[Smartkem Q3 2024 Financial Results & Business Update](index=1&type=section&id=Smartkem_Q3_2024_Financial_Results_Business_Update) [Q3 2024 Overview and Strategic Focus](index=1&type=section&id=Q3_2024_Overview_Strategic_Focus) Smartkem's Q3 2024 results highlight progress in OTFT commercialization for microLED displays, strategic partnerships, and a focus on 2025 qualifications and design wins - Entered a joint development agreement (JDA) with Chip Foundation for microLED-based backlight technology for LCDs[2](index=2&type=chunk) - ITRI requested Smartkem to develop packaging solutions for advanced computer and AI chips[2](index=2&type=chunk) - The microLED display industry is projected to grow from **$150 million** in 2024 to over **$4 billion** by 2031[3](index=3&type=chunk) - Strategic focus for 2025 is on delivering qualifications and design wins to increase adoption of advanced display technologies[4](index=4&type=chunk) [Recent Business Highlights](index=1&type=section&id=Recent_Business_Highlights) Smartkem's recent business highlights include a JDA with Shanghai Chip Foundation and active participation in key industry forums and exhibitions - Signed a JDA with Shanghai Chip Foundation Semiconductor Technology Co. to co-develop microLED-based backlight technology for LCDs[5](index=5&type=chunk) - Presented a keynote at the PlayNitride 2024 MicroLED Technology Forum, highlighting advantages for microLED display mass adoption[5](index=5&type=chunk) - Exhibited and presented at multiple international conferences, including SEMICON® Taiwan 2024, IMID 2024, ICFPE 2024, and TechBlick[5](index=5&type=chunk) [Company Information](index=2&type=section&id=Company_Information) [About Smartkem](index=2&type=section&id=About_Smartkem) Smartkem develops patented TRUFLEX® liquid semiconductor polymers and OTFTs for next-generation microLED displays, leveraging low-temperature printing and an extensive IP portfolio - Smartkem develops disruptive organic thin-film transistors (OTFTs) and patented TRUFLEX® liquid semiconductor polymers for next-generation displays, including microLEDs[7](index=7&type=chunk) - Their inks enable low-temperature printing processes compatible with existing manufacturing infrastructure for cost-effective, high-performance displays[7](index=7&type=chunk) - The company holds an extensive IP portfolio, including **125 granted patents** across **19 patent families** and **40 codified trade secrets**[8](index=8&type=chunk) [Forward-Looking Statements](index=2&type=section&id=Forward-Looking_Statements) This section contains cautionary forward-looking statements regarding Smartkem's future, subject to risks and uncertainties, with no obligation to update - All statements not historical are forward-looking, encompassing expectations for market position, product development, manufacturing, sales, and partnerships[9](index=9&type=chunk) - Forward-looking statements involve known and unknown risks, uncertainties, and assumptions, with actual results potentially differing materially[9](index=9&type=chunk) - The Company undertakes no obligation to revise or update this information to reflect future events or circumstances[9](index=9&type=chunk) [Financial Performance](index=1&type=section&id=Financial_Performance) [Q3 2024 Financial Highlights](index=1&type=section&id=Q3_2024_Financial_Highlights) Smartkem's Q3 2024 financial highlights show a significant decrease in cash, increased operating expenses, and negligible revenue Q3 2024 Financial Highlights (in millions, except revenue) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :------------------------ | :----------- | :----------- | | Cash and cash equivalents | $1.8 | $8.8 | | Operating expenses (Q3) | $3.0 | $2.7 | | Revenues (Q3) | Nil | $0.003 | [Condensed Consolidated Balance Sheets](index=3&type=section&id=SMARTKEM_INC_Condensed_Consolidated_Balance_Sheets) Smartkem's balance sheet as of September 30, 2024, shows decreased total assets, liabilities, and stockholders' equity, primarily due to reduced cash and warrant liability elimination Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :--------------------------- | :----------- | :----------- | | **Assets** | | | | Cash and cash equivalents | $1,783 | $8,836 | | Total current assets | $3,750 | $10,525 | | Total assets | $4,306 | $11,272 | | **Liabilities** | | | | Total current liabilities | $1,995 | $1,768 | | Warrant liability | $— | $1,372 | | Total liabilities | $2,026 | $3,159 | | **Stockholders' Equity** | | | | Total stockholders' equity | $2,280 | $8,113 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=5&type=section&id=SMARTKEM_INC_Condensed_Consolidated_Statements_of_Operations_and_Comprehensive_Loss) Smartkem reported nil revenue and increased operating expenses for Q3 and the nine months ended September 30, 2024, resulting in significant net and comprehensive losses Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | | :---------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $— | $3 | $40 | $27 | | Gross profit | $— | $2 | $8 | $4 | | Operating expenses | $3,125 | $2,954 | $8,797 | $8,315 | | Loss from operations | $(2,838) | $(2,695) | $(8,064) | $(7,616) | | Net loss | $(2,842) | $(3,022) | $(7,637) | $(7,097) | | Total comprehensive loss | $(2,717) | $(2,172) | $(7,356) | $(7,220) | | Basic net loss per common share | $(0.86) | $(1.78) | $(2.49) | $(5.82) | | Weighted average basic shares outstanding | 3,308,975 | 1,701,166 | 3,068,110 | 1,219,450 | [Additional Information](index=3&type=section&id=Additional_Information) [Investor and Media Contacts](index=3&type=section&id=Investor_and_Media_Contacts) This section provides contact information for Smartkem's CFO, Head of Communications, and U.S. Investor Relations - Contact details provided for Smartkem's Chief Financial Officer (Barbra Keck), Head of Communications (Selena Kirkwood), and U.S. Investor Relations (David Barnard, Alliance Advisors)[10](index=10&type=chunk)

Core Insights - Smartkem is advancing its proprietary organic thin-film transistors (OTFTs) aimed at revolutionizing display technologies, particularly microLED displays, which are projected to grow from $150 million in 2024 to over $4 billion by 2031 [3][6] Business Developments - In Q3 2024, Smartkem entered a joint development agreement with Chip Foundation to create microLED-based backlight technology for LCDs, enhancing collaborations with major display manufacturers [2][5] - The company showcased its innovations at various international forums, emphasizing the advantages of microLED displays, including durability and brightness [5] Financial Performance - As of September 30, 2024, Smartkem reported cash and cash equivalents of $1.8 million, a decrease from $8.8 million at the end of 2023 [6][10] - Operating expenses for Q3 2024 were $3.0 million, up from $2.7 million in the same period of 2023, while revenues were nil compared to $3,000 in Q3 2023 [6][12] - The net loss for Q3 2024 was $2.8 million, slightly improved from a loss of $3.0 million in Q3 2023 [12][13] Future Outlook - The company aims to secure qualifications and design wins in 2025 to boost the adoption of advanced display technologies [4]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2024 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-42115 SmartKem, Inc. (Exact name of registrant as specified in its charter) | --- | |-------| | | | | | | ...

Company Overview - Smartkem is focused on developing disruptive organic thin-film transistors (OTFTs) aimed at revolutionizing the display industry [3][4] - The company utilizes patented TRUFLEX® liquid semiconductor polymers to create new types of transistors suitable for various display technologies, including next-generation microLED displays [3] - Smartkem's inks allow for low-temperature printing processes that are compatible with existing manufacturing infrastructure, enabling the production of low-cost displays that outperform current technologies [3] Upcoming Conference - Smartkem will present at the 6th National Conference on Organic Field-Effect Transistors in Hangzhou, China on November 9, 2024 [1][2] - The presentation, titled "OTFT materials for emissive displays and low temperature logic circuitry on plastic substrates," will be delivered by Chief Technology Officer Dr. Simon Ogier from 13:30 to 13:50 local time [2] - The conference is organized by Beihang University and the Institute of Chemistry, Chinese Academy of Sciences, focusing on organic field-effect transistors and flexible printed optoelectronic materials and devices [2][5] Research and Development - Smartkem conducts its R&D at its facility in Manchester, UK, and offers prototyping services at the Centre for Process Innovation in Sedgefield, UK [4] - The company has a significant intellectual property portfolio, including 125 granted patents across 19 patent families and 40 codified trade secrets [4]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2024 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-42115 SmartKem, Inc. (Exact name of registrant as specified in its charter) Delaware 85-1083654 (State or othe ...

Exhibit 99.1 PRESS RELEASE Smartkem Reports Second Quarter 2024 Financial Results Manchester, England – Monday, August 12, 2024 – Smartkem (Nasdaq: SMTK), a company that has the potential to power the next generation of displays using its disruptive organic thin-film transistors (OTFTs), today provides a business update and reports financial results for the three and six months ended June 30, 2024. Recent Business Highlights During Q1 and Q2 2024, Smartkem: · Announced that it had uplisted to The Nasdaq Sto ...

Part I [Business](index=8&type=section&id=Item%201.%20Business) SmartKem is a development-stage company focused on its proprietary TRUFLEX® organic thin-film transistor (OTFT) technology for low-temperature manufacturing of flexible displays - The company's core technology is its patented TRUFLEX® organic thin-film transistors (OTFTs), which are electronic polymers designed to enable low-temperature (as low as **80°C**) manufacturing of flexible, low-cost displays[11](index=11&type=chunk)[15](index=15&type=chunk) - A key technological breakthrough is the monolithic integration of OTFT backplanes directly on top of GaN mini/microLED arrays, simplifying manufacturing by eliminating complex mass transfer and laser welding steps, potentially increasing yield and efficiency[15](index=15&type=chunk)[28](index=28&type=chunk)[30](index=30&type=chunk) - The commercialization strategy is based on three pillars: 1) Continuous development of polymer materials, 2) Development of Electronic Design Automation (EDA) tools for circuit design, and 3) Development of robust commercial manufacturing processes with partners like ITRI in Taiwan[34](index=34&type=chunk) - The company has an extensive intellectual property portfolio, including **125 granted patents** across **19 patent families**, **15 pending patents**, and **40 codified trade secrets**, covering materials, formulations, and processes[12](index=12&type=chunk)[71](index=71&type=chunk) - SmartKem has entered into several key joint development and technology transfer agreements with partners including RiTdisplay, ITRI, and Tianma Microelectronics to develop and commercialize its technology for AMOLED displays, miniLEDs, and microarray biochips[64](index=64&type=chunk)[65](index=65&type=chunk)[66](index=66&type=chunk) - The company anticipates a long and resource-intensive sales cycle of approximately **12-24 months**, from initial customer evaluation to a potential sales agreement, requiring significant upfront expense without assurance of a final order[48](index=48&type=chunk) [Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) The company faces substantial risks, highlighted by a history of significant financial losses and the need for future capital to sustain operations - The company has a history of substantial net losses, with an accumulated deficit of **$95.1 million** as of December 31, 2023, and anticipates continued operating losses, requiring additional capital to fund operations beyond April 2025[98](index=98&type=chunk)[100](index=100&type=chunk)[101](index=101&type=chunk) - SmartKem relies on third-party facilities, specifically the Centre for Process Innovation (CPI) and the Industrial Technology Research Institute (ITRI), for prototype fabrication and process development, and will depend on other third-party fabricators for commercial-scale manufacturing, where loss of access could materially harm business development[115](index=115&type=chunk)[116](index=116&type=chunk) - The terms of the June 2023 private placement (PIPE) impose significant restrictions on operations, including limits on cash use from operating activities and constraints on future capital raises, which may hinder the company's ability to pursue business opportunities or obtain financing on favorable terms[174](index=174&type=chunk)[175](index=175&type=chunk)[177](index=177&type=chunk) - The company's common stock is designated as a "penny stock," which subjects it to regulations that can limit liquidity, make it difficult for brokers to recommend, and may result in less trading activity[199](index=199&type=chunk) - A material weakness in internal control over financial reporting was identified in Q2 2023 related to the accounting for the June 2023 PIPE financing, and although management has implemented remediation measures, failure to maintain effective controls could harm financial reporting and investor confidence[171](index=171&type=chunk)[172](index=172&type=chunk) - The company faces political and operational risks from conducting business in Taiwan, where key partners like ITRI are located, due to the tense relationship between Taiwan and China[139](index=139&type=chunk)[140](index=140&type=chunk) [Unresolved Staff Comments](index=72&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that there are no unresolved staff comments - Not Applicable[224](index=224&type=chunk) [Cybersecurity](index=72&type=section&id=Item%201C.%20Cybersecurity) The company has implemented policies and processes to manage cybersecurity risks, including engaging a third-party consultant for threat monitoring and response - The company utilizes a third-party consultant for its cybersecurity risk management framework, which includes monitoring, detection, and response to threats[226](index=226&type=chunk) - As of December 31, 2023, the company has not identified any cybersecurity incidents that would materially impact its business or financial statements[227](index=227&type=chunk) [Properties](index=72&type=section&id=Item%202.%20Properties) SmartKem's headquarters, including R&D and corporate offices, are in a 10,000 sq. ft. leased space in Manchester, England - The company's main facilities are leased, including its headquarters in Manchester, UK, an office in Taiwan, and fabrication and office space at the CPI facility in Sedgefield, UK[228](index=228&type=chunk) - A new twelve-month Framework Agreement with CPI Innovation Services Limited (CPIIS) was executed on March 22, 2024, commencing April 1, 2024, ensuring continued access to fabrication facilities[228](index=228&type=chunk) [Legal Proceedings](index=72&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently a party to any legal proceedings that management believes would have a material adverse effect on its business - The company is not currently involved in any material litigation[229](index=229&type=chunk) [Mine Safety Disclosures](index=72&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[230](index=230&type=chunk) Part II [Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities](index=74&type=section&id=Item%205.%20Market%20For%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20Of%20Equity%20Securities) The company's common stock is traded on the OTCQB Market under the ticker symbol 'SMTK' - Common stock trades on the OTCQB Market under the ticker **'SMTK'**[231](index=231&type=chunk) - As of March 27, 2024, there were **1,355,361 shares** of common stock outstanding[231](index=231&type=chunk) - The company has never paid cash dividends and does not plan to in the foreseeable future[232](index=232&type=chunk) [Reserved]](index=74&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=74&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) For the fiscal year 2023, SmartKem's net loss decreased to **$8.5 million** from **$11.5 million** in 2022, primarily due to a significant gain on foreign currency transactions and slightly lower operating expenses Results of Operations (in thousands) | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $27 | $40 | ($13) | | Total Operating Expenses | $10,831 | $10,873 | ($42) | | Loss from Operations | ($9,991) | ($9,694) | ($297) | | Net Loss | ($8,499) | ($11,495) | $2,996 | | Basic and Diluted Net Loss per Share | ($6.32) | ($13.88) | $7.56 | Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($8,037) | ($9,049) | | Net cash used by investing activities | ($18) | ($79) | | Net cash provided by financing activities | $12,691 | $1,830 | - The company's cash and cash equivalents increased to **$8.8 million** as of December 31, 2023, from **$4.2 million** in 2022, which management believes is sufficient to fund operations through the end of April 2025[260](index=260&type=chunk) - Net cash from financing activities was **$12.7 million** in 2023, primarily from a private placement of preferred stock and warrants in June 2023 which yielded net proceeds of **$12.4 million**[263](index=263&type=chunk) - The decrease in net loss for 2023 was largely driven by a **$1.2 million** gain on foreign currency transactions, compared to a **$1.8 million** loss in 2022, and a **$0.5 million** gain on the valuation of warrant liability[257](index=257&type=chunk)[259](index=259&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=83&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) As a smaller reporting company, SmartKem is not required to provide the information for this item - The company is exempt from this disclosure requirement as it qualifies as a smaller reporting company[270](index=270&type=chunk) [Financial Statements and Supplementary Data](index=84&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements for the fiscal years ended December 31, 2023, and 2022, including reports from independent auditors and comprehensive notes Consolidated Balance Sheet Data (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $10,525 | $6,442 | | Total Assets | $11,272 | $7,525 | | Total Current Liabilities | $1,768 | $1,403 | | Total Liabilities | $3,159 | $1,642 | | Total Stockholders' Equity | $8,113 | $5,883 | Consolidated Statement of Operations Data (in thousands) | Metric | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Revenue | $27 | $40 | | Loss from Operations | ($9,991) | ($9,694) | | Net Loss | ($8,499) | ($11,495) | | Total Comprehensive Loss | ($9,594) | ($10,615) | - The company effected a **1-for-35 reverse stock split** on September 21, 2023, with all share and per-share amounts in the financial statements retroactively adjusted[304](index=304&type=chunk)[373](index=373&type=chunk) - In June 2023, the company raised **$14.2 million** in gross proceeds (**$12.7 million** net) through a private placement of preferred stock and warrants, which alleviated the going concern uncertainty noted in the 2022 financial statements[306](index=306&type=chunk) - The company recognized a warrant liability of **$1.4 million** as of December 31, 2023, related to warrants issued in the June 2023 PIPE financing, which are accounted for as derivatives and re-measured to fair value each period[284](index=284&type=chunk)[402](index=402&type=chunk) [Changes In And Disagreements With Accountants On Accounting And Financial Disclosure](index=144&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[447](index=447&type=chunk) [Controls and Procedures](index=144&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023, with a previously identified material weakness remediated by year-end - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[450](index=450&type=chunk) - A material weakness in internal control over financial reporting, identified in Q2 2023 concerning the accounting for the June 2023 PIPE, was remediated by the end of the fiscal year[452](index=452&type=chunk) - The company's management concluded that internal control over financial reporting was effective as of December 31, 2023[451](index=451&type=chunk) [Other Information](index=146&type=section&id=Item%209B.%20Other%20Information.) The company reports that none of its directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fourth quarter of 2023 - None[456](index=456&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=146&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections.) This item is not applicable to the company - Not Applicable[456](index=456&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=147&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) The company's leadership includes Chairman and CEO Ian Jenks, CFO Barbra C. Keck, Chief Scientist Dr. Beverley Brown, and CTO Dr. Simon Ogier Executive Officers and Directors (as of March 27, 2024) | Name | Position | | :--- | :--- | | Ian Jenks | Chairman of the Board, Chief Executive Officer and President | | Barbra C. Keck | Chief Financial Officer | | Beverley Brown, Ph.D. | Chief Scientist | | Simon Ogier, Ph.D. | Chief Technology Officer | | Klaas de Boer | Director | | Steven DenBaars, Ph.D. | Director | | Melisa Denis | Director | | Sriram Peruvemba | Director | - The Board of Directors is divided into three staggered classes, with directors serving three-year terms, a structure that may delay or prevent changes in management or control[473](index=473&type=chunk)[476](index=476&type=chunk) - The Board has determined that directors Klaas de Boer, Steven DenBaars, and Melisa Denis are independent, while CEO Ian Jenks and director Sriram Peruvemba are not considered independent[472](index=472&type=chunk)[534](index=534&type=chunk) - The company has adopted a code of business conduct and ethics, available on its website[470](index=470&type=chunk) [Executive Compensation](index=154&type=section&id=Item%2011.%20Executive%20Compensation) For fiscal year 2023, CEO Ian Jenks received total compensation of **$409,450**, including a base salary of **$342,333** and a bonus of **$50,000** Summary Compensation Table (2023) | Officer Name and Principle Position | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Ian Jenks, CEO | 342,333 | 50,000 | 17,117 | 409,450 | | Barbra Keck, CFO | 314,773 | 37,500 | 19,800 | 372,073 | | Beverly Brown, Chief Scientist | 200,093 | - | - | 200,093 | - In September 2023, CEO Ian Jenks' annual base salary was increased to **$400,000** and his target bonus was increased to **50%** of his base salary[489](index=489&type=chunk) - In September 2023, the compensation committee approved one-time bonuses of **$100,000** for CEO Ian Jenks and **$75,000** for CFO Barbra Keck, with **50%** paid upfront and **50%** payable upon a national exchange uplisting[492](index=492&type=chunk) - The non-employee director compensation policy provides an annual cash retainer of **$36,000** and initial and annual stock option grants[497](index=497&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=161&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) As of March 27, 2024, the company's executive officers and directors as a group beneficially owned **58.4%** of the common stock Security Ownership of 5% Stockholders (as of March 27, 2024) | Name of Beneficial Owner | Percentage Beneficially Owned (%) | | :--- | :--- | | Octopus Investments Limited | 15.8% | | Entrepreneurs Fund LP | 7.6% | | Orin Hirschman (and affiliates) | 9.9% | | The Hewlett Fund, LP | 9.9% | | Five Narrow Lane | 9.9% | - All executive officers and directors as a group beneficially own **58.4%** of the company's common stock as of March 27, 2024[210](index=210&type=chunk) - The 2021 Equity Incentive Plan was amended to increase the share reserve to **743,106 shares**, with **70,411 outstanding options** and **676,565 shares** available for future issuance as of December 31, 2023[502](index=502&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=165&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) The company discloses several related party transactions, notably a consulting agreement with director Sriram Peruvemba's firm, which terminated upon his board appointment in July 2023 - Prior to his appointment to the board, director Sriram Peruvemba provided consulting services to the company through his firm, Marketer International Inc., with the agreement terminated in July 2023[516](index=516&type=chunk)[518](index=518&type=chunk) - Major shareholders, including affiliates of Orin Hirschman, The Hewlett Fund, LP, and Five Narrow Lane, participated in the June 2023 PIPE financing and the subsequent January 2024 Consent, Conversion and Amendment Agreement[524](index=524&type=chunk)[531](index=531&type=chunk)[532](index=532&type=chunk) - The company has multiple registration rights agreements in place with directors, executive officers, and holders of more than **5%** of its capital stock, stemming from the February 2021 reverse merger, the January 2022 Octopus Share Purchase, the June 2023 PIPE, and the January 2024 Consent Agreement[519](index=519&type=chunk)[521](index=521&type=chunk)[526](index=526&type=chunk)[530](index=530&type=chunk) - The board has adopted a policy requiring Audit Committee approval for related party transactions exceeding **$100,000**[533](index=533&type=chunk) [Principal Accountant Fees and Services](index=173&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) The company paid its independent registered public accounting firms a total of **$336,000** in 2023 and **$368,000** in 2022 Principal Accountant Fees (in thousands) | Fee Category | 2023 | 2022 | | :--- | :--- | :--- | | Audit fees | $336 | $368 | | Audit-related fees | $0 | $0 | | Tax fees | $0 | $0 | | All other fees | $0 | $0 | | **Total** | **$336** | **$368** | - The Audit Committee has established a policy for pre-approving all audit and permissible non-audit services provided by the independent auditor[537](index=537&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=175&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section provides an index of all exhibits filed with the Form 10-K, including the Share Exchange Agreement, corporate governance documents, material contracts such as employment and financing agreements, and required certifications[540](index=540&type=chunk)[542](index=542&type=chunk) [Form 10-K Summary](index=180&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports that there is no Form 10-K summary - None[546](index=546&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-56181 SmartKem, Inc. | --- | --- | |----------------------------------------------------------------|---- ...

Part I Financial Information [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents SmartKem, Inc.'s unaudited interim condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, with detailed notes on business, liquidity, accounting, equity, and warrant issuances [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20as%20of%20June%2030%2C%202023%20and%20December%2031%2C%202022) Total assets and stockholders' equity significantly increased from December 2022 to June 2023, driven by cash and additional paid-in capital, while liabilities rose due to warrant recognition Balance Sheet Summary | Metric | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | Change ($ thousands) | % Change | | :--------------------------- | :-------------------------- | :------------------------------ | :------------------- | :------- | | Cash and cash equivalents | 13,774 | 4,235 | 9,539 | 225.2% | | Total current assets | 15,071 | 6,442 | 8,629 | 133.9% | | Total assets | 16,050 | 7,525 | 8,525 | 113.3% | | Accounts payable & accrued expenses | 1,494 | 931 | 563 | 60.5% | | Warrant liability | 1,834 | — | 1,834 | N/A | | Total liabilities | 3,721 | 1,642 | 2,079 | 126.6% | | Additional paid-in capital | 104,424 | 92,930 | 11,494 | 12.4% | | Accumulated deficit | (90,642) | (86,567) | (4,075) | 4.7% | | Total stockholders' equity | 12,329 | 5,883 | 6,446 | 109.6% | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202023%20and%202022) Net loss decreased for both three and six months ended June 30, 2023, driven by minimal revenue, stable operating expenses, and significant foreign currency transaction gains Statements of Operations and Comprehensive Loss Summary | Metric ($ thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenue | 8 | 4 | 24 | 34 | | Cost of revenue | 6 | 2 | 22 | 25 | | Gross profit | 2 | 2 | 2 | 9 | | Other operating income | 169 | 294 | 438 | 578 | | Research and development | 1,257 | 1,344 | 2,536 | 2,802 | | Selling, general and administrative | 1,324 | 1,370 | 2,757 | 2,611 | | Total operating expenses | 2,538 | 2,714 | 5,361 | 5,413 | | Loss from operations | (2,367) | (2,418) | (4,921) | (4,826) | | Gain/(loss) on foreign currency transactions (non-operating) | 533 | (1,284) | 1,035 | (1,638) | | Net loss | (2,027) | (3,701) | (4,075) | (6,463) | | Basic and diluted net loss per common share | (0.05) | (0.13) | (0.12) | (0.23) | [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20for%20the%20six%20months%20ended%20June%2030%2C%202023%20and%202022) Stockholders' equity rose significantly to $12.3 million by June 30, 2023, primarily from $11.0 million in preferred stock issuance and stock-based compensation, despite net loss Stockholders' Equity Summary | Metric ($ thousands) | January 1, 2023 | March 31, 2023 | June 30, 2023 | | :------------------------------- | :-------------- | :------------- | :------------ | | Total Stockholders' Equity | 5,883 | 3,727 | 12,329 | | Stock-based compensation expense | 293 | 119 | 412 (total for 6 months) | | Issuance of preferred stock, net of issuance costs | — | 11,027 | 11,027 | | Net loss | (2,048) | (2,027) | (4,075) (total for 6 months) | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20six%20months%20ended%20June%2030%2C%202023%20and%202022) Net cash increased by $9.5 million for the six months ended June 30, 2023, primarily from $12.7 million in financing activities, offsetting $3.1 million used in operations Cash Flow Summary | Metric ($ thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net loss | (4,075) | (6,463) | | Net cash used in operating activities | (3,070) | (5,651) | | Net cash used by investing activities | (6) | (58) | | Net cash provided by financing activities | 12,666 | 1,830 | | Net change in cash | 9,539 | (4,469) | | Cash, beginning of period | 4,235 | 12,226 | | Cash, end of period | 13,774 | 7,757 | [Notes to the Unaudited Interim Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Unaudited%20Interim%20Condensed%20Consolidated%20Financial%20Statements) SmartKem, Inc., formed in 2020 and focused on OTFTs for displays, raised $14.0 million (net $12.7 million) in a private placement, alleviating going concern doubts despite continuous losses - SmartKem develops disruptive organic thin-film transistors (OTFTs) using patented TRUFLEX® semiconductor and dielectric inks for low-cost, high-performance displays across various applications[11](index=11&type=chunk)[103](index=103&type=chunk) - The company possesses an extensive IP portfolio, comprising **125 granted patents** across 19 patent families and **40 codified trade secrets**[11](index=11&type=chunk)[104](index=104&type=chunk) Financial Highlights (Six Months Ended June 30, 2023) | Metric | Six Months Ended June 30, 2023 ($ millions) | | :----------------------------------- | :---------------------------------------- | | Net loss | 4.1 | | Cash as of June 30, 2023 | 13.8 | | Funds raised in June 2023 private placement | 14.0 | | Net proceeds from private placement | 12.7 | | Cash used in operating activities (6 months) | 3.1 | - Management believes existing cash of **$13.8 million** as of June 30, 2023, is sufficient to fund operations for the next twelve months, alleviating substantial doubt about the company's going concern ability, though additional capital may be required thereafter[15](index=15&type=chunk)[16](index=16&type=chunk)[119](index=119&type=chunk) [1. ORGANIZATION, BUSINESS, LIQUIDITY AND BASIS OF PRESENTATION](index=9&type=section&id=1.%20ORGANIZATION%2C%20BUSINESS%2C%20LIQUIDITY%20AND%20BASIS%20OF%20PRESENTATION) SmartKem, Inc., formed in 2020 and focused on OTFTs, raised $14.0 million (net $12.7 million) in a private placement, alleviating going concern doubts despite continuous losses - SmartKem, Inc. (formerly Parasol Investments Corporation) was formed on **May 13, 2020**, as a shell company and became the successor to SmartKem Limited in **February 2021**[10](index=10&type=chunk) - The company develops disruptive organic thin-film transistors (OTFTs) using patented TRUFLEX® inks for next-generation displays, with an extensive IP portfolio[11](index=11&type=chunk)[103](index=103&type=chunk)[104](index=104&type=chunk) - Despite continuous losses, a **June 2023 private placement** raised **$14.0 million** (net **$12.7 million**), increasing cash to **$13.8 million** and alleviating substantial doubt about the company's going concern ability for the next twelve months[15](index=15&type=chunk)[16](index=16&type=chunk)[119](index=119&type=chunk) [2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=12&type=section&id=2.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section details key accounting policies, noting no material changes from the prior annual report, emphasizing management's estimates for share and warrant valuations, and discussing recent accounting pronouncements - No material changes to significant accounting policies from the Annual Report on Form 10-K for fiscal year ended December 31, 2022, other than those specifically listed[20](index=20&type=chunk) - Management's preparation of financial statements involves significant estimates, especially for common share valuation, fair value of share options, and warrant liabilities, which are subject to inherent uncertainties[21](index=21&type=chunk)[22](index=22&type=chunk) - Warrants not meeting equity treatment criteria are classified as liabilities at fair value and re-measured each reporting period, with changes recognized in the statements of operations[23](index=23&type=chunk) - Issuance costs for equity contracts classified as liabilities are expensed immediately; total issuance costs were **$1.6 million**, with **$0.2 million** expensed[24](index=24&type=chunk) - The adoption of ASU No. 2016-13 (Credit Losses) and ASU No. 2020-06 (Convertible Instruments) on **January 1, 2023**, did not have a material impact on the financial statements[25](index=25&type=chunk)[26](index=26&type=chunk) [3. PREPAID EXPENSES AND OTHER CURRENT ASSETS](index=15&type=section&id=3.%20PREPAID%20EXPENSES%20AND%20OTHER%20CURRENT%20ASSETS) Prepaid expenses and other current assets decreased to $0.941 million by June 30, 2023, mainly due to lower prepaid consulting fees and VAT receivable, partially offset by other increases Prepaid Expenses and Other Current Assets Details | (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Prepaid service charges and property taxes | 99 | 55 | | Prepaid utilities | 78 | 51 | | Prepaid insurance | 461 | 358 | | Prepaid administrative expenses | 77 | 35 | | Prepaid consulting fees | 32 | 304 | | Research grant receivable | 35 | — | | Prepaid technical fees | 15 | 22 | | VAT receivable | 104 | 195 | | Other receivable and other prepaid expenses | 40 | 36 | | Total prepaid expenses and other current assets | 941 | 1,056 | [4. PROPERTY, PLANT AND EQUIPMENT](index=16&type=section&id=4.%20PROPERTY%2C%20PLANT%20AND%20EQUIPMENT) Net property, plant and equipment decreased to $0.558 million by June 30, 2023, primarily due to accumulated depreciation, with $0.1 million depreciation expense for the three-month period Property, Plant and Equipment Details | (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Plant and equipment | 1,568 | 1,478 | | Furniture and fixtures | 231 | 218 | | Computer hardware and software | 24 | 24 | | Less: Accumulated depreciation | (1,265) | (1,118) | | Property, plant and equipment, net | 558 | 602 | - Depreciation expense was **$0.1 million** for both the three months ended June 30, 2023 and 2022, with **$0.1 million** classified as research and development expense[28](index=28&type=chunk) [5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES](index=16&type=section&id=5.%20ACCOUNTS%20PAYABLE%20AND%20ACCRUED%20EXPENSES) Accounts payable and accrued expenses increased to $1.494 million by June 30, 2023, driven by higher accounts payable, legal/professional services, and payroll liabilities Accounts Payable and Accrued Expenses Details | (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Accounts payable | 680 | 230 | | Accrued expenses – lab refurbishments | 123 | 117 | | Accrued expenses – technical fees | 76 | 130 | | Accrued expenses – variable rent & utilities | 2 | 15 | | Accrued expenses – audit & accounting fees | 143 | 128 | | Accrued expenses – legal & other professional services | 126 | — | | Accrued expenses – other | 5 | 80 | | Credit card liabilities | 17 | 20 | | Payroll liabilities | 322 | 211 | | Total accounts payable and accrued expenses | 1,494 | 931 | [6. LEASES](index=17&type=section&id=6.%20LEASES) The company's operating lease costs were $0.211 million for six months ended June 30, 2023, with right-of-use assets and lease liabilities decreasing, and a weighted average remaining lease term of 1.80 years - The Company has operating leases for office space, lab space, and equipment with remaining lease terms of **1 to 3 years**[30](index=30&type=chunk) Lease Costs | (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Operating lease cost | 75 | 68 | 139 | 131 | | Short-term lease cost | 3 | 2 | 7 | 4 | | Variable lease cost | 20 | 41 | 65 | 95 | | Total lease cost | 98 | 111 | 211 | 230 | Lease Assets and Liabilities | (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Right-of-use assets, net | 415 | 475 | | Lease liability, current | 245 | 206 | | Lease liability, non-current | 135 | 239 | | Total lease liabilities | 380 | 445 | Lease Term and Discount Rate | Metric | June 30, 2023 | | :---------------------------------------- | :------------ | | Weighted average remaining lease term (years) | 1.80 | | Weighted average discount rate | 8.03% | [7. COMMITMENTS AND CONTINGENCIES](index=18&type=section&id=7.%20COMMITMENTS%20AND%20CONTINGENCIES) Management believes potential liabilities from legal disputes would not materially affect the interim condensed consolidated financial statements - Management believes any potential liabilities from legal disputes would not materially affect the interim condensed consolidated financial statements[37](index=37&type=chunk) [8. STOCKHOLDERS' EQUITY](index=18&type=section&id=8.%20STOCKHOLDERS'%20EQUITY) This section details preferred and common stock, including the June 2023 issuance of Series A-1/A-2 Preferred Stock and Warrants for $12.2 million, outlining their rights, preferences, and restrictions, and the Purchase Agreement's operational limitations - The board of directors has the authority to issue up to **10,000,000 shares** of preferred stock in one or more series, with rights and preferences determined by the board[38](index=38&type=chunk) - In **June 2023**, the Company sold Series A-1 and A-2 Convertible Preferred Stock and Class A and B Warrants for aggregate gross proceeds of **$12.2 million** in a private placement[59](index=59&type=chunk) - The Purchase Agreement for the June 2023 PIPE imposes restrictions on the Company's operations and ability to raise additional capital, including limits on cash usage from operating activities and significant purchasers' rights in future financings[64](index=64&type=chunk)[65](index=65&type=chunk)[66](index=66&type=chunk) [Preferred Stock](index=18&type=section&id=Preferred%20Stock) The board is authorized to issue up to 10 million preferred stock shares in series, with rights and restrictions that may exceed common stock - The board of directors has the authority to issue up to **10,000,000 shares** of preferred stock in one or more series[38](index=38&type=chunk) - The board can fix the rights, preferences, privileges, and restrictions of preferred stock, which may be greater than those of common stock[38](index=38&type=chunk) [Series A-1 Preferred Stock](index=18&type=section&id=Series%20A-1%20Preferred%20Stock) Series A-1 Preferred Stock, designated June 2023 at $1,000 stated value, offers as-if converted dividends, accrues 19.99% annual dividends under certain conditions, has limited voting rights, liquidation preference, and is convertible at $0.25 per share - Series A-1 Preferred Stock has a stated value of **$1,000 per share** and entitles holders to as-if converted dividends equal to common stock dividends[39](index=39&type=chunk)[40](index=40&type=chunk) - If the 30-day VWAP is less than the conversion price after 18 months, Series A-1 Preferred Stock will accrue dividends at an annual rate of **19.99%** of the stated value, payable in cash or, if equity conditions are met, in common stock[40](index=40&type=chunk)[144](index=144&type=chunk) - The Series A-1 Preferred Stock has limited voting rights, a liquidation preference over common stock (and other preferred stock except Series A-2), and is convertible into common stock at **$0.25 per share**, subject to anti-dilution and beneficial ownership limitations[41](index=41&type=chunk)[43](index=43&type=chunk)[44](index=44&type=chunk)[46](index=46&type=chunk) [Series A-2 Preferred Stock](index=22&type=section&id=Series%20A-2%20Preferred%20Stock) Series A-2 Preferred Stock, designated June 2023 at $1,000 stated value, offers as-if converted dividends, has limited voting rights, liquidation preference, is convertible at $0.25 per share, and automatically converts upon exchange listing - Series A-2 Preferred Stock has a stated value of **$1,000 per share** and entitles holders to as-if converted dividends equal to common stock dividends[49](index=49&type=chunk)[50](index=50&type=chunk) - It has limited voting rights, a liquidation preference over common stock (and other preferred stock except Series A-1), and is convertible into common stock at **$0.25 per share**, subject to anti-dilution and beneficial ownership limitations[51](index=51&type=chunk)[53](index=53&type=chunk)[54](index=54&type=chunk)[56](index=56&type=chunk) - The Series A-2 Preferred Stock automatically converts into common stock upon listing on a national securities exchange (NYSE American, Nasdaq Capital Market, etc.)[55](index=55&type=chunk) [Series A-1 and A-2 Preferred Stock and Class A and Class B Warrant Issuances](index=26&type=section&id=Series%20A-1%20and%20A-2%20Preferred%20Stock%20and%20Class%20A%20and%20Class%20B%20Warrant%20Issuances) June 2023 private placement of Series A-1/A-2 Preferred Stock and Warrants generated $14.2 million gross proceeds (net $12.7 million), with warrants classified as derivative liabilities, and the Purchase Agreement imposing significant operational and capital raising restrictions PIPE Financing Details | Metric | Amount | | :----------------------------------- | :----- | | Total gross proceeds from June 2023 PIPE | $14.2 million | | Net proceeds after expenses | $12.7 million | | Class A Warrants exercise price | $0.25 | | Class B Warrants exercise price | $0.01 | - The Class A and Class B Warrants are accounted for as derivative instruments and classified as liabilities due to provisions that adjust the number of shares issued and the existence of a pre-specified volatility input for fundamental transactions[62](index=62&type=chunk) - The Purchase Agreement imposes restrictions, including a limit on cash usage from operating activities (average of **$2.8 million** for any consecutive three-month period until **June 14, 2024**) and significant purchasers' rights to participate in or consent to future financings[64](index=64&type=chunk)[65](index=65&type=chunk)[66](index=66&type=chunk) [Common Stock](index=30&type=section&id=Common%20Stock) Each common stock share carries one vote, and the company has never paid cash dividends nor anticipates doing so. Its common stock began trading on the OTCQB® Market in February 2022, and shares were issued to vendors for services in early 2023 - Each holder of common stock is entitled to **one vote per share** on all matters[71](index=71&type=chunk) - The company has never paid cash dividends and does not anticipate doing so in the foreseeable future[72](index=72&type=chunk) - Common stock began trading on the OTCQB® Market under the ticker symbol "SMTK" in **February 2022**[73](index=73&type=chunk) - In **January and February 2023**, the company issued **102,777 shares** of common stock as payment for investor relations and other financial consulting services[73](index=73&type=chunk)[74](index=74&type=chunk) [Common Stock Warrants](index=30&type=section&id=Common%20Stock%20Warrants) As of June 30, 2023, 91.5 million common stock warrants (average exercise price $0.19, 4.94-year term) and 2.2 million pre-funded warrants ($0.01 exercise price) were outstanding, valued using Black-Scholes with peer company volatility Common Stock Warrants Outstanding | Metric | June 30, 2023 | January 1, 2023 | | :----------------------------------- | :------------ | :-------------- | | Common Stock Warrants Outstanding | 91,490,975 | 985,533 | | Weighted-Average Exercise Price | $0.19 | $2.00 | | Weighted-Average Remaining Contractual Term (Years) | 4.94 | 3.15 | Pre-funded Warrants Outstanding | Metric | June 30, 2023 | January 1, 2023 | | :----------------------------------- | :------------ | :-------------- | | Pre-funded Warrants Outstanding | 2,168,000 | 2,168,000 | | Weighted-Average Exercise Price | $0.01 | $0.01 | - The fair value of common stock warrants is determined using the Black-Scholes option-pricing model, with expected stock volatility estimated based on historical volatility of publicly traded peer companies due to insufficient historical data for the company[77](index=77&type=chunk)[82](index=82&type=chunk) [9. SHARE-BASED COMPENSATION](index=32&type=section&id=9.%20SHARE-BASED%20COMPENSATION) The 2021 Equity Incentive Plan authorizes up to 4.4 million shares; share-based compensation was $0.412 million for six months ended June 30, 2023, with no options granted, and fair value determined via Black-Scholes - The 2021 Equity Incentive Plan authorizes a maximum of **4,376,571 shares**, with annual increases[78](index=78&type=chunk) Share-Based Compensation Expense | (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Research and development | 49 | 38 | 119 | 78 | | Selling, general and administrative | 70 | 59 | 293 | 117 | | Total | 119 | 97 | 412 | 195 | - No options were granted under the 2021 Plan for the three and six months ended June 30, 2023 and 2022[80](index=80&type=chunk) - Total compensation cost related to non-vested stock option awards not yet recognized as of June 30, 2023, was **$1.1 million**, to be recognized through **July 2026**[85](index=85&type=chunk) [10. NET LOSS PER COMMON SHARE](index=33&type=section&id=10.%20NET%20LOSS%20PER%20COMMON%20SHARE) Basic and diluted net loss per share are equal due to net operating losses, with 121.4 million potentially dilutive securities excluded as anti-dilutive as of June 30, 2023 - Basic and diluted net loss per share are equal in periods with net operating losses, as all common stock options and warrants are deemed anti-dilutive[86](index=86&type=chunk) Potentially Dilutive Securities Excluded | Potentially Dilutive Securities | June 30, 2023 | June 30, 2022 | | :------------------------------ | :------------ | :------------ | | Common stock warrants | 62,047,115 | 985,533 | | Assumed conversion of preferred stock | 56,597,464 | — | | Stock options | 2,745,920 | 1,937,382 | | Total | 121,390,499 | 2,922,915 | Weighted Average Shares Outstanding | Weighted Average Shares Outstanding | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Weighted average shares issued | 27,087,773 | 26,583,365 | 27,083,982 | 26,427,550 | | Weighted average pre-funded warrants | 2,168,000 | 2,168,000 | 2,168,000 | 2,168,000 | | Weighted average penny warrants | 9,660,613 | - | 4,856,993 | - | | Weighted average shares outstanding | 38,916,386 | 28,751,365 | 34,108,976 | 28,595,550 | [11. DEFINED CONTRIBUTION PENSION](index=35&type=section&id=11.%20DEFINED%20CONTRIBUTION%20PENSION) The company operates a defined contribution pension scheme for UK employees, with total pension cost for six months ended June 30, 2023, at $0.077 million, a slight decrease year-over-year - The Company operates a defined contribution pension scheme for its UK employees[89](index=89&type=chunk) Defined Contribution Pension Costs | (in thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Research and development | 22 | 26 | 44 | 53 | | Selling, general and administrative | 15 | 13 | 33 | 27 | | Total | 37 | 39 | 77 | 80 | [12. FAIR VALUE MEASUREMENTS](index=35&type=section&id=12.%20FAIR%20VALUE%20MEASUREMENTS) Warrant liability, valued at $1.834 million as of June 30, 2023, is a Level 3 fair value measurement, determined using option pricing models with inputs like stock price, peer volatility, and risk-free rate Warrant Liability Rollforward | (in thousands) | Warrant Liability | | :---------------------------------- | :---------------- | | Balance at January 1, 2023 | — | | Fair value of warrant issued in Private Placement Offering | 1,837 | | Total change in the liability included in earnings | (3) | | Balance at June 30, 2023 | 1,834 | - The warrant liability is classified within **Level 3** of the fair value hierarchy due to the use of unobservable inputs like historical volatility (based on peer companies) in the option pricing models[91](index=91&type=chunk)[93](index=93&type=chunk) Warrant Valuation Inputs | Option Pricing Model Inputs | June 30, 2023 | June 22, 2023 | June 14, 2023 | | :-------------------------- | :------------ | :------------ | :------------ | | Expected term (years) | 4.96 | 5.00 | 5.00 | | Risk-free interest rate | 4.05% | 3.95% | 3.98% | | Expected volatility | 50.0% | 50.0% | 50.0% | | Expected dividend yield | 0.0% | 0.0% | 0.0% | | Underlying stock price | $0.06 | $0.06 | $0.06 | [13. SUBSEQUENT EVENTS](index=37&type=section&id=13.%20SUBSEQUENT%20EVENTS) Subsequent to June 30, 2023, 2.5 million common share warrants were exercised for $25,000, and 200 Series A-2 Preferred Stock shares converted into 800,000 common shares - Subsequent to **June 30, 2023**, warrants to purchase **2,500,000 common shares** were exercised for **$25,000**[95](index=95&type=chunk) - Subsequent to **June 30, 2023**, **200 Series A-2 Preferred Stock shares** were converted into **800,000 common shares**[95](index=95&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial condition, operations, and liquidity for the three and six months ended June 30, 2023, covering OTFT business, revenue, expenses, foreign currency impact, recent capital raise, and critical accounting estimates - The discussion should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes in Item 1, and the audited consolidated financial statements in the Annual Report on Form 10-K for December 31, 2022[96](index=96&type=chunk) - The company is focused on developing disruptive organic thin-film transistors (OTFTs) and patented TRUFLEX® inks for next-generation displays, with R&D in the UK and a field application office in Taiwan[103](index=103&type=chunk)[104](index=104&type=chunk) - The company has incurred substantial operating losses since inception, with an accumulated deficit of **$90.6 million** as of June 30, 2023, primarily from R&D and general and administrative costs[105](index=105&type=chunk)[106](index=106&type=chunk) [DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS](index=38&type=section&id=DISCLOSURE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section contains forward-looking statements subject to risks and uncertainties that could cause material differences in actual results; readers should consult "Risk Factors" in the 10-K and this report - The report contains forward-looking statements identified by words like "anticipates," "expects," "intends," and "plans," which are subject to risks and uncertainties[98](index=98&type=chunk) - Risks include the implementation of business plans, market acceptance of technology, product development, capital requirements, intellectual property protection, dependence on third parties, and international operations[98](index=98&type=chunk)[99](index=99&type=chunk) - Readers should not place undue reliance on forward-looking statements and should review "Risk Factors" in the 10-K and this report, as actual results may differ materially[101](index=101&type=chunk)[102](index=102&type=chunk) [Company Overview](index=40&type=section&id=Company%20Overview) SmartKem develops OTFTs and TRUFLEX® inks for advanced displays, with R&D in the UK and Taiwan, backed by extensive IP, incurring significant operating losses and an accumulated deficit of $90.6 million by June 30, 2023 - SmartKem develops disruptive organic thin-film transistors (OTFTs) and patented TRUFLEX® semiconductor and dielectric inks for next-generation displays, including microLED, miniLED, and AMOLED[103](index=103&type=chunk) - The company has an extensive IP portfolio with **125 granted patents** and **40 codified trade secrets**, with R&D in Manchester, UK, and a field application office in Taiwan[104](index=104&type=chunk) - Since inception in **2009**, substantial resources have been devoted to R&D, leading to an accumulated deficit of **$90.6 million** as of June 30, 2023, primarily from R&D and general and administrative costs[105](index=105&type=chunk)[106](index=106&type=chunk) [Results of Operations for the three and six months ended June 30, 2023](index=42&type=section&id=Results%20of%20Operations%20for%20the%20three%20and%20six%20months%20ended%20June%2030%2C%202023) Results for three and six months ended June 30, 2023, show minimal revenue, stable operating expenses (R&D, SG&A), and reduced net loss due to significant foreign currency transaction gains - Revenue and cost of revenue are minimal, stemming from sales of OTFT backplanes and TRUFLEX® materials for customer assessment and development[107](index=107&type=chunk)[112](index=112&type=chunk) - Operating expenses are primarily driven by research and development (payroll, technical costs) and selling, general, and administrative expenses (payroll, professional services)[109](index=109&type=chunk)[110](index=110&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk) - Non-operating income was significantly impacted by favorable foreign currency transaction gains related to intercompany loans, increasing by **$1.8 million** for the three-month period and **$2.6 million** for the six-month period compared to prior year losses[112](index=112&type=chunk)[117](index=117&type=chunk) [Three months ended June 30, 2023 compared with three months ended June 30, 2022](index=42&type=section&id=Three%20months%20ended%20June%2030%2C%202023%20compared%20with%20three%20months%20ended%20June%2030%2C%202022) For Q2 2023, revenue doubled to $8.0 thousand, operating expenses decreased to $2.5 million, and a $1.8 million foreign currency gain reduced net loss to $2.0 million from $3.7 million year-over-year Three Months Ended June 30, 2023 vs 2022 Financial Summary | Metric ($ thousands) | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change ($ thousands) | % Change | | :------------------------------- | :--------------------------- | :--------------------------- | :------------------- | :------- | | Revenue | 8 | 4 | 4 | 100.0% | | Cost of revenue | 6 | 2 | 4 | 200.0% | | Other operating income | 169 | 294 | (125) | (42.5%) | | Total operating expenses | 2,538 | 2,714 | (176) | (6.5%) | | Research and development | 1,257 | 1,344 | (87) | (6.5%) | | Selling, general and administrative | 1,324 | 1,370 | (46) | (3.4%) | | Gain/(loss) on foreign currency transactions (non-operating) | 533 | (1,284) | 1,817 | N/A | | Net loss | (2,027) | (3,701) | 1,674 | (45.2%) | - Issuance costs of **$0.2 million** allocated to warrant liability were expensed in full during the three months ended June 30, 2023, primarily for legal, placement, and consulting fees related to the private placement[111](index=111&type=chunk) [Six months ended June 30, 2023 compared with six months ended June 30, 2022](index=42&type=section&id=Six%20months%20ended%20June%2030%2C%202023%20compared%20with%20six%20months%20ended%20June%2030%2C%202022) For H1 2023, revenue decreased to $24.0 thousand, total operating expenses remained stable at $5.4 million, and a $2.6 million foreign currency gain reduced net loss to $4.1 million from $6.5 million year-over-year Six Months Ended June 30, 2023 vs 2022 Financial Summary | Metric ($ thousands) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change ($ thousands) | % Change | | :------------------------------- | :--------------------------- | :--------------------------- | :------------------- | :------- | | Revenue | 24 | 34 | (10) | (29.4%) | | Cost of revenue | 22 | 25 | (3) | (12.0%) | | Other operating income | 438 | 578 | (140) | (24.2%) | | Total operating expenses | 5,361 | 5,413 | (52) | (1.0%) | | Research and development | 2,536 | 2,802 | (266) | (9.5%) | | Selling, general and administrative | 2,757 | 2,611 | 146 | 5.6% | | Gain/(loss) on foreign currency transactions (non-operating) | 1,035 | (1,638) | 2,673 | N/A | | Net loss | (4,075) | (6,463) | 2,388 | (37.0%) | - Issuance costs of **$0.2 million** allocated to warrant liability were expensed in full during the six months ended June 30, 2023, primarily for legal, placement, and consulting fees related to the private placement[116](index=116&type=chunk) [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and cash equivalents rose to $13.8 million by June 30, 2023, driven by $12.7 million net proceeds from PIPE financing, offsetting $3.1 million operating cash use; management expects sufficient liquidity for 12 months, with $1.7 million in capital commitments Liquidity and Capital Resources Summary | Metric | June 30, 2023 ($ millions) | December 31, 2022 ($ millions) | | :----------------------------------- | :------------------------- | :----------------------------- | | Cash and cash equivalents | 13.8 | 4.2 | | Net proceeds from June 2023 PIPE financing | 12.7 | N/A | | Cash used in operating activities (6 months) | 3.1 | N/A | - Management believes existing cash is sufficient to fund operations for the next twelve months, but additional capital may be required thereafter for continued operations and R&D[119](index=119&type=chunk) Capital Commitments | Capital Commitments (next 12 months) | Amount ($ millions) | | :----------------------------------- | :------------------ | | Accounts payable and accrued expenses | 1.5 | | Lease liabilities | 0.2 | [Critical Accounting Estimates](index=44&type=section&id=Critical%20Accounting%20Estimates) The primary critical accounting estimate is warrant liability valuation from the June 2023 private placement, classified as long-term derivative liabilities and valued using option pricing models with various inputs - The primary critical accounting estimate is the valuation of warrant liability, arising from the **June 2023 private placement** of preferred A-1 and A-2 shares[120](index=120&type=chunk)[122](index=122&type=chunk) - Warrants are classified as long-term derivative liabilities and valued using option pricing models that consider underlying stock price, expected volatility (based on peer companies), risk-free interest rate, expected life, and the probability of uplisting[122](index=122&type=chunk)[124](index=124&type=chunk) - Issuance costs for equity contracts classified as liabilities are expensed immediately, while those for equity securities are deferred and charged against gross proceeds[125](index=125&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=46&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Market risk disclosures are not applicable for the company - Not applicable[126](index=126&type=chunk) [Item 4. Controls and Procedures](index=46&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were ineffective as of June 30, 2023, due to a material weakness in accounting for the complex June 2023 private placement, with no impact on prior financial statements or material changes to internal controls - Management concluded that disclosure controls and procedures were **not effective** as of **June 30, 2023**[130](index=130&type=chunk) - A material weakness was identified in internal control over financial reporting related to the complex financial reporting and accounting associated with the **June 2023 private placement** (a non-cash item)[131](index=131&type=chunk) - No prior financial statements were impacted, and no changes in internal controls over financial reporting materially affected financial reporting during the period[131](index=131&type=chunk)[132](index=132&type=chunk) Part II Other Information [Item 1. Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) The company reported no legal proceedings - None[133](index=133&type=chunk) [Item 1A. Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) This section updates 10-K risk factors with new risks from the June 2023 PIPE financing, including cash usage restrictions, significant purchasers' rights impacting future capital raises, and potential high cash dividends on Series A-1 Preferred Stock - No material changes to risk factors previously disclosed in the 10-K, except for new risks related to the **June 2023 PIPE financing**[133](index=133&type=chunk)[134](index=134&type=chunk) - The **June 2023 PIPE** includes restrictions on cash usage from operating activities (average of **$2.8 million** for any consecutive three-month period until **June 14, 2024**)[135](index=135&type=chunk) - Significant purchasers in the PIPE have rights to participate in or consent to future financings, which may make it more difficult or expensive to raise additional capital and could adversely affect the amount of capital raised[136](index=136&type=chunk)[139](index=139&type=chunk)[141](index=141&type=chunk) - The Series A-1 Preferred Stock may accrue **19.99% annual dividends** payable in cash if the 30-day VWAP falls below the conversion price after 18 months, which would materially and adversely affect financial condition[144](index=144&type=chunk)[145](index=145&type=chunk) - The Series A-1 Preferred Stock also imposes negative covenants, such as prohibitions on issuing parity preferred stock, incurring new debt over **$1 million**, granting liens, or repurchasing junior securities without consent, potentially limiting capital raising and operational flexibility[147](index=147&type=chunk) - The company lacks commercial-scale production ability and relies on third-party foundries, which may lead to unanticipated costs and delays in transferring technology and adapting manufacturing processes[148](index=148&type=chunk)[149](index=149&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=52&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds - None[150](index=150&type=chunk) [Item 3. Defaults Upon Senior Securities](index=52&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[151](index=151&type=chunk) [Item 4. Mine Safety Disclosures](index=52&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[151](index=151&type=chunk) [Item 5. Other Information](index=52&type=section&id=Item%205.%20Other%20Information) The company reported no other information - None[151](index=151&type=chunk) [Item 6. Exhibits](index=52&type=section&id=Item%206.%20Exhibits) This section provides an index of exhibits filed with the Form 10-Q, including various agreements, certificates of designation for preferred stock, warrant forms, and certifications - The exhibit index lists various documents, including the Share Exchange Agreement, Amended and Restated Certificate of Incorporation and Bylaws, Certificates of Designation for Series A-1 and A-2 Preferred Stock, forms of Class A, Class B, and Placement Agent Warrants, and the Purchase Agreement[153](index=153&type=chunk) - Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[153](index=153&type=chunk) - Inline XBRL documents (Instance, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, Presentation Linkbase, and Cover Page Interactive Data File) are filed herewith[152](index=152&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk) SIGNATURES [SIGNATURES](index=57&type=section&id=SIGNATURES) The report was signed on August 14, 2023, by Ian Jenks (CEO and Chairman) and Barbra C. Keck (CFO) - The report was signed on **August 14, 2023**, by Ian Jenks (CEO and Chairman) and Barbra C. Keck (CFO)[158](index=158&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-56181 SmartKem, Inc. (Exact name of registrant as specified in its charter) Delaware 85-1083654 (State or other ju ...