Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and other financial information included in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Cautionary Note on Forward-Looking Statements” above. You should review the disclosure under the heading “Item1A. Risk Factors” in this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statement.
Overview
We develop and manufacture custom electronic materials designed to enable the next generation of electronics. Our advanced TRUFLEX® materials integrate into existing manufacturing processes, supporting efficient, scalable production and high-performance outcomes across a broad range of electronic applications. We combine materials science expertise with practical engineering to deliver tailored solutions for partners seeking to innovate in electronics.
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We design and develop our materials at our research and development facility in Manchester, UK and operate a field application office in Hsinchu, Taiwan. We operate with an international footprint, providing materials development, prototyping and technical support to customers and collaborators globally.
Key Factors Affecting Our Performance
There are a number of industry factors that affect our business which include, among others:
Overall Demand for Products and Applications using Organic thin film transistors
Our potential for growth depends significantly on the adoption of OTFT materials in the display and sensor markets and our ability to capture a significant share of any market that does develop. We expect that demand for our technology will also fluctuate based on various market cycles, continuously evolving industry supply chains, trade and tariff terms, as well as evolving competitive dynamics in each of the respective markets. These uncertainties make demand difficult to forecast for us and our customers.
Intense and Constantly Evolving Competitive Environment
Competition in the industries we serve is intense. Many companies have made significant investments in product development and production equipment. To remain competitive, market participants must continuously increase product performance, reduce costs, and develop improved ways to serve their customers. To address these competitive pressures, we have invested in research and development activities to support new product development, improve ease of use, lower product costs and deliver higher levels of performance to differentiate our products in the market.
Governmental Trade and Regulatory Conditions
Our potential for growth depends on a balanced and stable trade, political, economic and regulatory environment among the countries where we do business. Changes in trade policy such as the imposition of tariffs or export bans to specific customers or countries could reduce or limit demand for our products in certain markets.
Technological Innovation and Advancement
Innovations and advancements in organic materials continue to expand the potential commercial application for our products. However, new technologies or standards could emerge, or improvements could be made in existing technologies that could reduce or limit the demand for our products in certain markets.
Intellectual Property Issues
We rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of our business. Protection of intellectual property is critical. Therefore, steps such as additional patent applications, confidentiality, and non-disclosure agreements, as well as other security measures are important. While we believe we have a strong patent portfolio and there is no actual or, to our knowledge, threatened litigation against us for patent-related matters, litigation or threatened litigation is a common method to effectively enforce or protect intellectual property rights. Such action may be initiated by or against us and would require significant management time and expenses.
Components of Results of Operations
Revenue
Revenue. Our revenue consists of revenue from the sale of TRUFLEX® inks and demonstration products and revenue earned from various joint development agreements.
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Cost of Revenues. Cost of revenues consists of (1) direct product costs incurred for the raw materials and manufacturing services for our products, (2) fixed product costs primarily relating to production, manufacturing and personnel and (3) depreciation consisting primarily of expenses related to our fixed assets. We expect our cost of goods sold attributable to direct product costs to increase proportionately with increases in revenue, and our cost of goods sold attributable to fixed product costs to remain substantially flat or moderately increase in connection with increases in revenue.
Other Operating Income. Our Other Operating Income includes government grants received for qualifying research and development projects, and research and development tax credits related to the United Kingdom’s Research and Development tax relief for small and medium-sized enterprises, which is a government tax incentive designed to reward innovative companies for investing in research and development. The income associated with these items is recognized in the period which the research and development expenses occurred.
Operating Expenses
Research and Development. Research and development expenses consist primarily of compensation and related costs for personnel, including share-based compensation and employee benefits as well as costs associated with design, fabrication and testing of OTFT devices. In addition, research and development expenses include depreciation expenses related to our fixed assets. We expense research and development expenses as incurred. As we continue to invest in developing our technology for new products, we expect research and development expenses to remain flat or moderately increase in absolute dollars but to decline as a percentage of revenue. We do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of our technology, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and other factors beyond our control will impact our development programs and plans.
General and Administrative. General and administrative expenses consist primarily of allocated compensation and related costs for personnel, including share-based compensation, employee benefits and travel. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, allocations of overhead costs, such as rent, facilities and information technology. We expect general and administrative expenses to increase in absolute dollars in future periods due to additional legal, accounting, insurance, investor relations and other costs associated with being a public company, as well as other costs associated with growing our business.
Non-Operating Income (Expense)
Non-operating income/expense aggregates the following amounts:
Foreign Currency Translation. Foreign currency translation reflects adjustments made due to currency fluctuations.
Fair Value of Warrant Liability. The fair value of equity contracts that are classified as a liability.
Interest Income. Interest income is interest on our cash deposits.
Interest Expense. Interest Expense is related to our short term note payables.
Income Tax Expense/Refund
Income tax expense/refund consists primarily of income taxes in jurisdictions in which we conduct business.
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Results of Operations
Twelve months ended December 31, 2025 compared with the twelve months ended December 31, 2024
Revenue and Cost of Revenue
Our revenue and cost of revenue reflects sales of TRUFLEX® inks and demonstration products, and the direct costs associated with those sales.
Revenues were $697 thousand for the year ended December 31, 2025, compared to $82 thousand for the same period of 2024. The increase in revenues resulted primarily from an increase of $107 thousand in the sale of demonstrator products to potential partners, as we sought to expand our marketing efforts and $508 thousand related to several joint development agreements that were completed in 2025. Cost of revenue was $272 thousand for the twelve months ended December 31, 2025, compared to $32 thousand for the same period of 2024, primarily as a result of a unit increase in the number of products sold during 2025 and costs associated with the completed joint development agreements during 2025.
Other Operating Income
Other operating income was $1.0 million for both years ended December 31, 2025 and 2024 and is comprised primarily of research grants and research and development tax credits.
Operating Expenses
Operating expenses increased by $2.7 million to $14.2 million for the year ended December 31, 2025, compared to $11.5 million for the comparable period of 2024.
Research and development expenses, which represented 49.4% and 44.3% of our total operating expenses for the twelve months ended December 31, 2025 and 2024, respectively, increased by $1.9 million to $7.0 million for the year ended December 31, 2025, compared to $5.1 million for the same period of 2024. The increase in research and development expenses was mainly due to the increase in the cost of our prototyping activities.
General and administrative expense, which represented 51.9% and 55.0% of our total operating expenses for the twelve months ended December 31, 2025 and 2024, respectively, increased by $1.1 million to $7.4 million for year ended December 31, 2025 as compared to $6.3 million for the same period in 2024. This increase was mainly due to increased professional service fees.
Non-Operating Income/(Expenses)
Total non-operating income was $2.3 million for the year ended December 31, 2025, compared to $0.1 thousand for the year ended December 31, 2024. The increase in non-operating income resulted primarily from a gain on foreign currency transactions of $2.4 million in 2025, compared to a loss of $0.1 thousand for the comparable period of 2024. The increase in loss on foreign currency transactions resulted from fluctuations in U.S. dollar/British pound value affecting transactions denominated in foreign currencies and the translation of foreign currency denominated balances on intra-group loans. There was a decrease of $0.7 million in non-operating income resulting from the change in the valuation of the warrant liability.
Net Loss
Net loss was $10.5 million for the year ended December 31, 2025, an increase of $0.2 million, compared to a net loss of $10.3 million for the year ended December 31, 2024. The increase in net loss in the 2025 period was attributable to the factors described in the preceding paragraphs.
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Liquidity and Capital Resources
As of December 31, 2025, our cash and cash equivalents were $0.4 million compared with $7.1 million as of December 31, 2024. We anticipate operating losses to continue for the foreseeable future due to, among other things, costs related to research and development of our technology and products and expenses related to the marketing and commercialization of our products.
We expect that our cash and cash equivalents of $0.4 million as of December 31, 2025 will not be sufficient to fund our operating expenses and capital expenditure requirements for the next 12 months and that we will require additional capital funding to continue our operations and research development activity thereafter.
Our expected cash payments over the next twelve months include (a) $2.6 million to satisfy accounts payable and accrued expenses, (b) $271 thousand to satisfy the lease liabilities and (c) $1.1 million to satisfy the note payable. Additional expected cash payments beyond the next twelve months include $312 thousand of lease liabilities.
Our future viability is dependent on our ability to raise additional capital to fund our operations. We will need to obtain additional funds to satisfy our operational needs and to fund our sales and marketing efforts, research and development expenditures, and business development activities. Until such time, if ever, as we can generate sufficient cash through revenue, management’s plans are to finance our working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. If we raise additional funds by issuing equity securities, our existing security holders will likely experience dilution. If we borrow money, the incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict its operations. If we enter 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 we will be able to pay our obligations as they fall due, and this substantial doubt is not alleviated by management plans.
Cash Flow from Operating Activities
Net cash used in operating activities was $7.7 million for the year ended December 31, 2025 and $8.1 million for the year ended December 31, 2024. Our net loss increased by $0.2 million for the year ended December 31, 2025, the non-cash expenses decreased by $1.4 million and the change in operating asset and liabilities increased by $1.9 million.
Cash Flow from Investing Activities
Net cash used in investing activities was $123 thousand for the year ended December 31, 2025, compared to $75 thousand for the year ended December 31, 2024, an increase of $48 thousand. The increase resulted from additional purchases of laboratory and capital equipment in 2025.
Cash Flow from Financing Activities
Net cash flows provided by financing activities was $1.0 million for the year ended December 31, 2025, compared to $6.5 million for the year ended December 31, 2024, a decrease of $5.5 million. The decrease in net cash provided by financing activities resulted primarily from lower proceeds from offering activities in 2025 compared to 2024.
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Contractual Payment Obligations
Our principal commitments primarily consist of obligations under leases for office space and purchase commitments in the normal course of business for research & development facilities and services, communications infrastructure, and administrative services. We expect to fund these commitments from our cash balances and working capital.
Recently Issued Accounting Pronouncements
For recently issued accounting announcements, see “Recently Issued Accounting Pronouncements” in Note 2, “Significant Accounting Policies and Recent Accounting Pronouncements” in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
Although there are items within our financial statements that require management to make accounting estimates, we do not believe them to be critical, as defined above.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item.
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Item 8. Financial Statements and Supplementary Data
SmartKem, Inc.
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets as of December 31, 2025, and 2024 41
Notes to the Consolidated Financial Statements 45
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
SmartKem, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of SmartKem, Inc. and Subsidiaries (the “Company”) as of December 31, 2024, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We served as the Company’s auditor from 2023 to 2025
New York, NY
March 31, 2025
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
SmartKem, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of SmartKem, Inc. and Subsidiaries (the “Company”) as of December 31, 2025, the related consolidated statements of operations and comprehensive loss, stockholders’ (deficit) equity, and cash flows for the year ended December 31, 2025, and the related notes (collectively referred to as the “financial statements”). In our opinion, based on our audit, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2025, and the results of its operations and its cash flows for the year ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses, and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ CBIZ CPAS P.C.
CBIZ CPAs P.C.
We have served as the Company’s auditor since 2023 (such date takes into account the acquisition of the attest business of Marcum LLP by CBIZ CPAs P.C. effective November 1, 2024).
New York, NY
April 7, 2026
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SMARTKEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except number of shares and per share data)
December 31, December 31,
Assets
Current assets
Cash and cash equivalents $ 374 $ 7,141
Accounts receivable 3 —
Research and development tax credit receivable 549 519
Prepaid expenses and other current assets 575 849
Property, plant and equipment, net 180 269
Right-of-use assets, net 607 120
Other assets, non-current — 6
Liabilities and stockholders’ (deficit) / equity
Current liabilities
Accounts payable and accrued expenses $ 4,603 $ 1,791
Lease liabilities, current 271 47
Notes payable, net 928 —
Deferred revenue 108 450
Total current liabilities 5,910 2,288
Lease liabilities, non-current 312 25
Contingencies (Note 7) — —
Stockholders’ (deficit) / equity:
Accumulated other comprehensive loss (3,578) (1,105)
Total stockholders' (deficit) / equity (3,934) 6,591
Total liabilities and stockholders’ (deficit) / equity $ 2,288 $ 8,904
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except number of shares and per share data)
Year Ended December 31,
Cost of revenue 272 32
Other operating income 951 1,017
Operating expenses
Research and development 7,017 5,111
General and administrative 7,371 6,342
(Gain) / loss on foreign currency transactions (177) 78
Non-operating income / (expense)
Gain / (loss) on foreign currency transactions 2,375 (544)
Change in fair value of the warrant liability — 672
Interest, net (73) 7
Total non-operating income / (expense) 2,302 135
Loss before income taxes (10,533) (10,329)
Income tax refund / (expense) 24 (1)
Preferred stock deemed dividends — (9,224)
Net loss attributed to common stockholders $ (10,509) $ (19,554)
Common share data:
Basic net loss per common share $ (1.29) $ (3.17)
Weighted average shares outstanding - basic 8,156,638 3,260,127
Diluted net loss per common share $ (1.29) $ (6.00)
Weighted average shares outstanding - diluted 8,156,638 3,260,127
Dividends per common share $ — $ (2.83)
Other comprehensive loss:
Foreign currency translation (2,473) 473
Total comprehensive loss $ (12,982) $ (9,857)
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
Accumulated
Preferred Stock Common stock Additional other Total
Stock-based compensation expense — — — — 1,040 — — 1,040
Net loss — — — — — — (10,509) (10,509)
Accumulated
Preferred Stock Common stock Additional other Total
Stock-based compensation expense — — — — 829 — — 829
Issuance of stock awards — — 3,400 — 21 — — 21
Net loss — — — — — — (10,330) (10,330)
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
Cash flow from operating activities:
Stock-based compensation expense 1,040 850
Issuance of common stock to vendor 1,258 253
Right-of-use asset amortization 205 268
(Loss) / gain on foreign currency transactions (2,552) 647
Change in fair value of the warrant liability — (672)
Debt discount amortization 87 —
Change in operating assets and liabilities:
Accounts receivable (3) 269
Research and development tax credit receivable (29) 84
Prepaid expenses and other assets 268 (33)
Accounts payable and accrued expenses 2,811 504
Lease liabilities (182) (281)
Other current liabilities (342) 87
Net cash used in operating activities (7,736) (8,096)
Cash flows from investing activities:
Purchases of property, plant and equipment (123) (75)
Net cash used by investing activities (123) (75)
Cash flow from financing activities:
Payment of issuance costs — (1,142)
Proceeds from the issuance of debt 1,000 —
Proceeds from the exercise of warrants — 24
Net cash provided by financing activities 1,000 6,532
Effect of exchange rate changes on cash 92 (56)
Cash, beginning of period 7,141 8,836
Cash, end of period $ 374 $ 7,141
Right-of-use asset and lease liability additions $ 708 $ 82
The accompanying notes are an integral part of these consolidated financial statements.
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SMARTKEM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION & BUSINESS
Organization & Reverse Recapitalization
SmartKem, Inc. (“SmartKem” or the “Company”) a Delaware corporation, formerly known as Parasol Investments Corporation (“Parasol”), was formed on May 13, 2020, and is the successor, as discussed below, of SmartKem Limited, which was formed under the Laws of England and Wales. The Company was founded as a “shell” company registered under the Exchange Act, with no specific business plan or purpose until it began operating the business of SmartKem Limited following the closing of the Exchange described below.
On February 23, 2021, Parasol entered into a Securities Exchange Agreement (“the Exchange Agreement”), with SmartKem Limited. Pursuant to the Exchange Agreement all of the equity interests in SmartKem Limited, except certain deferred shares which had no economic or voting rights (the “Deferred Shares”) and which were purchased by Parasol for an aggregate purchase price of $1.40, were exchanged for shares of Parasol common stock, par value $0.0001 per share (“common stock”), and SmartKem Limited became a wholly owned subsidiary of Parasol (the “Exchange”).
As a result of the Exchange, Parasol legally acquired the business of SmartKem Limited, and continues as the existing business operations of SmartKem Limited as a public reporting company under the name SmartKem, Inc.
Business
We are seeking to change the world of electronics with a new class of transistor developed using our proprietary advanced semiconductor materials that we believe has the potential to revolutionize the display industry. Our TRUFLEX® semiconductor polymers enable low-temperature printing processes that are compatible with existing manufacturing infrastructure to deliver low-cost, high-performance displays. Our semiconductor platform can be used in a range of display technologies, including MicroLED, liquid crystal display (“LCD”), and AMOLED, as well as in applications in advanced computer and artificial intelligence chip packaging, sensors, and logic.
We design and develop our materials at our research and development facility in Manchester, UK, and provide prototyping services at the Centre for Process Innovation in Sedgefield, UK. We also operate a field application office in Hsinchu, Taiwan, in close proximity to our collaboration partner, The Industrial Technology Research Institute of Taiwan. Together with our collaboration partners, we are developing a commercial-scale production process and Electronic Design Automation ("EDA") tools for our materials to demonstrate the commercial viability of manufacturing a new generation of displays using our materials.
During the first quarter of 2026, Smartkem was involved in a number of financing transaction. These included the transfer of our patent portfolio to a third party. The company still owns its process and formulation intellectual property as codified in 40 trade secrets. As previously disclosed the company is continuing to conduct a review of its strategy. In particular it is evaluating its display prototyping activities, its materials formulation activities and the possibility of adding new materials to its portfolio.
The consolidated entity presented is referred to herein as “SmartKem”, “we”, “us”, “our”, or the “Company”, as the context requires and unless otherwise noted.
Certain 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.
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Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN:
Basis for Presentation
These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and accounting principles generally accepted in the United States of America (“US GAAP”) as defined by the Financial Accounting Standards Board (FASB) within the FASB Accounting Standards Codification (“ASC”) and are presented in thousands, except number of shares and per share data.
Going Concern
As of December 31, 2025, we have incurred recurring losses including net losses of $10.5 million and $10.3 million for the years ended December 31, 2025, and 2024, respectively. Our working capital deficit is $4.4 million as of December 31, 2025. 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.
The Company expects that its cash and cash equivalents of $0.4 million as of December 31, 2025, will not be sufficient to fund its operating expenses and capital expenditure requirements for the 12 months from the issuance of these financial statements and that the Company will require additional capital funding to continue its operations and research development activity thereafter. It is possible this period could be shortened if there are any significant increases in spending or more rapid progress of development programs than anticipated.
Our future viability is dependent on our ability to raise additional capital to fund our operations. We will need to obtain additional funds to satisfy our operational needs and to fund our sales and marketing efforts, research and development expenditures, and business development activities. Until such time, if ever, as we can generate sufficient cash through revenue, management’s plans are to finance our working capital requirements through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. If we raise additional funds by issuing equity securities, our existing security holders will likely experience dilution. If we borrow money, the incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that could restrict our operations. If we enter into a collaboration, strategic alliance or other similar arrangement, we 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 consolidated financial statements as of December 31, 2025 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 Consolidation
The consolidated financial statements include the accounts of SmartKem, Inc. and its wholly-owned subsidiary, SmartKem Limited. The Company does not have any non-consolidated subsidiaries. All intercompany balances and transactions have been eliminated on consolidation, including unrealized gains and losses on transactions between the companies.
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Notes to Consolidated Financial Statements
Comprehensive loss
Comprehensive loss of all periods presented is comprised primarily of net loss and foreign currency translation adjustments.
Management’s Use of Estimates
The preparation of consolidated financial statements in conformity with 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 fair value of stock-based compensation expense and for the valuation allowance of deferred taxes. 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. As of December 31, 2025 and 2024, the Company did not have any cash equivalents.
Accounts Receivable
Accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The Company considers the following factors when determining the collectability of specific customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. These receivables have historically been paid timely. Due to the nature of the accounts receivable balance, the Company believes there is no significant risk of non-collection. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances for credit losses would be required. There was no allowance for credit losses recorded as of December 31, 2025 and 2024.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Periodically, the Company maintains deposits in financial institutions in excess of government insured limits.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, less accumulated depreciation. Maintenance and repairs are expensed when incurred. Additions and improvements that extend the economic useful life of the asset are capitalized and depreciated over the remaining useful lives of the assets. The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts, and any resulting gain or loss is reflected in current earnings. Depreciation and amortization are provided using the accelerated declining balance method in amounts considered to be sufficient to amortize the cost of the assets to operations over their estimated useful lives. Property, plant and equipment is depreciated over an estimated useful life of approximately 4 years.
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Notes to Consolidated Financial Statements
Impairment of Long-Lived Assets
Management continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows in measuring whether the long-lived asset should be written down to fair value. Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate. If the carrying amount is greater than the undiscounted cash flows, the carrying amount of the asset is reduced to the asset’s fair value. An impairment loss is recognized immediately as an operating expense in the consolidated statements of operations. As of December 31, 2025, and 2024, Company’s management believed that no impairment of the Company’s long-lived assets was required.
Non-retirement Post-employment Benefits
The company records employee severance benefits as non-retirement post-employment benefits that are accounted for under the guidance of ASC 712-10 Compensation - Nonretirement Postemployment Benefits. A liability is accrued when it becomes probable that a payment will be made, and the amount is estimable. In most cases, a payment is not deemed probable until the employer makes the decision to terminate the employee. All severance payments identified were paid and expensed in the period incurred.
Leases
Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease obligation on the consolidated balance sheets as of December 31, 2025 and 2024. The Company has elected not to present short-term leases as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that the Company is reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s leases do not provide an implicit rate of return, the Company used an incremental borrowing rate based on inception date of the lease agreement in determining the present value of lease payments.
Revenue
The Company applies the provisions of ASC 606, Revenue from Contracts with Customers. The Company recognizes revenue under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled to. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contact and (5) recognize revenue when a performance obligation is satisfied.
The Company’s current contracts with customers do not contain significant estimates or judgments. A portion of the Company’s revenue contains a single performance obligation that is recognized upon fulfilment of the sales order. The company also recognized a portion of revenue related to the certain agreements over time based on output method. The Company received cancellation notification from two customers in fourth quarter 2025 and recognized remaining contract liability.
In 2025, the Company recorded $147 thousand related to the sale of the of materials to various customers which was recognized at the point of the sale. The Company also recorded $550 thousand related to the recognition of income over the project term related to two project agreements that had been cancelled in 2025. In 2024, the Company recorded $40 thousand related to the sale of the of materials to various customers which was recognized at the point of the sale. The Company also recorded $42 thousand related to the recognition of income over the project term related to a project agreements that had been completed in 2024.
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Notes to Consolidated Financial Statements
Customer A and B comprised of 60% and 19% of revenue for the year ended December 31, 2025. No customers comprised over 10% of revenue for the year ended December 31, 2024.
The Company derives its revenues primarily from sales of TRUFLEX® inks and of demonstrator units to customers evaluating organic semiconductor technology. The transaction price is stated in each customer agreement and is allocated to a single performance obligation. Revenue is recognized upon shipment of each TRULFEX® ink or demonstrator, at a point in time. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year.
Contract Liability
The Company has recognized contract liabilities, primarily related to advance payments received from collaboration agreements for services to be performed in future periods. These contract liabilities are expected to be recognized as revenue within the next 12 month. The Company’s balance on January 1, 2024 was $360 thousand. During 2024, the Company added $128 thousand related to new advanced deposits collected, offset by a release of $42 thousand for the recognition of revenue related to the completion of the performance obligation contracts and foreign currency translations of $4 thousand. The Company’s balance as of December 31, 2024 was $450 thousand. During 2025, the Company added $3 thousand related to new advanced deposits collected, offset by a release of $391 thousand for the recognition of revenue related to the completion of the performance obligation contracts and foreign currency translations of $46 thousand. The Company’s balance as of December 31, 2025 was $108 thousand.
Research and Development Expenses
The Company expenses research and development costs as incurred. Research and development costs include salaries, employee benefit costs, direct project costs, supplies and other related costs. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received.
Patent and Licensing Costs
Patent and licensing costs are expensed as incurred because their realization is uncertain. These costs are classified as research and development expenses in the accompanying consolidated statements of operations and comprehensive loss.
Other Operating Income
The Company’s other operating income includes government grants received for qualifying research and development projects, and research and development tax credits related to the United Kingdom’s Research and Development tax relief for small and medium-sized enterprises, which is a government tax incentive designed to reward innovative companies for investing in research and development. Such incentives are recorded as other income when it is probable the amounts are collectible and can be reasonably estimated.
The Company has applied the guidance of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance to account for grants and recognition of the other operating income related to the grant. The government grant is recognized only when there is reasonable assurance that a) the Company will comply with any conditions attached to the grant and, (b) the grant will be received. The grant is recognized as income over the period necessary to match the related costs, for which the grant is intended to compensated, on a systematic basis. A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, is recognized as other operating income in the period in which it is receivable.
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Notes to Consolidated Financial Statements
For the year ended December 31, 2025 and 2024, the Company recorded grant income and research & development tax credits of $1.0 million for both years, which are recorded as other operating income in the accompanying consolidated statements of operations. As of December 31, 2025 and 2024, the Company had receivables related to research & development tax credits for payments not yet received of $0.5 million for both years.
Share-based compensation
All share-based payments, including grants of stock options, are measured based on the fair value of the share-based awards at the grant date and recognized over their respective vesting periods. Outstanding options generally expire 10 years after the grant date. The Company has issued options that vest based on service requirements and issued options that vest based on performance requirements. Options become exercisable when service requirements are met. In the case of performance-based options, options become exercisable when there is a liquidity event, such as a change in control, sale, or admission (listing as a public company or initial public offering (“IPO”)), and the employee, or consultant, must be providing services to the Company at the time of the event. Due to the Exchange, all options outstanding immediately prior to the event with a performance obligation requirement became vested and exercisable..
The estimated fair value of stock options at the grant date is determined using the Black-Scholes pricing model. The Black-Scholes option pricing model requires inputs such as the fair value of common stock on date of grant, expected term using a simplified method, expected volatility, dividend yield, and risk-free interest rate. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards. The Company records forfeitures when they occur.
Functional Currency and Operations
The Company’s functional currency is USD. The functional currency of the Company’s foreign operation is the respective local currency. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. The consolidated statements of operations and comprehensive loss are translated at the weighted average rate of exchange during the applicable period. The resulting unrealized gain/loss is recognized as foreign currency translation as a component of other comprehensive income.
Income Taxes
Valuation allowance of deferred tax assets
Income taxes are recorded in accordance with ASC 740, Income Taxes, which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We considered the positive and negative evidence bearing upon its ability to realize the deferred tax assets. In addition to the Company’s history of cumulative losses, the Company cannot be certain that future taxable income will be sufficient to realize its deferred tax assets. Accordingly, a full valuation allowance has been provided against its net deferred tax assets at both December 31, 2025 and 2024. Should the Company change its determination, based on the evidence available as to the amount of its deferred tax assets that can be realized, the valuation allowance will be adjusted with a corresponding impact to the provision for income taxes in the period in which such determination is made and which may be material.
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Notes to Consolidated Financial Statements
As of December 31, 2025, and 2024, there were no material uncertain tax positions.
Contingent Liabilities
A provision for contingent liabilities is recorded when it is both probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. From time to time, the Company may be party to certain litigation and disputes arising in the normal course of business. As of December 31, 2025, the Company is not a party to any litigation or disputes.
Segment Information
Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business as one operating segment: Semiconductor materials.
Basic and Diluted Loss Per Share
Basic net loss per share is determined by dividing net loss by the weighted average shares of common stock outstanding during the period, without consideration of potentially dilutive securities, except for those shares that are issuable for little or no cash consideration. Diluted net loss per share is determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflects the dilutive effect, if any, of potentially dilutive common shares, such as stock options and warrants calculated using the treasury stock method. In periods with reported net operating losses, all common stock options and warrants are generally deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.
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Notes to Consolidated Financial Statements
The following potentially dilutive securities were excluded from the computation of earnings per share as of December 31, 2025 and 2024 because their effects would be anti-dilutive:
December 31,
Assumed conversion of preferred stock — 1,973,200
Recently Issued Accounting Pronouncement
On November 2024, the FASB issued Accounting Standards Update (ASU) No. 2024-03, Income Statement (Topic 220): Reporting Comprehensive Income - Expense Disaggregation Disclosures, Disaggregation of Income Statement Expenses, which requires public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the financial statements. The amendments in this pronouncement will be effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted and is effective on either a prospective basis or retrospective basis. The Company is currently assessing the potential impacts of adoption on its consolidated financial statements and related disclosures.
In July 2025, the FASB issued ASU 2025-05, Financial Instruments - Credit Losses, which provides a practical expedient for estimating expected credit losses for current accounts receivable and current contract assets that arise from transactions accounted for under Topic 606, Revenue from Contracts with Customers. ASU 2025-05 is effective for annual periods beginning after December 15, 2025 and interim periods within those annual reporting periods and should be applied prospectively, with early adoption permitted. The Company is assessing the impact of adopting this standard.
In December 2025, the FASB issued ASU 2025-12, Codification Improvements, which clarifies various topics in the Accounting Standards Codification to improve consistency and address technical corrections. Key improvements include clarifying the calculation of diluted earnings per share (EPS) when a loss from continuing operations exists. The amendments in this update are effective for the Company beginning January 1, 2027, with early adoption permitted. The Company is assessing the impact of adopting this standard.
In December 2025, the FASB issued ASU 2025-11, Interim Reporting (Topic 270): Narrow Scope Improvements. This update clarifies the applicability of interim reporting guidance and the form and content of interim financial statements. It also establishes a disclosure principle requiring an entity to disclose material events and changes occurring since the end of the last annual reporting period. ASU 2025-11 is effective for the Company for interim periods within annual reporting periods beginning after December 15, 2027, with early adoption permitted. The Company is assessing the impact of adopting this standard.
In December 2025, the FASB issued ASU 2025-10, Government Grants (Topic 832): Accounting for Government Grants Received by Business Entities. This update establishes authoritative guidance for the recognition, measurement, presentation, and disclosure of government grants received by business entities. ASU 2025-10 is effective for the Company for interim periods within annual reporting periods beginning after December 15, 2028, with early adoption permitted. The Company is assessing the impact of adopting this standard.
The Organization for Economic Co-operation and Development (“OECD”) reached an agreement among various countries to implement a minimum 15% tax rate on certain multinational enterprises, commonly referred to as Pillar Two. Many countries continue to announce changes in their tax laws and regulations based on Pillar Two Proposals. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes
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Notes to Consolidated Financial Statements
available. Given the numerous proposed changes in law and uncertainty regarding such proposed changes, the impact cannot be determined at this time.
Recently Adopted accounting Pronouncements
In December 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 Company adopted ASU 2023-09 on a prospective basis for the year ended December 31, 2025.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following:
December 31, December 31,
Advances and retainers $ 54 $ —
Prepaid insurance 152 194
Deferred research & development costs — 138
Research grant receivable 88 62
Prepaid facility costs 68 67
Prepaid software licenses 52 66
VAT receivable — 319
Tax Receivable 117 —
Other receivable and other prepaid expenses 44 3
Total prepaid expenses and other current assets $ 575 $ 849
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 31, December 31,
Furniture and fixtures 114 106
Computer hardware and software 106 98
Less: Accumulated depreciation (1,826) (1,497)
Property, plant and equipment, net $ 180 $ 269
Depreciation expense was $0.2 million and $0.3 million for the year ended December 31, 2025 and 2024, respectively, and is classified as research and development expense.
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Notes to Consolidated Financial Statements
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
December 31, December 31,
Accounts payable - trade $ 4,435 $ 843
Payroll liabilities 39 397
Accrued expenses – other 129 158
VAT payable — 287
Accrued expenses – audit & accounting fees — 106
Total accounts payable and accrued expenses $ 4,603 $ 1,791
6. LEASES:
The Company has operating leases consisting of office space, lab space, and equipment with remaining lease terms of less than 3 years, subject to certain renewal options as applicable.
The Company evaluates the nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes the right of use asset and lease liability based on the present value of future minimum lease payments over the expected lease term. The Company’s leases do not generally contain an implicit interest rate and therefore the Company uses the incremental borrowing rate it would expect to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value of its lease payments.
On May 22, 2025, the Company renewed its lease for research & development, engineering, testing and corporate offices in Manchester, England. The renewed lease term expires in 2028 with an option for the Company to end the lease in 2027.
On July 14, 2025, the Company entered into a sublease agreement for its office in Taoyuan City, Taiwan. The lease term expires in 2028 and can be terminated with 60 days’ notice.
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:
Year Ended December 31,
Operating lease cost $ 297 $ 293
Short-term lease cost 40 29
Total lease cost $ 337 $ 322
The total lease cost is included in the consolidated statements of operations as follows:
Year Ended December 31,
Research and development $ 328 $ 293
General and administrative 9 29
Total lease cost $ 337 $ 322
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Notes to Consolidated Financial Statements
Right of use lease assets and lease liabilities for our operating leases were recorded in the consolidated balance sheets as follows:
December 31, December 31,
Assets
Right of use assets - Operating Leases $ 607 $ 120
Total lease assets $ 607 $ 120
Liabilities
Current liabilities:
Lease liability, current - Operating Leases $ 271 $ 47
Noncurrent liabilities:
Lease liability, non-current - Operating Leases 312 25
Total lease liabilities $ 583 $ 72