sentences

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

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

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

The condensed consolidated financial statements as of March 31, 2025 have been prepared assuming that the Company will continue as a going concern.

SMARTKEM, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

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

Basis of Presentation

The unaudited interim condensed consolidated financial statements of the Company as of September 30, 2024 and December 31, 2023 and for the three and nine months ended September 30, 2024 and 2023 should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024 and may also be found on the Company’s website (www.smartkem.com).

The unaudited interim condensed consolidated financial statements of the Company as of March 31, 2025 and December 31, 2024 and for the three months ended March 31, 2025 and 2024 should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2025 and may also be found on the Company’s website (www.smartkem.com).

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

3 unchanged sentences

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

These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended September 30, 2024 and 2023;

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Reverse Stock Split

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

7 unchanged sentences

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

SMARTKEM, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

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.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No.

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

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.

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

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

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

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

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

September 30,

(in thousands)

Prepaid insurance

Deferred research & development costs

Research grant receivable

2 unchanged sentences

Prepaid software licenses

Prepaid professional service fees

Other receivable and other prepaid expenses

2 unchanged sentences

Property, plant and equipment consist of the following:

September 30,

(in thousands)

4 unchanged sentences

Property, plant and equipment, net

Depreciation expense was $ 194.4 thousand and $ 121.7 thousand for the nine months ended September 30, 2024 and 2023, respectively and is classified as research and development expense.

Depreciation expense was $ 56.1 thousand and $ 63.2 thousand for the three months ended March 31, 2025 and 2024, respectively and is classified as research and development expense.

SMARTKEM, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

September 30,

(in thousands)

1 unchanged sentence

Payroll liabilities

Accrued expenses – legal fees

Accrued expenses – audit & accounting fees

Accrued expenses – technical fees

Accrued expenses – other

2 unchanged sentences

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

1 unchanged sentence

Short-term lease cost

Variable lease cost

Total lease cost

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

Research and development

Selling, general and administrative

General and administrative

Total lease cost

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

September 30,

(in thousands)

6 unchanged sentences

Total lease liabilities

The Company had no right of use lease assets and lease liabilities for financing leases as of September 30, 2024 and December 31, 2023.

SMARTKEM, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

The Company had no right of use lease assets or lease liabilities classified as financing leases as of March 31, 2025 and December 31, 2024.

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

September 30,

(in thousands)

Operating cash outflows from operating leases

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

The table below presents certain information related to the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases as of the period ended:

September 30,

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

Weighted average discount rate – operating leases

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

September 30,

(in thousands)

7 unchanged sentences

STOCKHOLDERS’ EQUITY

Reverse Stock Split

At the Company’s Annual Meeting of Stockholders held on August 25, 2023 (the “2023 Annual Meeting”), the Company’s stockholders approved a proposal to approve and adopt an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of its shares of common stock, issued and outstanding or reserved for issuance, at a specific ratio within a range from 1-for- 30 to 1-for- 60 , inclusive, prior to the first anniversary of stockholder approval of the proposal, and to grant authorization to the Board of Directors to determine, in its sole discretion, whether to effect the reverse stock split, as well as its specific timing and ratio.

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

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

The Charter Amendment did not change the par value or any other terms of the common stock.

Preferred Stock

2 unchanged sentences

Series A-1 Preferred Stock

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

Notes to the Unaudited Condensed Consolidated Financial Statements

(the “Series A-1 Certificate of Designation”).

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

The holders of Series A-1 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of common stock, when and if actually paid.

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

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

Voting Rights

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

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

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

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

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

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.

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.

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

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.

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 shares of the Series A-1 Preferred Stock which must include AIGH for so long as

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Mandatory Conversion at the Option of the Company

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

Notes to the Unaudited Condensed Consolidated Financial Statements

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

4 unchanged sentences

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

Negative Covenants

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

Trading Market

2 unchanged sentences

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

(the “Series A-2 Certificate of Designation”).

The following is a summary of the principal terms of the Series A-2 Preferred Stock as set forth in the Series A-2 Certificate of Designation:

The holders of Series A-2 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of common stock, when and if actually paid.

Voting Rights

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

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

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

The Series A-2 Preferred Stock is convertible into common stock at any time at a conversion price of $ 8.75 , subject to adjustment for certain anti-dilution provisions set forth in the Series A-2 Certificate of Designation (the “Series A-2 Conversion Price”).

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

Conversion at the Option of the Holder

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

Automatic Conversion

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

Beneficial Ownership Limitation

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

of 9.99 % upon notice to us, provided that any increase in this limitation will not be effective until 61 days after such notice from the holder to us and such increase or decrease will apply only to the holder providing such notice.

Preemptive Rights

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

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

Trading Market

There is no established trading market for any of the Series A-2 Preferred Stock, and the Company does not expect a market to develop.

The Company does not intend to apply for a listing for any of the Series A-2 Preferred Stock on any securities exchange or other nationally recognized trading system.

Without an active trading market, the liquidity of the Series A-2 Preferred Stock will be limited.

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

On June 14, 2023, the Company and certain investors entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold an aggregate of (i) 9,229 shares of Series A-1 Convertible Preferred Stock at a price of $ 1,000 per share (the “Series A-1 Preferred Stock”), (ii) 2,950 shares of the Company’s Series A-2 Convertible Preferred Stock at a price of $ 1,000 per share (“Series A-2 Preferred Stock” and together with the Series A-1 Preferred Stock, the “Preferred Stock”), (iii) Class A Warrants to purchase up to an aggregate of 1,391,927 shares of common stock (the “Class A Warrant”), and (iv) Class B Warrants to purchase up to an aggregate of 798,396 shares of common stock (the “Class B Warrant” and together with the Class A Warrant, the “Warrants”) for aggregate gross proceeds of $ 12.2 million (the “June 2023 PIPE”).

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

The fair value of the service provided was $ 59 thousand.

On June 22, 2023, in a second closing of the June 2023 PIPE, the Company sold an aggregate of (i) 1,870.36596 Series A-1 Preferred Stock, (ii) 100 shares of Series A-2 Preferred Stock, and (iii) Class A Warrants to purchase up to an aggregate of 225,190 shares of common stock pursuant to the Purchase Agreement for aggregate gross proceeds of $ 2.0 million.

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

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

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

The Warrants expire five years from the issuance date.

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

The fair value of this fee is $ 31 thousand.

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

The Company classified the Warrants as a liability because they could be considered indexed to the Company’s stock due to provisions that, in certain circumstances, adjust the number of shares to be issued if the exercise price is adjusted and the existence of a pre-specified volatility input to the Black-Scholes calculation which could be used to calculate consideration in the event of a Fundamental Transaction, as defined in the agreements.

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

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

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

The Company also expensed $ 0.2 million of issuance costs that were allocated to the warranty liability during the three and six months ended June 30, 2023.

The terms of the June 2023 PIPE include a number of restrictions on our operations and on our ability to raise additional capital.

The Purchase Agreement, among other things, provides that, for a period ending on June 14, 2024, we may not use cash from operating activities (as defined under GAAP) of more than an average of $ 2.8 million for any consecutive three-month period (subject to certain exceptions).

This provision may cause us to delay certain actions that may benefit our business and may prevent us from pursuing potentially favorable business opportunities, even if a majority of our board of directors believes such actions or opportunities are in the best interest of our company and our stockholders.

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

This provision may make it more difficult for us to raise additional capital because other investors may want to provide all, or a larger portion of the capital provided in the subsequent financing or may be unwilling to co-invest with one or more of the significant purchasers or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers.

In addition, during such period, the Company may not issue common stock or common stock equivalents in a subsequent financing with an effective price per share of common stock that is or may become lower than the then-effective conversion price of the Series A-1 Preferred Stock without the consent of the significant purchasers, which must include AIGH and its affiliates for so long as they are holding at least $ 1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement.

This provision may prevent the Company from obtaining additional capital on market terms even if a majority of the Company’s board of directors believes that the terms of the subsequent financing are in the best interests of the Company and its stockholders.

This provision may also have the effect of increasing the cost of obtaining additional capital either because the significant purchasers refuse to consent to any such subsequent financing unless provided by them on terms approved by them or because the Company is required to provide additional consideration to such significant purchasers in exchange for their consent.

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

This provision may make it more expensive to obtain additional capital prior to an uplisting because it permits any significant purchaser to “cherry pick” the terms of the subsequent financing and to require any term deemed to be more favorable to be included retroactively in the terms of the June 2023 PIPE.

This provision also potentially creates uncertainty around the terms of a subsequent financing because the significant purchasers have the right to review terms of a completed subsequent financing before deciding which, if any, of the terms thereof they find more favorable to them.

The Purchase Agreement provides that, until June 14, 2025, a significant purchaser may participate in a subsequent transaction by exchanging some or all of its Series A-1 Preferred Stock having a stated value equal to its subscription amount in the subsequent financing.

This provision may adversely affect the amount of capital the Company raises in a subsequent financing, as it permits a significant purchaser to roll its existing investment into the new financing rather than being required to invest cash.

This provision also has the potential to make it more difficult for the Company to raise additional capital as other investors may want to provide all or a larger portion of the capital provided in the subsequent financing or may require the Company to raise a minimum amount of new capital or may be unwilling to commit to provide financing without knowing how much of the subsequent financing will be provided by the significant purchasers in cash.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

If the Company is unable to raise additional capital when needed, the Company may be required to delay, limit, reduce or terminate commercialization, its research and product development, or grant rights to develop and market its products that the Company would otherwise prefer to develop and market itself and may have a material adverse effect on the Company’s business, financial condition and results of operations.

Consent, Conversion and Amendment Agreement

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

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

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

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

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

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

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

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

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

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

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

As of September 30, 2024, there were an aggregate of 856 shares of Series A-1 Preferred Stock outstanding.

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

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

As of March 31, 2025, there were an aggregate of 856 shares of Series A-1 Preferred Stock outstanding.

Voting Rights

1 unchanged sentence

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

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

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

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

1 unchanged sentence

Common Stock Issued to Vendors for Services

On September 10, 2024, the Company issued 30,000 shares of common stock, as payment for consulting services.

During the three months ended March 31, 2025, 30,000 shares of our common stock were issued to a vendor in consideration for services to be provided.

SMARTKEM, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

Common Stock Warrants

3 unchanged sentences

$ 0.35 - $ 70.00

Warrants outstanding at September 30, 2024

Warrants outstanding at March 31, 2025

$ 0.35 - $ 70.00

1 unchanged sentence

Pre-funded warrants outstanding at January 1, 2025

Pre-funded warrants outstanding at September 30, 2024

Pre-funded warrants outstanding at March 31, 2025

SHARE-BASED COMPENSATION

4 unchanged sentences

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

At the 2023 Annual Meeting, the Company’s stockholders approved an amendment (the “2021 Plan Amendment”) to the Company’s 2021 Plan, increasing the number of the shares of common stock reserved for

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

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

3 unchanged sentences

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

The Company did not issue any options during the three months ended September 30, 2024.

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

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

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

The Company did not issue any options during the three months ended March 31, 2025.

SMARTKEM, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

The following table reflects share activity under the share option plans for the three months ended March 31, 2025:

Fair Value at

2 unchanged sentences

Cancelled/Forfeited

Options outstanding at September 30, 2024

Options exercisable at September 30, 2024

Options outstanding at March 31, 2025

Options exercisable at March 31, 2025

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

Research and development

Selling, general and administration

Total compensation cost related to non-vested stock option awards not yet recognized as of September 30, 2024 was $ 2.0 million and will be recognized on a straight-line basis through the end of the vesting periods in June 2027.

General and administration

Total compensation cost related to non-vested stock option awards not yet recognized as of March 31, 2025 was $ 1.5 million and will be recognized on a straight-line basis through the end of the vesting periods in June 2027.

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

NET LOSS PER COMMON SHARE

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.

2 unchanged sentences

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

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands, except share data)

Net loss - basic

Preferred stock dividends

Net loss - diluted

Weighted average shares outstanding - basic*

Weighted average shares outstanding - diluted*

Net loss per common share - basic*

Net loss per common share - diluted*

Dividend per common share

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

35 ) reverse stock split effected on September 21, 2023

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

September 30,

The following potentially dilutive securities were excluded from the computation of earnings per share as of March 31, 2025 and 2024 because their effects would be anti-dilutive:

Common stock warrants

1 unchanged sentence

Stock options

At September 30, 2024, the Company had 61,587 pre-funded warrants, 761,426 Class B Warrants and 726,344 Class C Warrants outstanding.

The following table provides a reconciliation of the weighted average shares outstanding calculation for the three and nine months ended September 30, 2024 and 2023:

Three Months Ended September 30,

Nine Months Ended September 30,

Weighted average shares issued

Weighted average pre-funded and penny warrants

Weighted average shares outstanding

SMARTKEM, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

DEFINED CONTRIBUTION PENSION

3 unchanged sentences

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

Research and development

Selling, general and administration

General and administration

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.

The following table provides the net losses of the Semiconductor materials segment:

Three Months Ended March 31,

Cost of revenue

Other operating income

Operating expenses

Research and development

General and administrative

(Gain)/loss on foreign currency transactions

Total operating expenses

Loss from operations

Total non-operating income/(expense)

Loss before income taxes

Income tax refund

SUBSEQUENT EVENTS

Preferred Stock Conversion

Pursuant to the terms of the Series A-1 Certificate of Designation, on May 7, 2025, the remaining 856 outstanding shares of Series A-1 Preferred Stock automatically converted into an aggregate of 690,788 shares of common stock and Class C Warrants to purchase 1,282,412 shares of common stock.

The Company filed a Certificate of Elimination with respect to the Series A-1 Certificate of Designation, pursuant to which, effective May 7, 2025, all matters set forth in the Series A-1 Certificate of Designation were eliminated from the Company’s Amended and Restated Certificate of Incorporation.

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

FAIR VALUE MEASUREMENTS

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

(in thousands)

Warrant Liability

Balance at January 1,2024

Total change in the liability included in earnings

Reclass from liability to equity

Balance at September 30, 2024

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

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

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

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

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

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

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

The fair value of the common warrants was determined by using an option pricing model assuming the following:

Expected term (years)

Risk-free interest rate

Expected volatility

Expected dividend yield

Additionally, the Company had determined that the warrant liability was most appropriately classified within Level 3 of the fair-value hierarchy by evaluating each input for the option pricing models against the fair-value hierarchy criteria and using the lowest level of input as the basis for the fair-value classification as called for in ASC 820.

There are six inputs:

closing price of the Company’s common stock on the day of evaluation;

the exercise price of the warrants;

the remaining term of the warrants;

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

annual rate of dividends;

and the risk-free rate of return.

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

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

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

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

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

The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value as of December 31, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value.

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

Quoted Prices

Significant Other

Warrant liability

Total liabilities

Notes to the Unaudited Condensed Consolidated Financial Statements

Consultant Shares

During the period of April 1, 2025 through May 1, 2025, 120,000 shares of our common stock were issued to a vendor in consideration for services to be provided.

Warrant Exercises

On April 9, 2025, 160 shares of our common stock were issued upon the exercise of Class B warrants.

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

What changed 10-Q

Item 1. Financial Statements