SmartKem, Inc. 10-Q

Item 1. Financial Statements SMARTKEM, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except number of shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ ​ 2025 ​ 2024 Assets ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 3,881 ​ $ 7,141 Research and development tax credit receivable ​ 664 ​ 519 Prepaid expenses and other current assets ​ 1,091 ​ 849 Total current assets ​ 5,636 ​ 8,509 Property, plant and equipment, net ​ 220 ​ 269 Right-of-use assets, net ​ 54 ​ 120 Other assets, non-current ​ — ​ 6 Total assets ​ $ 5,910 ​ $ 8,904 ​ ​ ​ ​ ​ ​ ​ Liabilities and stockholders’ equity ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable and accrued expenses ​ $ 1,439 ​ $ 1,791 Lease liabilities, current ​ 24 ​ 47 Other current liabilities ​ ​ 639 ​ ​ 450 Total current liabilities ​ 2,102 ​ 2,288 Lease liabilities, non-current ​ 21 ​ 25 Total liabilities ​ 2,123 ​ 2,313 ​ ​ ​ ​ ​ ​ ​ Commitments and contingencies (Note 7) ​ — ​ — ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ 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 ​ 122,651 ​ 122,316 Accumulated other comprehensive loss ​ ( 2,110 ) ​ ( 1,105 ) Accumulated deficit ​ ( 116,754 ) ​ ( 114,620 ) Total stockholders' equity ​ 3,787 ​ 6,591 Total liabilities and stockholders’ equity ​ $ 5,910 ​ $ 8,904 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ 3 Table of Contents ​ SMARTKEM, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) (in thousands, except number of shares and per share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2025 2024 Revenue ​ $ 23 ​ $ — Cost of revenue ​ 1 ​ — Gross profit ​ 22 ​ — ​ ​ ​ ​ ​ ​ ​ Other operating income ​ 251 ​ ​ 202 ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ ​ Research and development ​ 1,497 ​ ​ 1,276 General and administrative ​ 2,009 ​ ​ 1,362 (Gain)/loss on foreign currency transactions ​ ( 95 ) ​ ​ 13 Total operating expenses ​ 3,411 ​ 2,651 ​ ​ ​ ​ ​ ​ ​ Loss from operations ​ ( 3,138 ) ​ ( 2,449 ) ​ ​ ​ ​ ​ ​ ​ Non-operating income/(expense) ​ ​ Gain/(loss) on foreign currency transactions ​ ​ 969 ​ ​ ( 6 ) Change in fair value of the warrant liability ​ ​ — ​ ​ 753 Interest income/(expense) ​ 10 ​ ​ 6 Total non-operating income/(expense) ​ 979 ​ 753 ​ ​ ​ ​ ​ ​ ​ Loss before income taxes ​ ​ ( 2,159 ) ​ ​ ( 1,696 ) Income tax refund ​ ​ 25 ​ ​ — Net loss ​ $ ( 2,134 ) ​ $ ( 1,696 ) Preferred stock deemed dividends ​ ​ — ​ ​ ( 7,094 ) Net loss attributed to common stockholders ​ $ ( 2,134 ) ​ $ ( 8,790 ) ​ ​ ​ ​ ​ ​ ​ Weighted average shares outstanding - basic and diluted ​ ​ 6,649,603 ​ ​ 2,735,375 ​ ​ ​ ​ ​ ​ ​ Basic and diluted net loss per common share attributed to common stockholders ​ $ ( 0.32 ) ​ $ ( 3.21 ) ​ ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 2,134 ) ​ $ ( 1,696 ) Other comprehensive loss: ​ ​ Foreign currency translation ​ ( 1,005 ) ​ ​ ( 18 ) Total comprehensive loss ​ $ ( 3,139 ) ​ $ ( 1,714 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ ​ ​ 4 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (in thousands, except share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Preferred Stock ​ Common stock ​ Additional ​ Accumulated other ​ ​ ​ ​ Total ​ ​ $0.0001 par value ​ $0.0001 par value ​ paid-in ​ comprehensive ​ Accumulated ​ Stockholders' ​ ​ Shares Amount ​ Shares Amount capital income / (loss) deficit equity Balance at January 1, 2025 ​ 856 ​ $ — ​ 3,590,217 ​ $ — ​ $ 122,316 ​ $ ( 1,105 ) ​ $ ( 114,620 ) ​ $ 6,591 Stock-based compensation expense ​ — ​ — ​ — ​ — ​ 250 ​ — ​ — ​ 250 Issuance of common stock to vendor ​ — ​ — ​ 30,000 ​ — ​ 85 ​ — ​ — ​ 85 Foreign currency translation adjustment ​ — ​ — ​ — ​ — ​ — ​ ( 1,005 ) ​ — ​ ( 1,005 ) Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 2,134 ) ​ ( 2,134 ) Balance at March 31, 2025 ​ 856 ​ $ — ​ 3,620,217 ​ $ — ​ $ 122,651 ​ $ ( 2,110 ) ​ $ ( 116,754 ) ​ $ 3,787 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Preferred Stock ​ Common stock ​ Additional ​ Accumulated other ​ ​ ​ ​ Total ​ ​ $0.0001 par value ​ $0.0001 par value ​ paid-in ​ comprehensive ​ Accumulated ​ Stockholders' ​ ​ Shares Amount ​ Shares Amount capital income / (loss) deficit equity Balance at January 1, 2024 ​ 13,765 ​ $ — ​ 889,668 ​ $ — ​ $ 104,757 ​ $ ( 1,578 ) ​ $ ( 95,066 ) ​ $ 8,113 Stock-based compensation expense ​ — ​ — ​ — ​ — ​ 107 ​ — ​ — ​ 107 Issuance of stock awards ​ — ​ — ​ 3,400 ​ — ​ 21 ​ — ​ — ​ 21 Issuance of common stock to vendor ​ — ​ — ​ 50,000 ​ — ​ 53 ​ — ​ — ​ 53 Conversion of Preferred stock into common stock ​ ( 3,817 ) ​ — ​ 436,294 ​ — ​ — ​ — ​ — ​ — Exchange of Preferred stock into common stock warrants ​ ( 6,356 ) ​ — ​ — ​ — ​ — ​ — ​ — ​ — Deemed dividend on extinguishment of Preferred stock ​ — ​ — ​ — ​ — ​ 7,069 ​ — ​ ( 7,094 ) ​ ( 25 ) Cashless exercise of warrants into common stock ​ — ​ — ​ 388 ​ — ​ — ​ — ​ — ​ — Foreign currency translation adjustment ​ — ​ — ​ — ​ — ​ — ​ ( 18 ) ​ — ​ ( 18 ) Net loss ​ — ​ — ​ — ​ — ​ — ​ — ​ ( 1,696 ) ​ ( 1,696 ) Balance at March 31, 2024 ​ 3,592 ​ $ — ​ 1,379,750 ​ $ — ​ $ 112,007 ​ $ ( 1,596 ) ​ $ ( 103,856 ) ​ $ 6,555 ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements . ​ 5 Table of Contents SMARTKEM, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2025 2024 Cash flow from operating activities: ​ ​ Net loss ​ $ ( 2,134 ) ​ $ ( 1,696 ) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ Depreciation ​ ​ 56 ​ ​ 63 Stock-based compensation expense ​ ​ 250 ​ ​ 129 Issuance of common stock to vendor ​ ​ 85 ​ ​ 53 Right-of-use asset amortization ​ ​ 68 ​ ​ 60 Gain/(loss) on foreign currency transactions ​ ​ ( 1,063 ) ​ ​ 19 Change in fair value of the warrant liability ​ ​ — ​ ​ ( 753 ) Change in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ — ​ ​ 267 Research and development tax credit receivable ​ ​ ( 126 ) ​ ​ ( 202 ) Prepaid expenses and other assets ​ ​ ( 222 ) ​ ​ ( 264 ) Accounts payable and accrued expenses ​ ​ ( 393 ) ​ ​ 822 Lease liabilities ​ ​ ( 29 ) ​ ​ ( 69 ) Other current liabilities ​ ​ 170 ​ ​ — Net cash used in operating activities ​ ( 3,338 ) ​ ( 1,571 ) ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash ​ ​ 78 ​ ( 14 ) ​ ​ ​ ​ ​ ​ ​ Net change in cash ​ ( 3,260 ) ​ ( 1,585 ) ​ ​ ​ ​ ​ ​ ​ Cash, beginning of period ​ ​ 7,141 ​ ​ 8,836 Cash, end of period ​ $ 3,881 ​ $ 7,251 ​ ​ ​ — ​ ​ ​ Supplemental disclosure of cash and non-cash investing and financing activities ​ ​ Issuance of common shares for consulting services ​ $ 85 ​ $ 53 ​ ​ ​ ​ ​ ​ ​ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. ​ 6 Table of Contents SMARTKEM, INC. Notes to the Unaudited Condensed Consolidated Financial Statements ​ 1. GENERAL Organization 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 . ​ 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 The Company’s activities are subject to significant risks and uncertainties including the risk of failure to secure additional funding to properly execute the Company’s business plan. The Company is subject to risks that are common to companies in the development stage, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology and compliance with regulatory requirements. The Company 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 7 Table of Contents 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 $ 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 $ 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. The Company’s future viability is dependent on its ability to raise additional capital to fund its operations. The Company will need to obtain additional funds to satisfy its operational needs and to fund its sales and marketing efforts, research and development expenditures, and business development activities. Until such time, if ever, as the Company can generate sufficient cash through revenue, management’s plans are to finance the Company’s working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. If the Company raises additional funds by issuing equity securities, the Company’s existing security holders will likely experience dilution. If the Company borrows money, the incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that could restrict its operations. If the Company enters into a collaboration, strategic alliance or other similar arrangement, it may be forced to give up valuable rights. There can be no assurance however that such financing will be available in sufficient amounts, when and if needed, on acceptable terms or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including the market demand for the Company’s products and services, the quality of product development efforts, management of working capital, and continuation of normal payment terms and conditions for purchase of services. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows for operations, then the Company will need to raise additional funding. There is substantial doubt that the Company will be able to pay its obligations as they fall due, and this substantial doubt is not alleviated by management plans. The condensed consolidated financial statements as of March 31, 2025 have been prepared assuming that the Company will continue as a going concern. Accordingly, 8 Table of Contents 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 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. These interim condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. They include the accounts of all wholly owned subsidiaries and all significant inter-company accounts and transactions have been eliminated in consolidation. Amounts are presented in thousands, except number of shares and per share data. The preparation of interim condensed consolidated financial statements requires management to make assumptions and estimates that impact the amounts reported. These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended March 31, 2025 and 2024; 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Other than the policies listed below, there have been no material changes to the Company’s significant accounting policies as set forth in Note 3 Summary of Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report. The Company records, when necessary, deemed dividends for: (i) the exchange of preferred shares for pre-funded warrants, based on the fair value of the pre-funded warrants in excess of the carrying value of the preferred shares and (ii) the amendment of preferred stock accounted for as an extinguishment, based on the fair value of the preferred stock immediately before and after the amendments. Management’s Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relate to the valuation of common stock, fair value of stock options and fair value of warrant liabilities. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates. ​ ​ 9 Table of Contents 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 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. ​ 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) 2025 ​ 2024 Prepaid insurance ​ $ 361 ​ $ 194 Deferred research & development costs ​ ​ 143 ​ ​ 138 Research grant receivable ​ ​ 96 ​ ​ 62 Prepaid facility costs ​ ​ 15 ​ ​ 67 VAT receivable ​ ​ 326 ​ ​ 319 Prepaid software licenses ​ ​ 51 ​ ​ 66 Other receivable and other prepaid expenses ​ ​ 99 ​ ​ 3 Total prepaid expenses and other current assets ​ $ 1,091 ​ $ 849 ​ ​ ​ ​ ​ ​ ​ ​ 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) 2025 ​ 2024 Plant and equipment ​ $ 1,609 ​ $ 1,562 Furniture and fixtures ​ 109 ​ 106 Computer hardware and software ​ 102 ​ 98 ​ ​ 1,820 ​ 1,766 Less: Accumulated depreciation ​ ( 1,600 ) ​ ( 1,497 ) Property, plant and equipment, net ​ $ 220 ​ $ 269 ​ ​ ​ ​ ​ ​ ​ ​ 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. 10 Table of Contents SMARTKEM, INC. Notes to the Unaudited Condensed Consolidated Financial Statements ​ 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) 2025 ​ 2024 Accounts payable - trade ​ $ 738 ​ $ 843 Payroll liabilities ​ 175 ​ 397 VAT payable ​ ​ 266 ​ ​ 287 Accrued expenses – legal fees ​ 106 ​ — Accrued expenses – audit & accounting fees ​ 56 ​ 106 Accrued expenses – other ​ 98 ​ 158 Total accounts payable and accrued expenses ​ $ 1,439 ​ $ 1,791 ​ ​ ​ ​ ​ ​ ​ ​ 6. LEASES The Company has operating leases consisting of office space, lab space and equipment with remaining lease terms of 1 to 3 years , subject to certain renewal options as applicable. The Company is not the lessor in any lease agreement, and no related party transactions for lease arrangements have occurred. The table below presents certain information related to the lease costs for the Company’s operating leases for the periods ended: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, (in thousands) 2025 2024 Operating lease cost ​ $ 73 ​ $ 65 Short-term lease cost ​ 3 ​ 6 Total lease cost ​ $ 76 ​ $ 71 ​ ​ ​ ​ ​ ​ ​ ​ The total lease cost is included in the unaudited condensed consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, (in thousands) ​ 2025 2024 Research and development ​ $ 73 ​ $ 65 General and administrative ​ 3 ​ 6 Total lease cost ​ $ 76 ​ $ 71 ​ ​ ​ ​ ​ ​ ​ ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, (in thousands) 2025 2024 Assets ​ ​ ​ Right of use assets - Operating Leases ​ $ 54 ​ $ 120 Total lease assets ​ $ 54 ​ $ 120 ​ ​ ​ ​ ​ ​ ​ Liabilities ​ ​ Current liabilities: ​ ​ Lease liability, current - Operating Leases ​ $ 24 ​ $ 47 Noncurrent liabilities: ​ ​ ​ Lease liability, non-current - Operating Leases ​ 21 ​ 25 Total lease liabilities ​ $ 45 ​ $ 72 ​ ​ ​ ​ ​ ​ ​ 11 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, (in thousands) ​ 2025 2024 Operating cash outflows from operating leases ​ $ 29 ​ $ 69 ​ ​ ​ ​ ​ ​ ​ ​ 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: ​ ​ ​ ​ ​ ​ ​ March 31, ​ ​ 2025 Weighted average remaining lease term (in years) – operating leases ​ ​ 1.8 Weighted average discount rate – operating leases ​ ​ 10.90 % ​ Remaining maturities of the Company’s operating leases, excluding short-term leases, are as follows: ​ ​ ​ ​ ​ ​ ​ March 31, (in thousands) ​ 2025 2025 ​ $ 22 2026 ​ ​ 22 2027 ​ ​ 5 Total undiscounted lease payments ​ ​ 49 Less imputed interest ​ ​ ( 4 ) Total net lease liabilities ​ $ 45 ​ ​ ​ ​ ​ ​ 7. COMMITMENTS AND CONTINGENCIES Legal proceedings In the normal course of business, the Company may become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material effect on the interim condensed consolidated financial statements. 8. STOCKHOLDERS’ EQUITY 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 12 Table of Contents SMARTKEM, INC. 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: ​ 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 shares of the Series A-1 Preferred Stock which must include AIGH for so long as 13 Table of Contents SMARTKEM, INC. 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 ​ 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. ​ As of March 31, 2025, there were an aggregate of 856 shares of Series A-1 Preferred Stock outstanding. ​ Common Stock Voting Rights Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. The Company’s Charter and the Company’s Bylaws do not provide for cumulative voting rights. The holders of one-third of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, constitutes a quorum for the transaction of business at all meetings of the stockholders. Dividends The Company has never paid any cash dividends to stockholders and do not anticipate paying any cash dividends to stockholders in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant. Common Stock Issued to Vendors for Services 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. 14 Table of Contents SMARTKEM, INC. Notes to the Unaudited Condensed 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, 2025 5,171,430 ​ ​ $ 0.35 - $ 70.00 ​ $ 4.94 2.26 Issued — ​ ​ ​ ​ ​ — Exercised — ​ ​ ​ ​ — Expired — ​ ​ ​ ​ — Warrants outstanding at March 31, 2025 5,171,430 ​ ​ $ 0.35 - $ 70.00 ​ $ 4.94 2.02 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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, 2025 2,318,502 ​ $ 0.0064 Issued — ​ — Exercised — ​ — Expired — ​ — Pre-funded warrants outstanding at March 31, 2025 2,318,502 ​ $ 0.0064 ​ ​ ​ ​ ​ ​ ​ 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 Plan from 125,045 shares to 743,106 shares. The Company’s Board of Directors had previously approved the 2021 Plan Amendment, subject to stockholder approval. Determining the appropriate fair value of share-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for share options, the expected life of the option, and expected share price volatility. The Company uses the Black-Scholes option pricing model to value its share option awards. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, the share-based compensation expense could be materially different for future awards. The Company did not issue any options during the three months ended March 31, 2025. 15 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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, 2025 619,910 $ 12.31 9.06 $ 3.54 ​ ​ Granted — ​ ​ — ​ ​ Exercised ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ Cancelled/Forfeited ( 8,002 ) 10.48 ​ ​ ​ Expired — — ​ ​ Options outstanding at March 31, 2025 611,908 $ 12.33 8.93 $ 3.56 ​ ​ Options exercisable at March 31, 2025 ​ 303,353 ​ $ 16.32 ​ 8.70 ​ ​ ​ ​ $ 20.75 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock-based compensation is included in the unaudited interim condensed consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, (in thousands) ​ 2025 2024 Research and development ​ $ 72 ​ $ 42 General and administration ​ 178 ​ 65 Total ​ $ 250 ​ $ 107 ​ ​ ​ ​ ​ ​ ​ ​ 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. 10. 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 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 March 31, 2025 and 2024 because their effects would be anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ 2025 ​ 2024 Common stock warrants ​ ​ 4,450,324 ​ ​ 3,330,186 Assumed conversion of preferred stock ​ ​ 1,973,200 ​ ​ 410,587 Stock options ​ ​ 611,908 ​ ​ 69,920 Total ​ ​ 7,035,432 ​ ​ 3,810,693 ​ ​ ​ ​ ​ ​ ​ ​ ​ 16 Table of Contents SMARTKEM, INC. Notes to the Unaudited Condensed Consolidated Financial Statements ​ 11. DEFINED CONTRIBUTION PENSION The Company operates a defined contribution pension scheme for its UK employees. The assets of the scheme are held separately from those of the Company in an independently administered fund. The pension cost charge represents contributions payable by the Company to the fund. Pension cost is included in the unaudited interim condensed consolidated statements of operations as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, (in thousands) ​ 2025 2024 Research and development ​ $ 21 ​ $ 21 General and administration ​ 20 ​ 16 Total ​ $ 41 ​ $ 37 ​ ​ ​ ​ ​ ​ ​ ​ ​ 12. 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, ​ ​ 2025 2024 Revenue ​ $ 23 ​ $ - Cost of revenue ​ ​ 1 ​ ​ - Gross profit ​ ​ 22 ​ ​ - Other operating income ​ ​ 251 ​ ​ 202 Operating expenses ​ ​ ​ ​ ​ ​ Research and development ​ ​ 1,497 ​ ​ 1,276 General and administrative ​ ​ 2,009 ​ ​ 1,362 (Gain)/loss on foreign currency transactions ​ ​ ( 95 ) ​ ​ 13 Total operating expenses ​ ​ 3,411 ​ ​ 2,651 Loss from operations ​ ​ ( 3,138 ) ​ ​ ( 2,449 ) Total non-operating income/(expense) ​ ​ 979 ​ ​ 753 Loss before income taxes ​ ​ ( 2,159 ) ​ ​ ( 1,696 ) Income tax refund ​ ​ 25 ​ ​ - Net loss ​ $ ( 2,134 ) ​ $ ( 1,696 ) ​ ​ ​ ​ ​ ​ ​ ​ 13. 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. 17 Table of Contents SMARTKEM, INC. 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. ​ ​ ​ ​ 18 Table of Contents ​