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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 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.

(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 November 13, 2023, there were 883,595 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 September 30, 2023 and December 31, 2022

3

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

4

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

5-6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022

7

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

8-24

Item 2.

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

25

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

29

Part II

Other Information

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

33

Exhibit Index

34

Signatures

35

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)

September 30, 

December 31, 

    

2023

2022

Assets

 

  

  

Current assets

Cash and cash equivalents

$

11,210

$

4,235

Accounts receivable

 

54

 

30

Research and development tax credit receivable

 

452

 

1,121

Prepaid expenses and other current assets

 

1,018

 

1,056

Total current assets

 

12,734

 

6,442

Property, plant and equipment, net

 

503

 

602

Right-of-use assets, net

 

337

 

475

Other assets, non-current

 

6

 

6

Total assets

$

13,580

$

7,525

Liabilities and stockholders’ equity

 

  

 

  

Current liabilities

Accounts payable and accrued expenses

$

1,453

$

931

Lease liabilities, current

 

228

 

206

Income tax payable

22

Other current liabilities

147

244

Total current liabilities

 

1,828

 

1,403

Lease liabilities, non-current

 

75

 

239

Warrant liability

1,376

 

Total liabilities

 

3,279

 

1,642

Commitments and contingencies (Note 6)

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized, 13,879 and zero shares issued and outstanding, at September 30, 2023 and December 31, 2022, respectively

 

 

Common stock, par value $0.0001 per share, 300,000,000 shares authorized, 876,278 and 771,054 shares issued and outstanding, at September 30, 2023 and December 31, 2022, respectively *

 

 

Additional paid-in capital

 

104,571

 

92,933

Accumulated other comprehensive loss

 

(606)

 

(483)

Accumulated deficit

 

(93,664)

 

(86,567)

Total stockholders' equity

 

10,301

 

5,883

Total liabilities and stockholders’ equity

$

13,580

$

7,525

 * reflects a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023

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

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 September 30, 

Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

Revenue

$

3

$

26

$

27

$

60

Cost of revenue

 

1

 

26

 

23

 

50

Gross profit

 

2

 

 

4

 

10

Other operating income

 

257

277

 

695

 

855

Operating expenses

 

  

 

  

 

  

 

  

Research and development

 

1,568

1,346

 

4,104

 

4,150

Selling, general and administrative

 

1,268

1,392

 

4,025

 

4,002

Loss on foreign currency transactions

 

118

 

186

 

Total operating expenses

 

2,954

 

2,738

 

8,315

 

8,152

Loss from operations

 

(2,695)

 

(2,461)

 

(7,616)

 

(7,287)

Non-operating income/(expense)

 

  

 

  

 

  

 

  

Gain/(loss) on foreign currency transactions

(787)

(1,493)

248

(3,131)

Transaction costs allocable to warrants

(198)

Change in fair value of the warrant liability, net

458

461

Interest income

 

2

1

 

8

 

3

Total non-operating income/(expense)

 

(327)

 

(1,492)

 

519

 

(3,128)

Loss before income taxes

 

(3,022)

 

(3,953)

 

(7,097)

 

(10,415)

Income tax expense

 

 

Net loss

$

(3,022)

$

(3,953)

$

(7,097)

$

(10,415)

Net loss

$

(3,022)

$

(3,953)

$

(7,097)

$

(10,415)

Other comprehensive loss:

 

  

 

  

 

  

 

  

Foreign currency translation

 

850

1,117

 

(123)

 

1,995

Total comprehensive loss

$

(2,172)

$

(2,836)

$

(7,220)

$

(8,420)

Basic and diluted net loss per common share *

$

(1.78)

$

(4.75)

$

(5.82)

$

(12.61)

Basic and diluted weighted average shares outstanding *

1,701,166

831,981

1,219,450

826,193

 * reflects a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023

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

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 / (loss)

    

deficit

    

equity

Balance at January 1, 2023

$

771,054

$

$

92,933

$

(483)

$

(86,567)

$

5,883

Stock-based compensation expense

 

 

 

293

 

 

 

293

Issuance of common stock to vendor

 

2,937

 

 

55

 

 

 

55

Foreign currency translation adjustment

 

 

 

 

(456)

 

 

(456)

Net loss

 

 

 

 

 

(2,048)

 

(2,048)

Balance at March 31, 2023

$

773,991

$

$

93,281

$

(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

$

773,991

$

$

104,427

$

(1,456)

$

(90,642)

$

12,329

Stock-based compensation expense

 

 

 

119

 

 

 

119

Conversion of Preferred stock into common stock

(270)

 

30,859

 

 

 

 

 

Exercise of warrants into common stock

 

71,428

 

 

25

 

 

 

25

Foreign currency translation adjustment

 

 

 

 

850

 

 

850

Net loss

 

 

 

 

 

(3,022)

 

(3,022)

Balance at September 30, 2023

13,879

$

876,278

$

$

104,571

$

(606)

$

(93,664)

$

10,301

 * reflects a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023

5

Table of Contents

SMARTKEM, INC.

Condensed Consolidated Statements of Stockholders’ Equity, continued

(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 / (loss)

    

deficit

    

equity

Balance at January 1, 2022

$

730,176

$

$

89,957

$

(1,363)

$

(75,072)

$

13,522

Stock-based compensation expense

 

 

 

98

 

 

 

98

Issuance of common stock to vendor

 

358

 

 

43

 

 

 

43

Issuance of common stock in private placement

28,573

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

$

759,107

$

$

91,938

$

(1,207)

$

(77,834)

$

12,897

Stock-based compensation expense

 

 

 

97

 

 

 

97

Issuance of common stock to vendor

 

10,929

 

 

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

$

770,036

$

$

92,615

$

(485)

$

(81,535)

$

10,595

Stock-based compensation expense

 

 

 

123

 

 

 

123

Foreign currency translation adjustment

 

 

 

 

1,117

 

 

1,117

Net loss

 

 

 

 

 

(3,953)

 

(3,953)

Balance at September 30, 2022

$

770,036

$

$

92,738

$

632

$

(85,488)

$

7,882

 * reflects a one-for-thirty-five (1:35) reverse stock split effected on September 21, 2023

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

]

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SMARTKEM, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

Nine Months Ended September 30, 

    

2023

    

2022

Cash flow from operating activities:

 

  

 

  

Net loss

$

(7,097)

$

(10,415)

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

 

  

 

Depreciation

122

151

Stock-based compensation expense

531

318

Issuance of common stock to vendor

55

230

Right-of-use asset amortization

197

197

Gain/(loss) on foreign currency transactions

(66)

3,131

Transaction costs allocable to warrant liability

198

Warrant liability fair value adjustment

(461)

Change in operating assets and liabilities:

Accounts receivable

(24)

(21)

Research and development tax credit receivable

697

104

Prepaid expenses and other current assets

(159)

(311)

Accounts payable and accrued expenses

713

(29)

Lease liabilities

(201)

(190)

Income tax payable

(23)

Other current liabilities

(102)

Net cash used in operating activities

 

(5,620)

 

(6,835)

Cash flows from investing activities:

 

  

 

  

Purchases of property, plant and equipment

(12)

(67)

Net cash used by investing activities

 

(12)

 

(67)

Cash flow from financing activities:

 

  

 

  

Proceeds from the issuance of preferred stock in private placement

12,386

Proceeds from the issuance of warrants in private placement

1,763

Proceeds from the issuance of common stock in private placement

2,000

Payment of issuance costs

(1,483)

(170)

Proceeds from the exercise of warrants

25

Net cash provided by financing activities

 

12,691

 

1,830

Effect of exchange rate changes on cash

(84)

 

(850)

Net change in cash

 

6,975

 

(5,922)

Cash, beginning of period

4,235

12,226

Cash, end of period

$

11,210

$

6,304

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

$

583

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

7

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SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

1.

ORGANIZATION, BUSINESS, LIQUIDITY AND BASIS OF PRESENTATION

Organization

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

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 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 technologies. 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.

The Company has incurred continuing losses including net losses of $7.1 million for the nine months ended September 30, 2023. The Company’s cash as of September 30, 2023 was $11.2 million. The Company anticipates operating losses to continue for the foreseeable future due to, among other things, costs related to research funding, further development of our technology and products and expenses related to the commercialization of our products.

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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 (as defined below) and Warrants (as defined below). Net proceeds after related expenses were $12.7 million, alleviating substantial doubt about the Company's ability to continue as a going concern. The Company used approximately $5.6 million of cash in its operating activities for the nine months ended September 30, 2023.

Management believes that the Company’s existing cash as of September 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 the Company as of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 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 the Company and its consolidated subsidiaries.

These interim condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting and with the SEC’s instructions to Form 10-Q and Article 10 of Regulation S-X. They include the accounts of all wholly owned subsidiaries and all significant inter-company accounts and transactions have been eliminated in consolidation. Amounts are presented in thousands, except number of shares and per share data.

The preparation of interim condensed consolidated financial statements requires management to make assumptions and estimates that impact the amounts reported. These interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the interim periods ended September 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.

Reverse Stock Split

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Other than the policies listed below, there have been no material changes to the Company’s significant accounting policies as set forth in Note 3 Summary of Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report.

Management’s Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements 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

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SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates.

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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SMARTKEM, INC.

Notes to Condensed Consolidated Financial Statements

3.    PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

September 30, 

December 31, 

(in thousands)

    

2023

2022

Prepaid service charges and property taxes

$

78

$

55

Prepaid utilities

 

43

 

51

Prepaid insurance

 

383

 

358

Prepaid administrative expenses

 

110

 

35

Prepaid consulting fees

13

304

Research grant receivable

176

Prepaid technical fees

35

22

VAT receivable

105

195

Other receivable and other prepaid expenses

75

36

Total prepaid expenses and other current assets

$

1,018

$

1,056

4.    PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

September 30, 

December 31, 

(in thousands)

    

2023

2022

Plant and equipment

$

1,511

$

1,478

Furniture and fixtures

 

222

 

218

Computer hardware and software

 

23

 

24

 

1,756

 

1,720

Less: Accumulated depreciation

 

(1,253)

 

(1,118)

Property, plant and equipment, net

$

503

$

602

Depreciation expense was $0.1 million for each of the nine months ended September 30, 2023 and 2022 and is classified as research and development expense.

5.    ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

September 30, 

December 31, 

(in thousands)

    

2023

2022

Accounts payable

$

385

$

230

Accrued expenses – lab refurbishments

 

124

 

117

Accrued expenses – technical fees

 

245

 

130

Accrued expenses – variable rent & utilities

1

15

Accrued expenses – audit & accounting fees

 

196

 

128

Accrued expenses – legal & other professional services

43

Accrued expenses – other

 

29

 

80

Credit card liabilities

17

20

Payroll liabilities

 

413

 

211

Total accounts payable and accrued expenses

$

1,453

$

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 September 30, 

Nine Months Ended September 30, 

(in thousands)

    

2023

    

2022

    

2023

    

2022

Operating lease cost

$

70

$

65

$

209

$

196

Short-term lease cost

 

 

2

 

7

 

6

Variable lease cost

 

53

 

48

 

118

 

143

Total lease cost

$

123

$

115

$

334

$

345

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

(in thousands)

2023

    

2022

    

2023

    

2022

Research and development

$

113

$

107

$

312

$

325

Selling, general and administrative

 

10

 

8

 

22

 

20

Total lease cost

$

123

$

115

$

334

$

345

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

    

September 30, 

December 31,