UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
EXCHANGE ACT OF 1934
For the quarterly period ended
or
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
(Address of Principal Executive Offices)
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of exchange on which registered |
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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.
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).
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 | ☐ |
☒ | 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
As of November 8, 2024, there were
TABLE OF CONTENTS
2
Item 1. Financial Statements
SMARTKEM, INC.
Condensed Consolidated Balance Sheets
(in thousands, except number of shares and per share data)
September 30, | December 31, | |||||
| 2024 | 2023 | ||||
(Unaudited) | ||||||
Assets |
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Current assets | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable |
| — |
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Research and development tax credit receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Right-of-use assets, net |
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Other assets, non-current |
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Total assets | $ | | $ | | ||
Liabilities and stockholders’ equity |
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Current liabilities | ||||||
Accounts payable and accrued expenses | $ | | $ | | ||
Lease liabilities, current |
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Other current liabilities | | | ||||
Total current liabilities |
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Lease liabilities, non-current |
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Warrant liability | — |
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Total liabilities |
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Commitments and contingencies (Note 7) |
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Stockholders’ equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
| ( |
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Accumulated deficit |
| ( |
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Total stockholders' equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
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, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Revenue | $ | — | $ | | $ | | $ | | ||||
Cost of revenue |
| — |
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Gross profit |
| — |
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Other operating income |
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Operating expenses |
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Research and development |
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Selling, general and administrative |
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(Gain)/loss on foreign currency transactions |
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Total operating expenses |
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Loss from operations |
| ( |
| ( |
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Non-operating income/(expense) |
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Gain/(loss) on foreign currency transactions | — | ( | ( | | ||||||||
Transaction costs allocable to warrants | — | — | — | ( | ||||||||
Change in fair value of the warrant liability | — | | | | ||||||||
Interest income/(expense) |
| ( | |
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Total non-operating income/(expense) |
| ( |
| ( |
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Loss before income taxes | ( | ( | ( | ( | ||||||||
Income tax expense | — | — |
| ( |
| — | ||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive loss: |
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Foreign currency translation |
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| ( | |||||
Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Common share data: | ||||||||||||
Basic net loss per common share* | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Diluted net loss per common share* | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Dividend per common share | $ | — | $ | — | $ | ( | $ | — | ||||
Weighted average number of basic shares outstanding* | | | | | ||||||||
Weighted average number of diluted shares outstanding* | | | | | ||||||||
* reflects a one-for-thirty-five (1:) reverse stock split effected on September 21, 2023 | ||||||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
SMARTKEM, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share data)
Preferred Stock | Common stock | Additional | Accumulated other | Total | ||||||||||||||||||
$0.0001 par value | $0.0001 par value | paid-in | comprehensive | Accumulated | Stockholders' | |||||||||||||||||
Shares |
| Amount | Shares |
| Amount |
| capital |
| income / (loss) |
| deficit |
| equity | |||||||||
Balance at January 1, 2024 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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| — |
| — |
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Issuance of stock awards | — |
| — | |
| — |
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| — |
| — |
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Issuance of common stock to vendor | — |
| — | |
| — |
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| — |
| — |
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Conversion of Preferred stock into common stock | ( |
| — | |
| — |
| — |
| — |
| — |
| — | ||||||||
Exchange of Preferred stock into common stock warrants | ( |
| — | — |
| — |
| — |
| — |
| — |
| — | ||||||||
Deemed dividend on extinguishment of Preferred stock | — |
| — | — |
| — |
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| — |
| ( |
| ( | ||||||||
Cashless exercise of warrants into common stock | — |
| — | |
| — |
| — |
| — |
| — |
| — | ||||||||
Foreign currency translation adjustment | — |
| — | — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at March 31, 2024 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
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Issuance of common stock to vendor | — |
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Conversion of Preferred stock into common stock | ( |
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Exercise of warrants into common stock | — |
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Fair value of warrants reclassified from liability to equity | — |
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Foreign currency translation adjustment | — |
| — | — |
| — |
| — |
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Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at June 30, 2024 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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| — |
| — |
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Issuance of common stock to vendor | — |
| — | |
| — |
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| — |
| — |
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Conversion of Preferred stock into common stock | ( |
| — | |
| — |
| — |
| — |
| — |
| — | ||||||||
Foreign currency translation adjustment | — |
| — | — |
| — |
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Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at September 30, 2024 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
5
SMARTKEM, INC.
Condensed Consolidated Statements of Stockholders’ Equity (continued)
(Unaudited)
(in thousands, except share data)
Preferred Stock | Common stock | Additional | Accumulated other | Total | ||||||||||||||||||
$0.0001 par value | $0.0001 par value | paid-in | comprehensive | Accumulated | Stockholders' | |||||||||||||||||
Shares |
| Amount | Shares |
| Amount |
| capital |
| income / (loss) |
| deficit |
| equity | |||||||||
Balance at January 1, 2023 | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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| — |
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Issuance of common stock to vendor | — |
| — | |
| — |
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| — |
| — |
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Foreign currency translation adjustment | — |
| — | — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at March 31, 2023 | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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Issuance of preferred stock, net of issuance costs | |
| — | — |
| — |
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| — |
| — |
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Foreign currency translation adjustment | — |
| — | — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at June 30, 2023 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Stock-based compensation expense | — |
| — | — |
| — |
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| — |
| — |
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Conversion of Preferred stock into common stock | ( |
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Exercise of warrants into common stock | — |
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Foreign currency translation adjustment | — |
| — | — |
| — |
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Net loss | — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | ||||||||
Balance at September 30, 2023 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
* reflects a one-for-thirty-five (1:) reverse stock split effected on September 21, 2023 |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
6
SMARTKEM, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||
| 2024 |
| 2023 | |||
Cash flow from operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation | | | ||||
Stock-based compensation expense | | | ||||
Issuance of common stock to vendor | | | ||||
Right-of-use asset amortization | | | ||||
Loss on foreign currency transactions | | ( | ||||
Transaction costs allocable to warrants | — | | ||||
Change in fair value of the warrant liability | ( | ( | ||||
Change in operating assets and liabilities: | ||||||
Accounts receivable | | ( | ||||
Research and development tax credit receivable | ( | | ||||
Prepaid expenses and other current assets | | ( | ||||
Other non-current assets | | — | ||||
Accounts payable and accrued expenses | | | ||||
Lease liabilities | ( | ( | ||||
Income tax payable | — | ( | ||||
Other current liabilities | ( | ( | ||||
Net cash used in operating activities |
| ( |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment | ( | ( | ||||
Net cash used by investing activities |
| ( |
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Cash flow from financing activities: |
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Proceeds from the issuance of preferred stock in private placement | — | | ||||
Proceeds from the issuance of warrants in private placement | — | | ||||
Payment of issuance costs | — | ( | ||||
Proceeds from the exercise of warrants | | | ||||
Net cash provided by financing activities |
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Effect of exchange rate changes on cash | |
| ( | |||
Net change in cash |
| ( |
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Cash, beginning of period | | | ||||
Cash, end of period | $ | | $ | | ||
Supplemental disclosure of cash and non-cash investing and financing activities |
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Issuance of common shares for consulting services | $ | | $ | | ||
Initial classification of fair value of warrants | $ | — | $ | | ||
Right-of-use asset and lease liability additions | $ | | $ | |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
7
1. | ORGANIZATION, BUSINESS, GOING CONCERN 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 $
Business
The Company is seeking to reshape the world of electronics with its disruptive organic thin-film transistors (“OTFTs”) that have the potential to revolutionize the display industry. The Company’s patented TRUFLEX® liquid semiconductor polymers are used to make a new type of transistor that can be used in a number of display technologies including next generation microLED displays. The Company’s inks enable low temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost displays that outperform existing technology. The Company develops its materials at its research and development facility in Manchester, UK and provides prototyping services at the Centre for Process Innovation (“CPI”) at Sedgefield, UK. The Company entered into a technology transfer agreement (TTA) with the Industrial Technology Research Institute (ITRI) in Taiwan for product prototyping on its Gen2.5 fabrication line and it also has a field application office in Taiwan. The Company has an extensive IP portfolio including 125 granted patents across 19 patent families and 40 codified trade secrets.
Risk and Uncertainties
The Company’s activities are subject to significant risks and uncertainties including the risk of failure to secure additional funding to properly execute the Company’s business plan. The Company is subject to risks that are common to companies in the development stage, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, reliance on third party manufacturers, protection of proprietary technology and compliance with regulatory requirements.
The Company 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.
Going Concern
The Company has incurred continuing losses including net losses of $
The Company expects that its cash and cash equivalents of $
8
its operations and research development activity thereafter. It is possible this period could be shortened if there are any significant increases in spending or more rapid progress of development programs than anticipated.
The Company’s future viability is dependent on its ability to raise additional capital to fund its operations. The Company will need to obtain additional funds to satisfy its operational needs and to fund its sales and marketing efforts, research and development expenditures, and business development activities. Until such time, if ever, as the Company can generate sufficient cash through revenue, management’s plans are to finance the Company’s working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. If the Company raises additional funds by issuing equity securities, the Company’s existing security holders will likely experience dilution. If the Company borrows money, the incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that could restrict its operations. If the Company enters into a collaboration, strategic alliance or other similar arrangement, it may be forced to give up valuable rights. There can be no assurance however that such financing will be available in sufficient amounts, when and if needed, on acceptable terms or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will depend on a number of factors, including the market demand for the Company’s products and services, the quality of product development efforts, management of working capital, and continuation of normal payment terms and conditions for purchase of services. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows for operations, then the Company will need to raise additional funding.
There is substantial doubt that the Company will be able to pay its obligations as they fall due, and this substantial doubt is not alleviated by management plans. The condensed consolidated financial statements as of September 30, 2024 have been prepared assuming that the Company will continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
Basis of Presentation
The unaudited interim condensed consolidated financial statements of the Company as of September 30, 2024 and December 31, 2023 and for the three and nine months ended September 30, 2024 and 2023 should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Annual Report”), which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024 and may also be found on the Company’s website (www.smartkem.com). 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, 2024 and 2023; however, certain information and footnote disclosures normally included in our audited consolidated financial statements included in our Annual Report have been condensed or omitted as permitted by GAAP. It is important to note that the Company’s results of operations and cash flows for interim periods are not necessarily indicative of the results of operations and cash flows to be expected for a full fiscal year or any interim period.
9
Reverse Stock Split
All share numbers and per share amounts presented in these financial statements, including these footnotes reflect a
(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.
The Company records, when necessary, deemed dividends for: (i) the exchange of preferred shares for pre-funded warrants, based on the fair value of the pre-funded warrants in excess of the carrying value of the preferred shares and (ii) the amendment of preferred stock accounted for as an extinguishment, based on the fair value of the preferred stock immediately before and after the amendments.
Management’s Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s consolidated financial statements relate to the valuation of common stock, fair value of stock options and fair value of warrant liabilities. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the consolidated financial statements, actual results may materially vary from these estimates.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures which will require companies to disclose significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”). The pronouncement is effective for annual filings for the year ended December 31, 2024. The Company is still assessing the impact of the adoption of this standard.
On December 14, 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures which applies to all entities subject to income taxes. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to provide more detailed income tax disclosures. For public business entities (PBEs), the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is still assessing the impact of the adoption of this standard but does not expect it to have a material impact on its results of operations, financial position or cash flows.
10
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
September 30, | December 31, | |||||
(in thousands) |
| 2024 | 2023 | |||
Prepaid insurance | $ | | $ | | ||
Research grant receivable | | | ||||
Prepaid facility costs | | | ||||
VAT receivable | | | ||||
Prepaid software licenses | | | ||||
Prepaid professional service fees |
| — |
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Other receivable and other prepaid expenses | | | ||||
Total prepaid expenses and other current assets | $ | | $ | | ||
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, | December 31, | |||||
(in thousands) |
| 2024 | 2023 | |||
Plant and equipment | $ | | $ | | ||
Furniture and fixtures |
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Computer hardware and software |
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Less: Accumulated depreciation |
| ( |
| ( | ||
Property, plant and equipment, net | $ | | $ | | ||
Depreciation expense was $
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
September 30, | December 31, | |||||
(in thousands) |
| 2024 | 2023 | |||
Accounts payable - trade | $ | | $ | | ||
Payroll liabilities |
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VAT payable | | — | ||||
Accrued expenses – audit & accounting fees |
| — |
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Accrued expenses – technical fees |
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Accrued expenses – other |
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Total accounts payable and accrued expenses | $ | | $ | | ||
6. LEASES
The Company has operating leases consisting of office space, lab space and equipment with remaining lease terms of
The Company is not the lessor in any lease agreement, and no related party transactions for lease arrangements have occurred.
11
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) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||
Short-term lease cost |
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| — |
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Variable lease cost |
| — |
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| — |
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Total lease cost | $ | | $ | | $ | | $ | | ||||
The total lease cost is included in the unaudited condensed consolidated statements of operations as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
(in thousands) | 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Research and development | $ |