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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, 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.

(Exact name of registrant as specified in its charter)

Delaware

    

85-1083654

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

Manchester Technology Centre, Hexagon Tower.

Delaunays Road, Blackley

Manchester, M9 8GQ U.K.

(Address of Principal Executive Offices)

011-44-161-721-1514

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No  

As of August 14, 2023, there were 30,387,773 of the registrant’s shares of common stock outstanding.

Table of Contents

TABLE OF CONTENTS

Page

Part I

Financial Information

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2023 and 2022

4

Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2023 and 2022

5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022

6

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

7-22

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

Item 4.

Controls and Procedures

27

Part II

Other Information

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

30

Exhibit Index

31

Signatures

33

2

Table of Contents

Item 1. Financial Statements

SMARTKEM, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

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

June 30, 

December 31, 

    

2023

2022

Assets

 

  

  

Current assets

Cash and cash equivalents

$

13,774

$

4,235

Accounts receivable

 

1

 

30

Research and development tax credit receivable

 

355

 

1,121

Prepaid expenses and other current assets

 

941

 

1,056

Total current assets

 

15,071

 

6,442

Property, plant and equipment, net

 

558

 

602

Right-of-use assets, net

 

415

 

475

Other assets, non-current

 

6

 

6

Total assets

$

16,050

$

7,525

Liabilities and stockholders’ equity

 

  

 

  

Current liabilities

Accounts payable and accrued expenses

$

1,494

$

931

Lease liabilities, current

 

245

 

206

Income tax payable

22

Other current liabilities

13

244

Total current liabilities

 

1,752

 

1,403

Lease liabilities, non-current

 

135

 

239

Warrant liability

1,834

 

Total liabilities

 

3,721

 

1,642

Commitments and contingencies (Note 6)

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized, 14,149 and zero shares issued and outstanding, at June 30, 2023 and December 31, 2022, respectively

 

 

Common stock, par value $0.0001 per share, 300,000,000 shares authorized, 27,087,773 and 26,984,996 shares issued and outstanding, at June 30, 2023 and December 31, 2022, respectively

 

3

 

3

Additional paid-in capital

 

104,424

 

92,930

Accumulated other comprehensive loss

 

(1,456)

 

(483)

Accumulated deficit

 

(90,642)

 

(86,567)

Total stockholders' equity

 

12,329

 

5,883

Total liabilities and stockholders’ equity

$

16,050

$

7,525

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 June 30, 

Six Months Ended June 30, 

    

2023

    

2022

    

2023

    

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

Operating expenses

 

  

 

  

 

  

 

  

Research and development

 

1,257

1,344

 

2,536

 

2,802

Selling, general and administrative

 

1,324

1,370

 

2,757

 

2,611

Loss/(gain) on foreign currency transactions

 

(43)

 

68

 

Total operating expenses

 

2,538

 

2,714

 

5,361

 

5,413

Loss from operations

 

(2,367)

 

(2,418)

 

(4,921)

 

(4,826)

Non-operating income/(expense)

 

  

 

  

 

  

 

  

Gain/(loss) on foreign currency transactions

533

(1,284)

1,035

(1,638)

Transaction costs allocable to warrants

(198)

(198)

Change in fair value of the warrant liability

3

3

Interest income

 

2

1

 

6

 

1

Total non-operating income/(expense)

 

340

 

(1,283)

 

846

 

(1,637)

Loss before income taxes

 

(2,027)

 

(3,701)

 

(4,075)

 

(6,463)

Income tax expense

 

 

Net loss

$

(2,027)

$

(3,701)

$

(4,075)

$

(6,463)

Net loss

$

(2,027)

$

(3,701)

$

(4,075)

$

(6,463)

Other comprehensive loss:

 

  

 

  

 

  

 

  

Foreign currency translation

 

(517)

722

 

(973)

 

878

Total comprehensive loss

$

(2,544)

$

(2,979)

$

(5,048)

$

(5,585)

Basic and diluted net loss per common share

$

(0.05)

$

(0.13)

$

(0.12)

$

(0.23)

Basic and diluted weighted average shares outstanding

38,916,386

28,751,365

34,108,976

28,595,550

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)

Accumulated

Preferred Stock

Common stock

Additional

other

Total

$0.0001 par value

$0.0001 par value

paid-in

comprehensive

Accumulated

Stockholders'

Shares

    

Amount

Shares

    

Amount

    

capital

    

income

    

deficit

    

equity

Balance at January 1, 2023

$

26,984,996

$

3

$

92,930

$

(483)

$

(86,567)

$

5,883

Stock-based compensation expense

 

 

 

293

 

 

 

293

Issuance of common stock to vendor

 

102,777

 

 

55

 

 

 

55

Foreign currency translation adjustment

 

 

 

 

(456)

 

 

(456)

Net loss

 

 

 

 

 

(2,048)

 

(2,048)

Balance at March 31, 2023

27,087,773

3

93,278

(939)

(88,615)

3,727

Stock-based compensation expense

 

 

 

119

 

 

 

119

Issuance of preferred stock, net of issuance costs

14,149

 

 

 

11,027

 

 

 

11,027

Foreign currency translation adjustment

 

 

 

 

(517)

 

 

(517)

Net loss

 

 

 

 

 

(2,027)

 

(2,027)

Balance at June 30, 2023

14,149

$

27,087,773

$

3

$

104,424

$

(1,456)

$

(90,642)

$

12,329

Preferred Stock

Common stock

Additional

other

Total

$0.0001 par value

$0.0001 par value

paid-in

comprehensive

Accumulated

Stockholders'

Shares

    

Amount

Shares

    

Amount

    

capital

    

income

    

deficit

    

equity

Balance at January 1, 2022

$

25,554,309

$

3

$

89,954

$

(1,363)

$

(75,072)

$

13,522

Stock-based compensation expense

 

 

 

98

 

 

 

98

Issuance of common stock to vendor

 

12,500

 

 

43

 

 

 

43

Issuance of common stock in private placement

1,000,000

2,000

2,000

Issuance costs related to common stock in private placement

(160)

(160)

Foreign currency translation adjustment

 

 

 

 

156

 

 

156

Net loss

 

 

 

 

 

(2,762)

 

(2,762)

Balance at March 31, 2022

26,566,809

3

91,935

(1,207)

(77,834)

12,897

Stock-based compensation expense

 

 

 

97

 

 

 

97

Issuance of common stock to vendor

 

382,473

 

 

590

 

 

 

590

Issuance costs related to preferred stock in private placement

 

 

 

(10)

 

 

 

(10)

Foreign currency translation adjustment

 

 

 

 

722

 

 

722

Net loss

 

 

 

 

 

(3,701)

 

(3,701)

Balance at June 30, 2022

$

26,949,282

$

3

$

92,612

$

(485)

$

(81,535)

$

10,595

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)

Six Months Ended June 30, 

    

2023

    

2022

Cash flow from operating activities:

 

  

 

  

Net loss

$

(4,075)

$

(6,463)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Depreciation

81

105

Stock-based compensation expense

412

195

Issuance of common stock to vendor

55

633

Right-of-use asset amortization

134

131

Gain/(loss) on foreign currency transactions

(962)

1,638

Transaction costs allocable to warrant liability

198

Change in fair value of the warrant liability

(3)

Change in operating assets and liabilities:

Accounts receivable

30

(6)

Research and development tax credit receivable

804

(578)

Prepaid expenses and other current assets

(64)

(1,057)

Accounts payable and accrued expenses

718

(134)

Lease liabilities

(137)

(115)

Income tax payable

(23)

Other current liabilities

(238)

Net cash used in operating activities

 

(3,070)

 

(5,651)

Cash flows from investing activities:

 

  

 

  

Purchases of property, plant and equipment

(6)

(58)

Net cash used by investing activities

 

(6)

 

(58)

Cash flow from financing activities:

 

  

 

  

Proceeds from the issuance of preferred stock in private placement

12,386

2,000

Proceeds from the issuance of warrants in private placement

1,763

Payment of issuance costs

(1,483)

(170)

Net cash provided by financing activities

 

12,666

 

1,830

Effect of exchange rate changes on cash

(51)

 

(590)

Net change in cash

 

9,539

 

(4,469)

Cash, beginning of period

4,235

12,226

Cash, end of period

$

13,774

$

7,757

Supplemental disclosure of cash and non-cash investing and financing activities

 

  

 

  

Initial classification of fair value of warrants

$

1,837

$

Right-of-use asset and lease liability additions

$

50

$

539

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

6

Table of Contents

SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

1.

ORGANIZATION, BUSINESS, LIQUIDITY AND BASIS OF PRESENTATION

Organization

SmartKem, formerly known as Parasol Investments Corporation (“Parasol”), was formed on May 13, 2020, and is the successor of SmartKem Limited, which was formed under the Laws of England and Wales. The Company was founded as a “shell” company registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with no specific business plan or purpose until it began operating the business of SmartKem Limited following the closing of the transactions contemplated by the Securities Exchange Agreement (“the Exchange Agreement”), dated February 21, 2021, with SmartKem Limited. Pursuant to the Exchange Agreement all of the equity interests in SmartKem Limited, except certain deferred shares which had no economic or voting rights and which were purchased by Parasol for an aggregate purchase price of $1.40, were exchanged for shares of Parasol common stock and SmartKem Limited became a wholly owned subsidiary of Parasol (the “Exchange”).

Business

The Company is seeking to reshape the world of electronics with its disruptive organic thin-film transistors (OTFTs) that have the potential to drive the next generation of displays. SmartKem’s patented TRUFLEX® semiconductor and dielectric inks, or liquid electronic polymers, are used to make a new type of transistor that could potentially revolutionize the display industry. SmartKem’s inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing models. The company’s electronic polymer platform can be used in a number of display technologies including microLED, miniLED and AMOLED displays for next generation televisions, laptops, augmented reality (AR) and virtual reality (VR) headsets, smartwatches and smartphones. SmartKem develops its materials at its research and development facility in Manchester, UK, its semiconductor manufacturing processes at the Centre for Process Innovation (CPI) at Sedgefield, UK and retains a field application office in Taiwan. The Company has an extensive IP portfolio including 125 granted patents across 19 patent families and 40 codified trade secrets.

Risk and Uncertainties

The Company’s activities are subject to significant risks and uncertainties including the risk of failure to secure additional funding to properly execute the Company’s business plan. The Company is subject to risks that are common to companies in the growth stage, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology and compliance with regulatory requirements.

The Company has access under a framework agreement to equipment which is used in the manufacturing of demonstrator products employing the Company’s inks. If the Company lost access to this fabrication facility, it would materially and adversely affect the Company’s ability to manufacture prototypes and demonstrate products for potential customers. The loss of this access could significantly impede the Company’s ability to engage in product development and process improvement activities. Alternative providers of similar services exist but would take effort and time to bring into the Company’s operations.

Liquidity

The accompanying unaudited interim condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business.

We have incurred continuing losses including net losses of $4.1 million for the six months ended June 30, 2023. The Company’s cash as of June 30, 2023 was $13.8 million. We anticipate operating losses to continue for the foreseeable future due to, among other things, costs related to research funding, further development of our technology and products and expenses related to the commercialization of our products.

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SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

In June 2023 the Company raised $14.0 million through two closings of a private placement of Preferred Stock and Warrants. Net proceeds after related expenses were $12.7 million, alleviating substantial doubt about the Company's ability to continue as a going concern. As a result, the Company’s cash balance at June 30, 2023 was $13.8 million. The Company used approximately $3.1 million of cash in its operating activities for the six months ended June 30, 2023.

Management believes that the Company’s existing cash as of June 30, 2023 will be sufficient to fund the operations of the Company for the twelve months from the issuance of this financial statement, and that the Company may require additional capital funding to continue its operations and research and development activity thereafter.

Basis of Presentation

The unaudited interim condensed consolidated financial statements of SmartKem, Inc. (“SmartKem” or the “Company”) as of June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and 2022 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, 2022 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023 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 SmartKem 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 June 30, 2023 and 2022; 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 SIGNIIFICANT ACCOUNTING POLICIES

Other than the policies listed below, there have been no material changes to our 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 on Form 10-K for the fiscal year ended December 31, 2022.

Management’s Use of Estimates

The preparation of consolidated financial statements in conformity with accounting standards generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relates to the valuation of common share, fair value of share 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

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Notes to Condensed Consolidated Financial Statements

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.

Warrant Liability

The Company assessed its warrants in accordance with the guidance contained in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 480, Distinguishing Liabilities from Equity and 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, under which warrants that do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company will classify those warrants as liabilities at their fair value and adjusts the warrants to fair value in respect of each reporting period. This liability is subject to re-measurement at each balance sheet date and any change in fair value is recognized in the statements of operations.

Issuance Costs

The Company assessed the issuance cost in connection with the issuance of an equity offering. ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A, Expenses of Offering, states that specific incremental costs directly attributable to a proposed or actual offering of equity securities may properly be deferred and charged against the gross proceeds of the offering. Analogizing to that guidance, specific incremental costs directly attributable to the issuance of an equity contract to be classified in equity should generally be recorded as a reduction in equity. However, issuance costs for equity contracts that are classified as a liability should be expensed immediately. The issuance costs are allocated to the equity and liability components of the underlying transaction on a basis of the allocated fair value of the gross proceeds in the overall transactions. The total issuance costs were $1.6 million, with $0.2 million charged directly to the statement of operations.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments: Credit Losses (Topic 326), which requires measurement and recognition of expected losses for financial assets held. The new standard changes the impairment model for most financial instruments, including trade receivables, from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require organizations to incorporate considerations of historical information, current conditions and reasonable and supportable forecasts. The standards update is effective prospectively for annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted, for U.S. Securities Exchange filers. However, the standard was not applicable until January 1, 2023, because the company has elected to apply the extended transition period available for emerging growth companies. Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies, which is effective prospectively for annual and interim periods beginning after December 15, 2022. The adoption of this guidance did not have a material impact in the interim condensed consolidated financial statements of the Company.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted the ASU on January 1, 2023. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company has determined that the impact this ASU did not have material effect on its consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

3.    PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

June 30, 

December 31, 

(in thousands)

    

2023

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

Property, plant and equipment consist of the following:

June 30, 

December 31, 

(in thousands)

    

2023

2022

Plant and equipment

$

1,568

$

1,478

Furniture and fixtures

 

231

 

218

Computer hardware and software

 

24

 

24

 

1,823

 

1,720

Less: Accumulated depreciation

 

(1,265)

 

(1,118)

Property, plant and equipment, net

$

558

$

602

Depreciation expense was $0.1 million and $0.1 million for the three months ended June 30, 2023 and 2022, respectively, and $0.1 million is classified as research and development expense.

5.    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

June 30, 

December 31, 

(in thousands)

    

2023

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

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SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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 June 30, 

Six Months Ended June 30, 

(in thousands)

    

2023

    

2022

    

2023

    

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

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

Three Months Ended June 30, 

Six Months Ended June 30, 

(in thousands)

2023

    

2022

    

2023

    

2022

    

Research and development

$

95

$

105

$

199

$

218

Selling, general and administrative

 

3

 

6

 

12

 

12

Total lease cost

$

98

$

111

$

211

$

230

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

    

June 30, 

December 31, 

(in thousands)

    

2023

    

2022

Assets

  

 

  

Right-of-use assets, net

$

415

$

475

Total lease assets

$

415

$

475

Liabilities

 

  

 

  

Current liabilities:

 

  

 

  

Lease liability, current

$

245

$

206

Noncurrent liabilities:

 

  

 

Lease liability, non-current

 

135

 

239

Total lease liabilities

$

380

$

445

The Company had no right of use lease assets and lease liabilities for financing leases as of June 30, 2023 and December 31, 2022.

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SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

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

June 30, 

(in thousands)

2023

    

2022

    

Operating cash outflows from operating leases

$

137

$

115

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

 

50

 

539

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:

June 30, 

2023

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

1.80

Weighted average discount rate – operating leases

8.03%

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

June 30, 

(in thousands)

2023

2023

$

151

2024

237

2025

19

Total undiscounted lease payments

407

Less imputed interest

(27)

Total net lease liabilities

$

380

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 (the “Series A-1 Certificate of Designation”). The following is a summary of the principal terms of the Series A-1 Preferred Stock as set forth in the Series A-1 Certificate of Designation:

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Notes to Condensed Consolidated Financial Statements

Dividends

The holders of Series A-1 Preferred Stock will be entitled to dividends, on an as-if converted basis, equal to and in the same form as dividends actually paid on shares of Common Stock, when and if actually paid. In addition, in the event that on the 18th month anniversary of the Closing Date, the trailing 30-day VWAP (as defined in the Series A-1 Certificate of Designation) is less than the then-effective Series A-1 Conversion Price, the Series A-1 Preferred Stock will begin accruing dividends at the annual rate of 19.99% of the stated value thereof (the “Series A-1 Dividend”). The Series A-1 Dividend would be paid in cash, or, at the option of the Company if certain equity conditions are met, in shares of Common Stock at a price per share equal to ninety percent (90%) of the trailing 10-day VWAP for the last 10 trading date prior to the date the Series A-1 Dividend is paid.

 

Voting Rights

 

The shares of Series A-1 Preferred Stock have no voting rights, except (a) the right to vote, with the holders of Common Stock, as a single class, on any resolution presented to stockholders for the purpose of obtaining approval of a proposed amendment to the Charter to effect a reverse split of the outstanding shares of the Common Stock at a ratio to be determined, with each share of Series A-1 Preferred Stock entitled to vote on an as-converted basis and (b) to the extent required by the Delaware General Corporation Law (the “DGCL”).

 

As long as any shares of Series A-1 Preferred Stock are outstanding, the Company may not, without the approval of a majority of the then outstanding shares of Series A-1 Preferred Stock which must include AIGH Investment Partners LP and its affiliates (“AIGH”) for so long as AIGH is holding at least $1,500,000 in aggregate stated value of Series A-1 Preferred Stock acquired pursuant to the Purchase Agreement (a) alter or change the powers, preferences or rights given to the Series A-1 Preferred Stock, (b) alter or amend the Charter, the Series A-1 Certificate of Designation, the Series A-2 Certificate of Designation (as defined below) or the bylaws of the Company (the “Bylaws”) in such a manner so as to materially adversely affect any rights given to the Series A-1 Preferred Stock, (c) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a Liquidation (as defined below) senior to, or otherwise pari passu with, the Series A-1 Preferred Stock, other than the Series A-2 Preferred Stock, (d) increase the number of authorized shares of Series A-1 Preferred Stock, (e) issue any Series A-1 Preferred Stock except pursuant to the Purchase Agreement, or (f) enter into any agreement to do any of the foregoing.

  

Liquidation

 

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

 

Conversion

 

The Series A-1 Preferred Stock is convertible into Common Stock at any time at a conversion price of $0.25, subject to adjustment for certain anti-dilution provisions set forth in the Series A-1 Certificate of Designation (the “Series A-1 Conversion Price”). Upon conversion the shares of Series A-1 Preferred Stock will resume the status of authorized but unissued shares of preferred stock of the Company.

 

Conversion at the Option of the Holder

  

The Series A-1 Preferred Stock is convertible at the then-effective Series A-1 Conversion Price at the option of the holder at any time and from time to time.

 

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Notes to Condensed Consolidated Financial Statements

Mandatory Conversion at the Option of the Company

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

  

Beneficial Ownership Limitation

 

The Series A-1 Preferred Stock cannot be converted to Common Stock if the holder and its affiliates would beneficially own more than 4.99% (or 9.99% at the election of the holder) of the outstanding common stock. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon notice to us, provided that any increase in this limitation will not be effective until 61 days after such notice from the holder to us and such increase or decrease will apply only to the holder providing such notice.

 

Preemptive Rights

 

No holders of Series A-1 Preferred Stock will, as holders of Series A-1 Preferred Stock, have any preemptive rights to purchase or subscribe for Common Stock or any of our other securities.

 

Redemption

 

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

 

Negative Covenants

 

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

 

Trading Market

 

There is no established trading market for any of the Series A-1 Preferred Stock, and we do not expect a market to develop. We do not intend to apply for a listing for any of the Series A-1 Preferred Stock on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series A-1 Preferred Stock will be limited.

  

Series A-2 Preferred Stock

 

On June 14, 2023, the Company filed a Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware designating 18,000 shares out of the authorized but unissued shares of its preferred stock as Series A-2 Preferred Stock with a stated value of $1,000 per share (the “Series A-2 Certificate of Designation”). The following is a summary of the principal terms of the Series A-2 Preferred Stock as set forth in the Series A-2 Certificate of Designation:

 

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Notes to Condensed Consolidated Financial Statements

Dividends

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

 

Voting Rights

 

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

 

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

  

Liquidation

 

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

 

Conversion

 

The Series A-2 Preferred Stock is convertible into Common Stock at any time at a conversion price of $0.25, subject to adjustment for certain anti-dilution provisions set forth in the Series A-2 Certificate of Designation (the “Series A-2 Conversion Price”). Upon conversion the shares of Series A-2 Preferred Stock will resume the status of authorized but unissued shares of preferred stock of the Company.

 

Conversion at the Option of the Holder

  

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

 

Automatic Conversion

 

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

 

Beneficial Ownership Limitation

 

The Series A-2 Preferred Stock cannot be converted to common stock if the holder and its affiliates would beneficially own more than 4.99% (or 9.99% at the election of the holder) of the outstanding common stock. However, any holder may increase or decrease such percentage to any other percentage not in excess 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.

 

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Notes to Condensed Consolidated Financial Statements

Preemptive Rights

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

 

Redemption

 

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

 

Trading Market

 

There is no established trading market for any of the Series A-2 Preferred Stock, and we do not expect a market to develop. We do not intend to apply for a listing for any of the Series A-2 Preferred Stock on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Series A-2 Preferred Stock will be limited.

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

On June 14, 2023, the Company and certain investors entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold an aggregate of (i) 9,229 shares of Series A-1 Convertible Preferred Stock at a price of $1,000 per share (the “Series A-1 Preferred Stock”), (ii) 2,950 shares of the Company’s Series A-2 Convertible Preferred Stock at a price of $1,000 per share (“Series A-2 Preferred Stock” and together with the Series A-1 Preferred Stock, the “Preferred Stock”), (iii) Class A Warrants to purchase up to an aggregate of 48,716,000 shares of common stock (the “Class A Warrant”), and (iv) Class B Warrants to purchase up to an aggregate of 27,943,860 shares of common stock (the “Class B Warrant” and together with the Class A Warrant, the “Warrants”) for aggregate gross proceeds of $12.2 million (the “June 2023 PIPE”). In addition, 1,200,000 Class B Warrants were issued in lieu of cash payments for consulting services related to the offering. The fair value of the service provided was $59 thousand.

On June 22, 2023, in a second closing of the June 2023 PIPE, the Company sold an aggregate of (i) 1,870.36596 Series A-1 Preferred Stock, (ii) 100 shares of Series A-2 Preferred Stock, and (iii) Class A Warrants to purchase up to an aggregate of 7,881,464 shares of Common Stock pursuant to the Purchase Agreement for aggregate gross proceeds of $2.0 million. In addition, 300,000 Class B Warrants were issued in lieu of cash payments for consulting services related to the offering. The fair value of the service provided was $15 thousand.

Each Class A Warrant has an exercise price of $0.25 and each Class B Warrant has an exercise price of $0.01, both subject to adjustments in accordance with the terms of the Warrants. The Warrants expire five years from the issuance date.

There were an additional 4,464,118 warrants issues related to a placement agent fee. The fair value of this fee is $31 thousand.

The Company has accounted for the Class A and Class B Warrants as derivative instruments in accordance with ASC 815, Derivatives and Hedging. The Company classified the Warrants as a liability because they cannot be considered indexed to the Company’s stock due to provisions that, in certain circumstances, adjust the number of shares to be issued if the exercise price is adjusted and the existence of a pre-specified volatility input to the Black-Scholes calculation which could be used to calculate consideration in the event of a Fundamental Transaction, as defined in the agreements.

The Company received net proceeds after expenses of $12.7 million. Of the net proceeds, the Company allocated an estimated fair value of $1.8 million to the Warrants. The Company also expensed $0.2 million of issuance costs that were allocated to the warranty liability during the three and six months ended June 30, 2023. 

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SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

The terms of the June 2023 PIPE include a number of restrictions on our operations and on our ability to raise additional capital. The Purchase Agreement, among other things, provides that, for a period ending on June 14, 2024, we may not use cash from operating activities (as defined under U.S. generally accepted accounting principles) of more than an average of $2.8 million for any consecutive three-month period (subject to certain exceptions). This provision may cause us to delay certain actions that may benefit our business and may prevent us from pursuing potentially favorable business opportunities, even if a majority of our board of directors believes such actions or opportunities are in the best interest of our company and our stockholders.

Under the terms of the Purchase Agreement, for a period ending on December 15, 2025, in the event that we issue common stock or common stock equivalents in a subsequent financing (as defined in the Purchase Agreement), the significant purchasers (defined in the Purchase Agreement as a purchaser acquiring at least 1,000 shares of Series A-1 Preferred Stock) will have the right to purchase up to 40% of the securities sold in the subsequent financing. This provision may make it more difficult for us to raise additional capital because other investors may want to provide al